SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
one)
x
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended December 31, 2007
OR
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
transition period from: ________ to ________
Commission
File No. 001-13937
ANTHRACITE
CAPITAL, INC.
(Exact
name of registrant as specified in its charter)
Maryland
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13-3978906
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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|
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40
East 52nd Street
New
York, New York
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10022
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(Address
of principal executive office)
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(Zip
Code)
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(212)
810-3333
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(Registrant's
telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the Act:
COMMON
STOCK, $0.001 PAR VALUE
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NEW
YORK STOCK EXCHANGE
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|
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9.375%
SERIES C CUMULATIVE REDEEMABLE
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NEW
YORK STOCK EXCHANGE
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PREFERRED
STOCK, $0.001 PAR VALUE
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8.25%
SERIES D CUMULATIVE REDEEMABLE
|
|
|
|
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(Title
of each class)
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(Name
of each exchange on which
registered)
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Securities
registered pursuant to Section 12(g) of the Act: Not Applicable
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements
for
the past 90 days. Yes x
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a smaller reporting company. (See definitions of "large
accelerated filer", "accelerated filer" and "smaller reporting company" in
Rule
12b-2 of the Exchange Act).
Large
accelerated filer x
Accelerated
filer o
Non-accelerated
filer o Smaller reporting
company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No
x
The
aggregate market value of the registrant's common stock, $0.001 par value,
held
by non-affiliates of the registrant, computed by reference to the closing sale
price of $12.00 as reported on the New York Stock Exchange on June 30, 2007,
was
$765,236,192. All executive officers and directors of the registrant have been
deemed, solely for the purpose of the foregoing calculation, to be affiliates
of
the registrant.
The
number of shares of the registrant's common stock, $0.001 par value, outstanding
as of March 12, 2008 was 63,296,397 shares.
Documents
Incorporated by Reference: Portions of the registrant's Definitive Proxy
Statement for the 2008 Annual Meeting of Stockholders are incorporated by
reference into Part III.
ANTHRACITE
CAPITAL, INC. AND SUBSIDIARIES
2007
FORM
10-K ANNUAL REPORT
TABLE
OF CONTENTS
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PAGE
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PART
I
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Item
1.
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Business
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4
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Item
1A.
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Risk
Factors
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18
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Item
1B.
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Unresolved
Staff Comments
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32
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Item
2.
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Properties
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32
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Item
3.
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Legal
Proceedings
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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PART
II
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Item
5.
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Market
for Registrant's Common Equity, Related Stockholder
Matters
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and
Issuer Purchases of Equity Securities
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Item
6.
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Selected
Financial Data
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35
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Item
7.
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Management's
Discussion and Analysis of
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Financial
Condition and Results of Operations
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37
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Item
7A.
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Quantitative
and Qualitative Disclosures About
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Market
Risk
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73
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Item
8.
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Financial
Statements and Supplementary Data
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77
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Item
9.
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Changes
in and Disagreements with Accountants
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on
Accounting and Financial Disclosure
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125
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Item
9A.
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Controls
and Procedures
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125
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Item
9B.
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Other
Information
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125
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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126
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Item
11.
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Executive
Compensation
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126
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Item
12.
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Security
Ownership of Certain Beneficial
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Owners
and Management and Related Stockholder Matters
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126
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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126
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Item
14.
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Principal
Accounting Fees and Services
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126
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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127
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Signatures
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130
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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.
Factors
that could cause actual results to differ materially from forward-looking
statements or historical performance include, without limitation:
|
(1)
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the
introduction, withdrawal, success and timing of business initiatives
and
strategies;
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(2)
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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 the Company's assets;
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(3)
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the
relative and absolute investment performance and operations of BlackRock
Financial Management, Inc. ("BlackRock"), the Company's Manager;
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(4)
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the
impact of increased competition;
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(5)
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the
impact of future acquisitions or divestitures;
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(6)
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the
unfavorable resolution of legal proceedings;
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(7)
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the
impact of legislative and regulatory actions and reforms and regulatory,
supervisory or enforcement actions of government agencies relating
to the
Company or BlackRock;
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(8)
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terrorist
activities and international hostilities, which may adversely affect
the
general economy, domestic and global financial and capital markets,
specific industries, and the Company;
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(9)
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the
ability of BlackRock to attract and retain highly talented professionals;
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(10)
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fluctuations
in foreign currency exchange rates; and
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(11)
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the
impact of changes to tax legislation and, generally, the tax position
of
the Company.
|
Additional
factors are set forth in the Company's filings with the Securities and Exchange
Commission (the "SEC"), including this Annual Report on Form 10-K, accessible
on
the SEC's website at www.sec.gov.
PART
I
ITEM
1. BUSINESS
All
dollar figures expressed herein are expressed in thousands, except share or
per
share amounts.
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 commenced operations on March 24, 1998
and
is organized as a real estate investment trust ("REIT"). 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 and equity.
The
Company's primary investment activities are conducted on a global basis in
three
investment sectors:
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 and equity provide attractive risk adjusted returns over shorter periods
of time through strategic investments in specific property types or regions.
The
Company's common stock, par value $0.001 per share ("Common Stock"), is traded
on the New York Stock Exchange ("NYSE") under the symbol "AHR". The Company's
primary long-term objective is to generate sufficient earnings to support a
dividend at a level which provides an attractive return to stockholders. 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 $1.357 trillion of assets under management at December 31, 2007.
The Manager provides an operating platform that incorporates significant asset
origination, risk management, and operational capabilities.
Commercial
Real Estate Securities
The
following table indicates the amounts of each category of commercial real estate
securities the Company owned at December 31, 2007. The dollar price ("Dollar
Price") represents the estimated fair value or adjusted purchase price of a
security, respectively, relative to its par value.
Commercial
Real Estate Securities
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Par
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Estimated
Fair
Value
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Dollar
Price
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Adjusted
Purchase Price*
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Dollar
Price
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Loss
Adjusted Yield
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U.S.
Dollar Denominated:
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Controlling
Class CMBS
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$
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1,513,132
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$
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688,764
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$
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45.52
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$
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839,141
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$
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55.46
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10.39
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%
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Other
below investment grade
CMBS
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60,959
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51,856
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85.07
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54,481
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89.37
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8.63
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%
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Collateralized
debt obligation
("CDO") investments
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351,807
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49,630
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14.11
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67,470
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19.18
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19.50
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%
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Investment
grade commercial real
estate securities
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1,117,584
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1,075,162
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96.02
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1,072,641
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95.98
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6.76
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%
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CMBS
interest only securities
("IOs")
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818,670
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15,915
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1.94
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14,725
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1.80
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8.80
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%
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3,862,152
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1,881,327
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48.71
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2,048,458
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53.04
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8.73
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%
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Non-U.S.
Dollar Denominated:
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Controlling
Class CMBS
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73,040
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41,599
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56.95
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42,334
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57.96
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9.32
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%
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Other
below investment grade
CMBS
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233,062
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199,692
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85.68
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202,484
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86.88
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8.55
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%
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Investment
grade commercial real
estate securities
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169,438
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151,532
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89.43
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153,384
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90.53
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|
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6.19
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%
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|
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|
475,540
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|
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392,823
|
|
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82.61
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398,202
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83.74
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7.72
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%
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|
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$
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4,337,692
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$
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2,274,150
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$
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52.43
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$
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2,446,660
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$
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56.40
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8.58
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%
|
*
Represents the amortized cost of the Company's investments.
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 where it maintains the right to control the
foreclosure/workout process on the underlying loans as controlling class CMBS
("Controlling Class").
Controlling
Class CMBS
The
Company's principal activity is to underwrite and acquire high yield CMBS that
are rated below investment grade (BB+ or lower). The Company's CMBS are
securities backed by pools of loans secured by first mortgages on commercial
real estate in the United States, Canada, Europe, and Asia. The commercial
real
estate securing the first mortgages consists of income-producing properties
including office buildings, shopping centers, apartment buildings, industrial
properties, healthcare properties, and hotels, among others. The terms of a
typical loan include a fixed rate of interest, thirty-year amortization, some
form of prepayment protection, and a large interest rate increase if not paid
off at the ten-year maturity. The loans are originated by various lenders and
pooled together in trusts which issue securities in the form of various classes
of fixed rate debt secured by the cash flows from the underlying loans. The
securities issued by the trusts are rated by one or more nationally recognized
credit rating organizations and are rated AAA down to CCC. The security that
is
affected first by loan losses is not rated. The principal amount of the pools
of
loans securing the CMBS varies.
The
Company focuses on acquiring the securities rated below investment grade. The
most subordinated CMBS classes are the first to absorb realized losses in the
loan pools. To the extent there are losses in excess of the most subordinated
class' stated entitlement to principal and interest, then the remaining CMBS
classes will bear such losses in order of their relative subordination. If
a
loss of face value, or par, is experienced in the underlying loans, a
corresponding reduction in the par of the lowest rated security occurs, reducing
the cash flow entitlement. The majority owner of the first loss position has
the
right to influence the workout process and therefore designate the trust's
special servicer. The Company will generally seek to influence the workout
process in each of its CMBS transactions by purchasing the majority of the
trust's non-rated securities and sequentially rated securities as high as BBB+.
Typically, the par amount of these below investment grade classes has
represented 2.0% to 5.0% of the principal of the Underlying Loan pools. This
is
known as the subordination level because 2.0% to 5.0% of the collateral
balance
is subordinated to the senior, investment grade rated securities.
Owning
commercial real estate loans in these forms allows the Company to earn
loss-adjusted returns over a period of time while achieving significant
diversification across geographic areas and property types.
At
December 31, 2007, the Company owned 39 Controlling Class trusts in which the
Company through its investment in subordinated CMBS of such trusts is in the
first loss position. As a result of this investment position, the Company
influences the workout process on $59,534,400 of underlying loans. The total
par
amount owned of these subordinated Controlling Class securities is $1,586,172.
The Company does not own the senior securities that represent the remaining
par
amount of the underlying mortgage loans.
Prior
to
acquiring Controlling Class securities, the Company performs a significant
amount of due diligence on the underlying loans to ensure their risk profiles
meet the Company's criteria. Loans that do not meet the Company's criteria
are
either removed from the pool or price adjustments occur. The debt service
coverage and loan to value ratios are evaluated to determine if they are
appropriate for each asset class.
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 39
Controlling Class trusts, the Company estimates that specific losses totaling
$779,338 related to principal of the underlying loans will not be recoverable,
of which $356,272 is expected to occur over the next five years. The total
loss
estimate of $779,338 represents 1.3% of the total underlying loan
pools.
Once
acquired, the Company uses a performance monitoring system to track the credit
experience of the mortgages in the pools securing both the Controlling Class
and
the other below investment grade CMBS. The Company receives remittance reports
monthly from the trustees and monitors any delinquent loans or other issues
that
may affect the performance of the loans. The special servicer of a loan pool
also assists in this process. The Company reviews its loss assumptions every
quarter using updated payment and debt service coverage information on each
loan
in the context of economic trends on both a national and regional
level.
Each
trust has a designated special servicer. Special servicers are responsible
for
carrying out loan loss mitigation strategies. In addition, a special servicer
will advance funds to a trust to maintain principal and interest cash flows
on
the trust's securities provided it believes there is a significant probability
of recovering those advances from the underlying borrowers. The special servicer
is paid interest on advanced funds and a fee for its efforts in carrying out
loss mitigation strategies. For the Company's 39 Controlling Class trusts,
Midland Loan Services, Inc. is the special servicer for 33 trusts, Capmark
Finance Inc., is the special servicer for three trusts, Global Servicing
Solutions Canada Corp. is the special servicer for two trusts, and the special
servicer on the remaining trust is Lennar Partners, Inc. Midland Loan Services,
Inc. is a related party of the Manager.
The
Company's anticipated yields on its investments are based upon a number of
assumptions that are subject to certain business and economic uncertainties
and
contingencies. Examples of such contingencies include, among other things,
the
timing and severity of expected credit losses, the rate and timing of principal
payments (including prepayments, repurchases, defaults, liquidations, special
servicer fees, and other related expenses), the pass-through or coupon rate,
and
interest rate fluctuations. Additional factors that may affect the Company's
anticipated yields on its Controlling Class CMBS include interest payment
shortfalls due to delinquencies on the underlying mortgage loans, 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 which may alter these assumptions,
no assurance can be given that the Company's anticipated yields to maturity
will
be maintained.
The
weighted average loss adjusted yield for all subordinated Controlling Class
securities at December 31, 2007 was 9.81%. If the loss assumptions prove to
be
consistent with actual loss experience, the Company will maintain that level
of
income for the life of the security. As actual losses differ from the original
loss assumptions, yields are adjusted to reflect the updated assumptions. In
addition, a write-down of the adjusted purchase price of the security may be
required. (See Item 7A -"Quantitative and Qualitative Disclosures About Market
Risk" for more information on the sensitivity of the Company's income and
adjusted purchase price to changes in credit experience.)
Other
Below Investment Grade CMBS
The
Company does not typically purchase a BB- or lower rated security unless the
Company is involved in the new issue due diligence process and has a clear
pari
passu alignment of interest with the special servicer, or can appoint the
special servicer. The Company purchases BB+ and BB rated securities at their
original issue or in the secondary market without necessarily having influence
over the workout process. BB+ and BB rated CMBS do not absorb losses until
the
BB- and lower rated securities have experienced losses of their entire principal
amounts. The Company believes the subordination levels of these securities
provide additional credit protection and diversification with an attractive
risk
return profile.
CDOs
The
Company issues secured term debt through its CDO offerings. This entails
creating a special purpose entity that holds assets used to secure the payments
required of the debt issued. For those that qualify as a sale under Statement
of
Financial Accounting Standards ("SFAS") No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities ("FAS
140"), the Company records the transaction as a sale and carries any retained
bonds as a component of securities available-for-sale on its consolidated
statements of financial condition. At December 31, 2007 and 2006, respectively,
the Company had retained bonds with an estimated fair value of $35,055 and
$114,142 on its consolidated statement of financial condition related to CDO
HY1
and CDO HY2. The Company also owns preferred securities in LEAFs CMBS I Ltd
("Leaf"). Leaf issued non-recourse liabilities secured by investment grade
commercial real estate securities. At December 31, 2007 and 2006, respectively,
Leaf
preferred securities were carried at an estimated fair value of $14,576 and
$6,493 on the Company's consolidated statements of financial
condition.
Investment
Grade Commercial Real Estate Related Securities
The
Company invests in investment grade commercial real estate related securities
in
the form of CMBS and unsecured debt of commercial real estate companies. The
addition of these higher rated securities is intended to add greater stability
to the long-term performance of the Company's portfolio as a whole and to
provide greater diversification to optimize secured financing alternatives.
The
Company seeks to assemble a portfolio of high quality issues that will maintain
consistent performance over the life of the security.
CMBS
Interest Only securities ("CMBS
IOs")
The
Company invests in CMBS IOs. These securities represent a portion of the
interest coupons paid by the underlying loans. The Company views this portfolio
as possessing attractive relative value versus other alternatives. These
securities do not have significant prepayment risk because the underlying loans
generally have prepayment restrictions for certain periods of time. Furthermore,
the credit risk is also mitigated because the IO represents a portion of all
underlying loans, not solely the first loss.
Commercial
Real Estate Loans
The
Company's loan activity is focused on providing mezzanine capital to the
commercial real estate industry. The Company targets real estate operators
with
strong track records and compelling business plans designed to enhance the
value
of their real estate. These loans generally are subordinated to a senior lender
or first mortgage and are priced to reflect a higher return. The Company has
significant experience in closing large, complex loan transactions and believes
it can deliver timely and competitive financing.
The
types
of commercial real estate loans include subordinated participations in first
mortgages, loans secured by partnership interests, preferred equity interests
in
real estate limited partnerships and loans secured by second mortgages. The
weighted average life of these investments is generally two to three years
and
the investments have fixed or floating rate coupons.
The
Company performs significant due diligence before making investments to evaluate
risks and opportunities in this sector. The Company generally focuses on strong
sponsorship, attractive real estate fundamentals, and pricing and structural
characteristics that provide significant influence over the underlying
asset.
The
Company's activity in commercial real estate loans also has been conducted
through Carbon Capital, Inc. ("Carbon I") and Carbon Capital II, Inc. ("Carbon
II", and collectively with Carbon I, the "Carbon Funds"), private commercial
real estate income funds managed by the Company's Manager. The Company believes
the use of the Carbon Funds allows it to invest in larger institutional quality
assets with greater diversification. The Company's consolidated financial
statements include its share of the net assets and income of the Carbon Funds.
At December 31, 2007, the Company owned approximately 20% of Carbon I as well
as
approximately 26% of Carbon II. The Company's investments in the Carbon Funds
at
December 31, 2007 were $99,398, compared with $72,403 at December 31,
2006.
Commercial
Real Estate Equity
BlackRock
Diamond Property Fund, Inc. ("BlackRock Diamond") is a REIT managed by BlackRock
Realty Advisors, Inc., a subsidiary of the Company's Manager. The
Company invested
$100,000 in BlackRock Diamond.
The
Company redeemed $25,000 of its investment on June 30, 2007 and redeemed the
remaining $75,000 and accumulated earnings on September 30, 2007. Over the
life
of this investment, the Company recognized a cumulative profit of $34,853,
an
annualized return of 20.8%.
Financing
and Leverage
The
Company has historically financed its assets with the net proceeds of Common
Stock offerings, the issuance of Common Stock, the issuance of preferred stock,
long-term secured and unsecured borrowings, short-term borrowings under reverse
repurchase agreements and the credit facilities discussed below. In the future,
assets may be financed in a similar manner. The Company expects that, in
general, it will employ leverage consistent with the type of assets acquired
and
the desired level of risk in various investment environments. The Company's
governing documents do not explicitly limit the amount of leverage that the
Company may employ. Instead, the Board of Directors has adopted an indebtedness
policy for the Company that limits its recourse debt to equity ratio to a
maximum of 3.0 to 1.0, which is consistent with the financial covenants in
the
Company's credit facilities (see discussion of credit facilities below). The
Company's recourse debt-to-equity ratio of 2.8 to 1 at December 31, 2007 was
in
compliance with the policy. The Board of Directors may reduce the Company's
indebtedness policy at any time.
Reverse
Repurchase Agreements and Credit Facilities
The
Company has entered into reverse repurchase agreements to finance its securities
that are not financed under its credit facilities or CDOs. Reverse repurchase
agreements are secured loans generally with a term of 30 to 90 days. The reverse
repurchase agreements collateralized by most of these securities bear interest
at rates that historically have moved in close relationship to the London
Interbank Offered Rate for U.S. dollar deposits ("LIBOR"). After the initial
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 lower compared with interest rates charged on alternatives due to the
lower risk inherent in reverse repurchase transactions.
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. 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 and bear interest at a variable rate. 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, rather
than
for thirty or ninety days as is customary in reverse repurchase transactions.
This longer term makes the financing of less liquid assets viable.
Under
the
credit facilities and the reverse repurchase agreements, the respective lenders
retain the right to mark the underlying collateral to estimated fair value.
A
reduction in the value of pledged assets will require the Company to provide
additional collateral or fund cash margin calls. From time to time, the Company
expects that it will be required to provide such additional collateral or fund
margin calls. The Company received and funded margin calls totaling $82,570
during 2007, $73,793 from January 1, 2008 through March 10, 2008, and will
fund
another $11,118 on March 14, 2008.
Further
information with respect to the Company's reverse repurchase agreements, credit
facilities, and commercial mortgage loan pools at December 31, 2007 is
summarized as follows:
|
|
Reverse
Repurchase
Agreements
|
|
Credit
Facilities
|
|
Commercial
Mortgage
Loan
Pools
|
|
Commercial
Real Estate Securities
|
|
|
|
|
|
|
|
Outstanding
Borrowings
|
|
$
|
71,161
|
|
$
|
405,568
|
|
|
-
|
|
Weighted
average borrowing rate
|
|
|
5.46
|
%
|
|
5.64
|
%
|
|
-
|
|
Weighted
average remaining
|
|
|
|
|
|
|
|
|
|
|
maturity
|
|
|
7
days
|
|
|
1.09
years
|
|
|
-
|
|
Estimated
fair value of assets
|
|
|
|
|
|
|
|
|
|
|
pledged
|
|
$
|
83,990
|
|
$
|
590,031
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Real Estate Loans
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Borrowings
|
|
|
-
|
|
$
|
259,905
|
|
|
-
|
|
Weighted
average borrowing rate
|
|
|
-
|
|
|
5.83
|
%
|
|
-
|
|
Weighted
average remaining
|
|
|
|
|
|
|
|
|
|
|
maturity
|
|
|
-
|
|
|
1.72
years
|
|
|
-
|
|
Estimated
fair value of assets
|
|
|
|
|
|
|
|
|
|
|
pledged
|
|
|
-
|
|
$
|
368,762
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
Residential Mortgage-Backed Securities
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Borrowings
|
|
$
|
8,958
|
|
|
-
|
|
|
-
|
|
Weighted
average borrowing rate
|
|
|
5.15
|
%
|
|
-
|
|
|
-
|
|
Weighted
average remaining
|
|
|
|
|
|
|
|
|
|
|
maturity
|
|
|
10
days
|
|
|
-
|
|
|
-
|
|
Estimated
fair value of assets
|
|
|
|
|
|
|
|
|
|
|
pledged
|
|
$
|
9,126
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Mortgage Loan Pools
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Borrowings
|
|
|
-
|
|
$
|
6,128
|
|
$
|
1,219,094
|
|
Weighted
average borrowing rate
|
|
|
-
|
|
|
5.90
|
%
|
|
3.99
|
%
|
Weighted
average remaining
|
|
|
|
|
|
|
|
|
|
|
maturity
|
|
|
-
|
|
|
233
days
|
|
|
4.90
years
|
|
Estimated
fair value of assets
|
|
|
|
|
|
|
|
|
|
|
pledged
|
|
|
-
|
|
$
|
10,346
|
|
$
|
1,240,793
|
|
Further
information with respect to the Company's reverse repurchase agreements, credit
facilities, and commercial mortgage loan pools at December 31, 2006 is
summarized as follows:
|
|
Reverse
Repurchase
Agreements
|
|
Credit
Facilities
|
|
Commercial
Mortgage
Loan
Pools
|
|
Commercial
Real Estate Securities
|
|
|
|
|
|
|
|
Outstanding
Borrowings
|
|
$
|
527,316
|
|
$
|
48,105
|
|
|
-
|
|
Weighted
average borrowing rate
|
|
|
5.38
|
%
|
|
6.91
|
%
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average remaining maturity
|
|
|
79
days
|
|
|
243
days
|
|
|
-
|
|
Estimated
fair value of assets
|
|
|
|
|
|
|
|
|
|
|
pledged
|
|
$
|
570,864
|
|
$
|
69,462
|
* |
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Real Estate Loans
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Borrowings
|
|
|
-
|
|
$
|
26,570
|
|
|
-
|
|
Weighted
average borrowing rate
|
|
|
-
|
|
|
6.34
|
%
|
|
-
|
|
Weighted
average remaining
|
|
|
-
|
|
|
|
|
|
-
|
|
maturity
|
|
|
|
|
|
245
days
|
|
|
|
|
Estimated
fair value of assets
|
|
|
-
|
|
|
|
|
|
-
|
|
pledged
|
|
|
|
|
$
|
41,748
|
|
|
|
|
Agency
Residential Mortgage-Backed Securities
|
|
|
|
|
|
|
Outstanding
Borrowings
|
|
$
|
266,731
|
|
|
-
|
|
|
-
|
|
Weighted
average borrowing rate
|
|
|
5.34
|
%
|
|
-
|
|
|
-
|
|
Weighted
average remaining
|
|
|
|
|
|
|
|
|
|
|
maturity
|
|
|
79
days
|
|
|
-
|
|
|
-
|
|
Estimated
fair value of assets
|
|
|
|
|
|
|
|
|
|
|
pledged
|
|
$
|
275,729
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Mortgage Loan Pools
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Borrowings
|
|
$
|
5,623
|
|
$
|
772
|
|
$
|
1,250,503
|
|
Weighted
average borrowing rate
|
|
|
6.06
|
%
|
|
6.60
|
%
|
|
3.99
|
%
|
Weighted
average remaining
|
|
|
|
|
|
|
|
|
|
|
maturity
|
|
|
8
days
|
|
|
29
days
|
|
|
5.84
years
|
|
Estimated
fair value of assets
|
|
|
|
|
|
|
|
|
|
|
pledged
|
|
$
|
7,481
|
|
$
|
1,209
|
|
$
|
1,271,014
|
|
*$21,742
of assets pledged are retained CDO bonds.
CDOs
The
Company finances the majority of its commercial real estate assets with match
funded, secured term debt through CDO offerings. To accomplish this, the Company
forms special purpose entities (each an "SPE") and contributes a portfolio
consisting of below investment grade CMBS, investment grade CMBS, unsecured
debt
of commercial real estate companies and commercial real estate loans in exchange
for the preferred equity interest in the SPE. With the exceptions of the
Company's fourth and fifth CDOs ("CDO HY1" and "CDO HY2", respectively), these
transactions are considered financings and the SPEs are fully consolidated
on
the Company's consolidated financial statements. The SPE then will issue fixed
and floating rate debt secured by the cash flows of the securities in its
portfolio. The SPE will enter into an interest rate swap agreement to convert
the floating rate debt issued to a fixed interest rate, thus matching the cash
flow profile of the underlying portfolio. For those CDOs not denominated in
U.S.
dollars, the SPE will also enter into currency swap agreements to minimize
any
currency exposure. The debt issued by the SPE generally is rated AAA down to
BB.
Due to its preferred equity interest, the Company continues to manage the credit
risk of the underlying portfolio as it did prior to the assets being contributed
to the CDO.
CDO
debt
is the Company's preferred capital structure to maximize returns on these types
of portfolios on a non-recourse basis. There is no mark-to-market requirement
in
this structure and the debt cannot be called or terminated by the bondholders.
Furthermore, since the debt issued is non-recourse to the issuer, 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. Other forms of
financing used for these types of assets include multi-year committed financing
facilities and 30 and 90-day reverse repurchase agreements.
The
terms
of five of eight CDOs issued by the Company include coverage tests, including
over-collateralization tests, used primarily to determine whether and to what
extent principal and interest proceeds on the underlying collateral debt
securities and other assets may be used to pay principal of and interest on
the
subordinate classes of bonds in the applicable CDO. In the event the coverage
tests are not satisfied, interest and principal that would otherwise be payable
on the subordinate classes may be re-directed to pay principal on the senior
bond classes. Therefore, failure to satisfy the coverage tests could adversely
affect cash flows received by the Company from the CDOs and thereby the
Company's liquidity and operating results. As of December 31, 2007, none of
the
collateral debt securities or other assets in the applicable CDOs is in a
condition that would cause expedited amortization.
At
December 31, 2007, outstanding borrowings under the Company's CDOs were
$1,823,328 with a weighted average borrowing rate of 6.11% and a weighted
average maturity of 4.8 years. Estimated fair value of assets pledged was
$2,014,047, consisting of 86.1% of commercial real estate securities and 13.9%
of commercial real estate loans.
At
December 31, 2006, outstanding borrowings under the Company's CDOs were
$1,812,574 with a weighted average borrowing rate of 6.02% and a weighted
average maturity of 7.0 years. Estimated fair value of assets pledged was
$2,096,455, consisting of 80.3% of commercial real estate securities and 19.7%
of commercial real estate loans.
Unsecured
Recourse Borrowings
The
Company may issue senior unsecured notes, senior convertible notes, junior
unsecured notes and junior subordinated notes from time to time as a source
of
unsecured long-term capital. Senior unsecured notes, junior unsecured notes
and
junior subordinated notes bear interest at fixed or floating rates and can
be
redeemed in whole by the Company after a period of time, subject to certain
provisions, which could include the payment of fees. Senior convertible notes
have a fixed coupon and are convertible to common stock under certain
conditions.
Preferred
and Common Stock 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.
Another
source of permanent capital is the issuance of Common Stock through a follow-on
offering. In some cases, investors may 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.
Hedging
Activities
The
Company enters into hedging transactions to protect its investment portfolio
and
related borrowings from interest rate fluctuations, foreign exchange rate and
other changes in market conditions. From time to time, the Company may modify
its exposure to market interest rates by entering into various financial
instruments that adjust portfolio duration, as well as short-term and foreign
exchange rate exposure. These financial instruments are intended to mitigate
the
effect of changes in interest and foreign exchange rates on the value of the
Company's assets and the cost of borrowing. These transactions may include
interest rate swaps, currency swaps, the purchase or sale of interest rate
collars, caps or floors, options, and other hedging instruments. These
instruments may be used to hedge as much of the interest rate risk as the
Manager determines is in the best interest of the Company's stockholders, given
the cost of such hedges. The Manager may elect to have the Company bear a level
of interest rate risk that could otherwise be hedged when the Manager believes,
based on all relevant facts, that bearing such risk is advisable. The Manager
has extensive experience in hedging interest rate risks with these types of
instruments.
Hedging
instruments often are not traded on regulated exchanges, guaranteed by an
exchange or its clearinghouse, or regulated by any U.S. or foreign governmental
authorities. The Company will enter into these transactions only with
counterparties with long-term debt rated A or better by at least one nationally
recognized credit rating organization. The business failure of a counterparty
with which the Company has entered into a hedging transaction most likely will
result in a default, which may result in the loss of unrealized profits.
Although the Company generally will seek to reserve for itself the right to
terminate its hedging positions, it may not always be possible to dispose of
or
close out a hedging position without the consent of the counterparty, and the
Company may not be able to enter into an offsetting contract in order to cover
its risk. There can be no assurance that a liquid secondary market will exist
for hedging instruments purchased or sold, and the Company may be required
to
maintain a position until exercise or expiration, which could result in
losses.
The
Company's hedging activities are intended to address both income and capital
preservation. Income preservation refers to maintaining a stable spread between
yields from mortgage assets and the Company's borrowing costs across a
reasonable range of adverse interest rate environments. Capital preservation
refers to maintaining a relatively steady level in the estimated fair value
of
the Company's capital across a reasonable range of adverse interest and foreign
exchange rate scenarios. However, no strategy can insulate the Company
completely from changes in interest and foreign exchange rates.
Operating
Policies
The
Company has adopted compliance guidelines, including restrictions on acquiring,
holding, and selling assets, to help ensure that the Company meets the
requirements for qualification as a REIT under the United States Internal
Revenue Code of 1986, as amended (the "Code"), and is excluded from regulation
as an investment company under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). Before acquiring any asset, the Manager
determines whether such asset would constitute a "Real Estate Asset" under
the
REIT provisions of the Code. The Company regularly monitors purchases of
commercial real estate assets and the income generated from such assets,
including income from its hedging activities, in an effort to ensure that at
all
times the Company's assets and income meet the requirements for qualification
as
a REIT and exclusion under the Investment Company Act.
In
order
to maintain the Company's REIT status, the Company generally intends to
distribute to its stockholders aggregate dividends equaling at least 90% of
its
taxable income each year. The Code permits the Company to fulfill this
distribution requirement by the end of the year following the year in which
the
taxable income was earned.
Regulation
The
Company intends to continue to conduct its business so as not to become
regulated as an investment company under the Investment Company Act. Under
the
Investment Company Act, a non-exempt entity that is an investment company is
required to register with the SEC and is subject to extensive, restrictive
and
potentially adverse regulation relating to, among other things, operating
methods, management, capital structure, dividends and transactions with related
parties. The Investment Company Act exempts entities that are "primarily engaged
in the business of purchasing or otherwise acquiring mortgages and other liens
on and interests in real estate" ("Qualifying Interests"). Under current
interpretation by the staff of the SEC, to qualify for this exemption, the
Company, among other things, must maintain at least 55% of its assets in
Qualifying Interests.
A
portion
of the CMBS acquired by the Company are collateralized by pools of first
mortgage loans where the terms of the CMBS owned by the Company provide the
right to monitor the performance of the underlying mortgage loans through loan
management and servicing rights and the right to control workout/foreclosure
rights in the event of default on the underlying mortgage loans. When such
rights exist, the Company believes that the related Controlling Class CMBS
constitute Qualifying Interests for purposes of the Investment Company Act.
Therefore, the Company believes that it should not be required to register
as an
"investment company" under the Investment Company Act as long as it continues
to
invest in a sufficient amount of such Controlling Class CMBS and/or in other
Qualifying Interests.
If
the
SEC or its staff were to take a different position with respect to whether
the
Company's Controlling Class CMBS constitute Qualifying Interests, the Company
could be required to modify its business plan so that either (i) it would not
be
required to register as an investment company or (ii) it would register as
an
investment company under the Investment Company Act. Modification of the
Company's business plan so that it would not be required to register as an
investment company might entail a disposition of a significant portion of the
Company's Controlling Class CMBS or the acquisition of significant additional
assets, such as agency pass-through and other mortgage-backed securities, which
are Qualifying Interests. Modification of the Company's business plan to
register as an investment company could result in increased operating expenses
and could entail reducing the Company's indebtedness, which also could require
it to sell a significant portion of its assets. No assurances can be given
that
any such dispositions or acquisitions of assets, or de-leveraging, could be
accomplished on favorable terms. Consequently, any such modification of the
Company's business plan could have a material adverse effect on the Company.
Further, if it were established that the Company were operating as an
unregistered investment company, there would be a risk that the Company would
be
subject to monetary penalties and injunctive relief in an action brought by
the
SEC, that the Company would be unable to enforce contracts with third parties,
and that third parties could seek to obtain rescission of transactions
undertaken during the period it was established that the Company was an
unregistered investment company. Any such result would likely have a material
adverse effect on the Company.
Competition
The
Company's net income depends, in large part, on the Company's ability to acquire
commercial real estate assets at favorable spreads over the Company's borrowing
costs. In acquiring commercial real estate assets, the Company competes with
other mortgage REITs, specialty finance companies, savings and loan
associations, banks, mortgage bankers, insurance companies, mutual funds,
institutional investors, investment banking firms, other lenders, governmental
bodies, and other entities. In addition, there are numerous mortgage REITs
with
asset acquisition objectives similar to the Company's, and others may be
organized in the future. The effect of the existence of additional REITs may
be
to increase competition for the available supply of commercial real estate
assets suitable for purchase by the Company. Some of the Company's competitors
are significantly larger than the Company, have access to greater capital and
other resources, and may have other advantages over the Company. In addition
to
existing companies, other companies may be organized for purposes similar to
that of the Company, including companies organized as REITs focused on
purchasing commercial real estate assets. A proliferation of such companies
may
increase the competition for equity capital and thereby adversely affect the
market price of the Company's Common Stock.
Employees
The
Company does not have any employees. The Company's officers, each of whom is
a
full-time employee of the Manager or its affiliates, perform the duties required
pursuant to the Management Agreement (as defined below) with the Manager and
the
Company's bylaws.
Management
Agreements
The
Company has a Management Agreement, an administrative services agreement and
an
accounting services agreement with the Manager, the employer, with its
affiliates, 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.
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 net income in
accordance with generally accepted accounting principles in the United States
of
America ("GAAP") 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 ($11.33 adjusted per share
issue
price at December 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 2007. The Board of Directors also
authorized a stock based incentive plan pursuant to which one-half of one
percent of common shares outstanding are paid to the Manager at the end of
each
calendar year. 289,155 shares were paid to the Manager on March 30,
2007.
The
Company's unaffiliated directors approved an extension of the Management
Agreement to March 31, 2008 at the Board's March 2007 meeting.
The
Manager primarily engages in four investment activities in its capacity as
Manager on behalf of the Company: (i) acquiring and originating commercial
real estate loans and other real estate related assets;
(ii) asset/liability and risk management, hedging of floating rate
liabilities, and financing, management and disposition of assets, including
credit and prepayment risk management; (iii) surveillance and restructuring
of
real estate loans and (iv) capital management, structuring, analysis,
capital raising, and investor relations activities. At all times, the Manager
and the Company's officers are subject to the direction and oversight of the
Company's Board of Directors.
The
Company may terminate, or decline to renew the term of, the Management Agreement
without cause at any time upon 60 days' written notice by a majority vote of
the
unaffiliated directors. Although no termination fee is payable in connection
with a termination for cause, in connection with a termination without cause,
the Company must pay the Manager a termination fee, which could be substantial.
The amount of the termination fee will be determined by independent appraisal
of
the value of the Management Agreement. Such appraisal is to be conducted by
a
nationally-recognized appraisal firm mutually agreed upon by the Company and
the
Manager. The other agreements the Company has with the Manager also may be
terminated by the Company; in the case of the administrative services agreement,
at any time upon 60 days' written notice, and in the case of the accounting
services agreement, following the 24 month anniversary thereof, on 60 days'
written notice prior to the 12 month anniversary thereof, or upon 60 days'
written notice following the termination of the Management
Agreement.
In
addition, the Company has the right at any time during the term of the
Management Agreement to terminate the Management Agreement without the payment
of any termination fee upon, among other things, a material breach by the
Manager of any provision contained in the Management Agreement that remains
uncured at the end of the applicable cure period.
Taxation
of the Company
The
Company has elected to be taxed as a REIT under the Code, and the Company
intends to continue to operate in a manner consistent with the REIT provisions
of the Code. The Company's qualification as a REIT depends on its ability to
meet the various requirements imposed by the Code, through actual operating
results, asset holdings, distribution levels, and diversity of stock
ownership.
The
Company and its stockholders may be subject to foreign, state, and local
taxation in various foreign, state, and local jurisdictions, including those
in
which it or they transact business or reside. The state and local tax treatment
of the Company and its stockholders may not conform to the Company's federal
income tax treatment.
Website
The
Company's website address is www.anthracitecapital.com. The Company makes
available free of charge through its website its Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments
to
those reports and other filings as soon as reasonably practicable after such
material is electronically filed with or furnished to the SEC, and also makes
available on its website the charters for the Audit, Compensation, and
Nominating and Corporate Governance Committees of the Board of Directors and
its
Codes of Business Conduct and Ethics, as well as its corporate governance
guidelines. Copies in print of these documents are available upon request to
the
Secretary of the Company at the address indicated on the cover of this report.
To communicate with the Board of Directors electronically, the Company has
established an e-mail address, [email protected], to which
stockholders may send correspondence to the Board of Directors or any such
individual directors or group or committee of directors.
In
accordance with NYSE Rules, on June 21, 2007, the Company filed the annual
certification by its Chief Executive Officer certifying that he was unaware
of
any violation by the Company of the NYSE's corporate governance listing
standards at the time of the certification.
ITEM
1A. RISK
FACTORS
Risks
The
Company's business is subject to many risks. In addition to the other
information in this document, you should consider carefully the following risk
factors. Additional risk factors may impair the Company's business, financial
condition or results of operations.
Risks
related to the Manager
Conflicts
of interest of the Manager may result in decisions that do not fully reflect
stockholders' best interests.
The
Company and the Manager have some common officers and directors, which may
present conflicts of interest in the Company's dealings with the Manager and
its
affiliates, including the Company's purchase of assets originated by such
affiliates.
The
Manager and its employees may engage in other business activities that could
reduce the time and effort spent on the management of the Company. The Manager
also provides services to REITs not affiliated with the Company. As a result,
there may be a conflict of interest between the operations of the Manager and
its affiliates in the acquisition and disposition of commercial real estate
assets. In addition, the Manager and its affiliates may from time to time
purchase commercial real estate assets for their own account and may purchase
or
sell assets from or to the Company. For example, BlackRock Realty Advisors,
Inc., a subsidiary of the Manager, provides real estate equity and other real
estate related products and services in a variety of strategies to its
institutional investor client base. In doing so, it purchases real estate on
behalf of its clients that may underlie the real estate loans and securities
the
Company acquires, and consequently depending on the factual circumstances
involved, there may be conflicts between the Company and those clients. Such
conflicts may result in decisions and allocations of commercial real estate
assets by the Manager, or decisions by the Manager's affiliates, that are not
in
the Company's best interests.
Although
the Company has adopted investment guidelines, these guidelines give the Manager
significant discretion in investing. The Company's investment and operating
policies and the strategies that the Manager uses to implement those policies
may be changed at any time without the consent of stockholders.
The
Company is dependent on the Manager, and the termination by the Company of
its
Management Agreement with the Manager could result in a termination
fee.
The
Company's success is dependent on the Manager's ability to attract and retain
quality personnel. The market for portfolio managers, investment analysts,
financial advisers and other professionals is extremely competitive. There
can
be no assurance the Manager will be successful in its efforts to recruit and
retain the required personnel.
The
Management Agreement between the Company and the Manager provides for base
management fees payable to the Manager without consideration of the performance
of the Company's portfolio and also provides for incentive fees based on certain
performance criteria, which could result in the Manager recommending riskier
or
more speculative investments. Termination of the Management Agreement by the
Company would result in the payment of a substantial termination fee, which
could adversely affect the Company's financial condition. Termination of the
Management Agreement could also adversely affect the Company if the Company
were
unable to find a suitable replacement.
There
is a limitation on the liability of the Manager.
Pursuant
to the Management Agreement, the Manager does not assume any responsibility
other than to render the services called for under the Management Agreement
and
is not responsible for any action of the Company's Board of Directors in
following or declining to follow its advice or recommendations. The Manager
and
its directors and officers will not be liable to the Company, any of its
subsidiaries, its unaffiliated directors, its stockholders or any subsidiary's
stockholders for acts performed in accordance with and pursuant to the
Management Agreement, except by reason of acts constituting bad faith, willful
misconduct, gross negligence or reckless disregard of their duties under the
Management Agreement. The Company has agreed to indemnify the Manager and its
directors and officers with respect to all expenses, losses, damages,
liabilities, demands, charges and claims arising from acts of the Manager not
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of duties, performed in good faith in accordance with and pursuant
to
the Management Agreement.
The
Company may change its investment and operational policies without stockholder
consent.
The
Company may change its investment and operational policies, including the
Company's policies with respect to investments, acquisitions, growth,
operations, indebtedness, capitalization and distributions, at any time without
the consent of the Company's stockholders, which could result in the Company
making investments that are different from, and possibly riskier than, the
types
of investments described in this filing. A change in the Company investment
strategy may increase the Company's exposure to interest rate risk, default
risk
and real estate market fluctuations, all of which could adversely affect the
Company's ability to make distributions.
Risks
related to the Company's business
If
the Company's lenders terminate or fail to renew any of its credit facilities
or
repurchase agreements, the Company may not be able to continue to fund its
business.
At
December 31, 2007, borrowings under the Company's credit facilities totaled
$671,000. These facilities contain various representations and warranties,
covenants, conditions and events of default that if breached, not satisfied,
or
triggered could result in termination of the facilities. In addition, there
can
be no assurance that the Company will be able to extend the term of any of
its
existing financing arrangements or obtain sufficient funds to repay any amounts
outstanding under any financing arrangement before it expires, either from
one
or more replacement financing arrangements or an alternative debt or equity
financing. Consequently, if one or more of these facilities were to terminate
prior to its expected maturity date or if any such facility were not renewed,
the Company's liquidity position could be materially adversely affected, and
it
may not be able to satisfy its outstanding loan commitments, originate new
loans
or continue to fund its operations.
The
Company's liquidity position could be adversely affected if it were unable
to
complete additional CDOs on favorable terms or at all.
The
Company has completed several CDOs through which it raised a significant amount
of debt capital. Relevant considerations regarding the Company's ability to
complete additional term debt transactions include:
|
·
|
to
the extent that the capital markets generally, and the asset-backed
securities market in particular, suffer disruptions, the Company
may be
unable to complete CDOs;
|
|
·
|
disruptions
in the credit quality and performance of the Company's commercial
real
estate securities and loan portfolio, particularly that portion
which
previously has been securitized and serves as collateral for existing
CDOs, could reduce or eliminate investor demand for its CDOs in
the
future;
|
|
·
|
any
material downgrading or withdrawal of ratings given to securities
previously issued in the Company's CDOs would reduce demand for
additional
term debt by it; and
|
|
·
|
structural
changes imposed by rating agencies or investors may reduce the
leverage it
is able to obtain, increase the cost and otherwise adversely affect
the efficiency
of its CDOs.
|
If
the
Company is unable to continue completing these CDO transactions on favorable
terms or at all, its ability to obtain the capital needed would be adversely
affected. In turn, this could have a material adverse effect on the Company's
growth and its Common Stock price.
The
Company's repurchase agreements and its CDO financing agreements may limit
its
ability to make investments.
In
order
to borrow money to make investments under the Company's repurchase agreements,
its lenders have the right to review the potential investment for which the
Company is seeking financing. The Company may be unable to obtain the consent
of
its lenders to make investments that it believes are favorable to the Company.
If the Company's lenders do not consent to the inclusion of the potential asset
in a repurchase facility, the Company may be unable to obtain alternate
financing for that investment. The Company's lender's consent rights with
respect to its repurchase agreements may limit its ability to execute its
business plan.
Each
CDO
financing in which the Company engages will contain certain eligibility criteria
with respect to the collateral that it seeks to acquire and sell to the CDO
issuer. If the collateral does not meet the eligibility criteria for eligible
collateral as set forth in the transaction documents of such CDO transaction,
the Company may not be able to acquire and sell such collateral to the CDO
issuer. The inability of the collateral to meet eligibility requirements with
respect to the Company's CDOs may limit its ability to execute its business
plan.
Interest
rate fluctuations will affect the value of the Company's commercial
real estate assets and
may adversely affect the Company's net income and the price of its Common
Stock.
Interest
rates are highly sensitive to many factors, including governmental monetary
and
tax policies, domestic and international economic and political considerations
and other factors. Interest rate fluctuations can adversely affect the income
and value of the Company's Common Stock in many ways and present a variety
of
risks, including the risk of a mismatch between asset yields and borrowing
rates, variances in the yield curve, changes in prepayment rates and margin
calls.
The
Company's operating results depend in large part on differences between the
income from its assets (net of credit losses) and borrowing costs. The Company
funds a substantial portion of its assets with borrowings that have interest
rates that reset relatively rapidly, such as monthly or quarterly. The Company
anticipates that, in most cases, the income from its floating-rate assets will
respond more slowly to interest rate fluctuations than the cost of borrowings,
creating a potential mismatch between asset yields and borrowing rates.
Consequently, changes in interest rates, particularly short-term interest rates,
may influence the Company's net income. Increases in these rates tend to
decrease the Company's net income and estimated fair value of the Company's
net
assets. Interest rate fluctuations that result in the Company's interest expense
exceeding interest income would result in the Company incurring operating
losses.
The
Company also invests in fixed-rate mortgage-backed securities. In a period
of
rising interest rates, the Company's interest payments could increase while
the
interest the Company earns on its fixed-rate mortgage-backed securities would
not change. This would adversely affect the Company's
profitability.
The
relationship between short-term and long-term interest rates often is referred
to as the "yield curve." Ordinarily, short-term interest rates are lower than
long-term interest rates. If short-term interest rates rise disproportionately
relative to long-term interest rates (a flattening of the yield curve), the
Company's borrowing costs may increase more rapidly than the interest income
earned on the Company's assets. Because the Company's borrowings primarily
will
bear interest at short-term rates and the Company's assets primarily will bear
interest at medium-term to long-term rates, a flattening of the yield curve
tends to decrease the Company's net income and estimated fair value of the
Company's net assets. Additionally, to the extent cash flows from long-term
assets that return scheduled and unscheduled principal are reinvested, the
spread between the yields of the new assets and available borrowing rates may
decline and also may tend to decrease the net income and estimated fair value
of
the Company's net assets. It is also possible that short-term interest rates
may
adjust relative to long-term interest rates such that the level of short-term
rates exceeds the level of long-term rates (a yield curve inversion). In this
case, the Company's borrowing costs may exceed the Company's interest income
and
operating losses could be incurred.
A
portion
of the Company's commercial real estate assets are financed under reverse
repurchase agreements and committed borrowing facilities which are subject
to
mark-to-market risk. Such 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 could require
a
margin call or a cash payment to maintain the relationship between asset value
and amount borrowed.
The
Company's investments may be subject to impairment charges.
The
Company periodically evaluates its investments for impairment indicators. The
judgment regarding the existence of impairment indicators is based on a variety
of factors depending on the nature of the investment and the manner in which
the
income related to such investment is calculated for purposes of the Company's
financial statements. If the Company determines that a significant impairment
has occurred, the Company would be required to make an adjustment to the net
carrying value of the investment, which could materially adversely affect the
Company's results of operations in the applicable period.
Some
of the Company's investments may be recorded at fair value as determined in
good
faith by the Manager and, as a result, there will be uncertainty as to the
value
of these investments.
Some
of
the Company's portfolio investments may be in the form of assets that are not
publicly traded. The fair value of securities and other investments that are
not
publicly traded may not be readily determinable. The Company values these
investments quarterly at fair value as determined in good faith by the Manager.
Because such valuations are inherently uncertain, may fluctuate over short
periods of time, and may be based on estimates, the Company's determinations
of
fair value may differ materially from the values that would have been used
if a
ready market for these securities existed. The value of the Common Stock could
be adversely affected if the Company's determinations regarding the fair value
of these investments were materially higher than the values that the Company
ultimately realizes upon their disposal.
The
Company's assets include subordinated CMBS and similar investments which are
subordinate in right of payment to more senior securities.
The
Company's assets include a significant amount of subordinated CMBS, which are
the most subordinate class of securities in a structure of securities secured
by
a pool of loans and accordingly are the first to bear the loss upon a
restructuring or liquidation of the underlying collateral and the last to
receive payment of interest and principal. The Company may not recover the
full
amount or, in extreme cases, any of its initial investment in such subordinated
securities.
In
general, losses on an asset securing a mortgage loan included in a
securitization will be borne first by the equity holder of the property, then
by
a cash reserve fund or letter of credit, if any, and then by the class of most
junior security holders. In the event of default and the exhaustion of any
equity support, reserve fund and letter of credit, classes of junior securities
in which the Company invests may not be able to recover some or all of its
investment in the securities it purchases. In addition, if the underlying
mortgage portfolio has been overvalued by the originator, or if the values
subsequently decline and, as a result, less collateral is available to satisfy
interest and principal payments due on the related mortgage-backed securities,
the securities in which it invests may incur significant losses.
The
estimated fair values of lower credit quality CMBS and similar investments
tend
to be less sensitive to interest rate changes than those of more highly rated
investments, but more sensitive to changes in economic conditions and underlying
borrower developments. A projection of an economic downturn, for example, could
cause a decline in the price of lower credit quality CMBS because the ability
of
borrowers to make principal and interest payments on the mortgages underlying
the mortgage-backed securities may be impaired. In such event, existing credit
support in the securitization structure may be insufficient to protect the
Company against loss of its principal on these securities. In addition, such
subordinated interests generally are not actively traded and may not provide
the
Company as a holder thereof with liquidity of investment.
The
subordinate interests in whole loans in which the Company invests may be subject
to additional risks relating to the privately negotiated structure and terms
of
the transaction, which may result in losses to the Company.
A
subordinate interest in a whole loan is a mortgage loan typically (i) secured
by
a whole loan on a single large commercial property or group of related
properties and (ii) subordinated to a senior interest secured by the same whole
loan on the same collateral. As a result, if a borrower defaults, there may
not
be sufficient funds remaining for subordinate interest owners after payment
to
the senior interest owners. Subordinate interests reflect similar credit risks
to comparably rated CMBS. However, since each transaction is privately
negotiated, subordinate interests can vary in their structural characteristics
and risks. For example, the rights of holders of subordinate interests to
control the process following a borrower default may be limited in certain
investments. The Company cannot predict the terms of each subordinate
investment. Further, subordinate interests typically are secured by a single
property, and so reflect the increased risks associated with a single property
compared to a pool of properties. Subordinate interests also are less liquid
than CMBS, thus the Company may be unable to dispose of underperforming or
non-performing investments. The higher risks associated with its subordinate
position in these investments could subject the Company to increased risk of
losses.
The
Company's ownership of non-investment grade commercial real estate assets
subjects it to an increased risk of loss which could adversely affect yields
on
its investments.
The
Company acquires commercial real estate loans and non-investment grade
mortgage-backed securities, which are subject to greater risk of credit loss
on
principal and non-payment of interest than investments in senior investment
grade securities.
The
commercial mortgage and mezzanine loans the Company originates or acquires
and
the commercial mortgage loans underlying the CMBS in which the Company invests
are subject to delinquency, foreclosure and loss, which could result in losses
to the Company.
The
Company's commercial mortgage and mezzanine loans are secured by commercial
property and are subject to risks of delinquency and foreclosure, and risks
of
loss that are greater than similar risks associated with loans made on the
security of single-family residential property. The ability of a borrower to
repay a loan secured by an income-producing property typically is dependent
primarily upon the successful operation of the property rather than upon the
existence of independent income or assets of the borrower. If the net operating
income of the property is reduced, the borrower's ability to repay the loan
may
be impaired. Net operating income of an income-producing property can be
affected by, among other things: tenant mix, success of tenant businesses,
property management decisions, property location and condition, competition
from
comparable types of properties, changes in laws that increase operating expenses
or limit rents that may be charged, any need to address environmental
contamination at the property, changes in national, regional or local economic
conditions and/or specific industry segments, declines in regional or local
real
estate values and declines in regional or local rental or occupancy rates,
increases in interest rates, real estate tax rates and other operating expenses,
changes in governmental rules, regulations and fiscal policies, including
environmental legislation, and acts of God, terrorism, social unrest and civil
disturbances.
The
Company's assets include mezzanine loans that have greater risks of loss than
more senior loans.
The
Company's assets include a significant amount of mezzanine loans that involve
a
higher degree of risk than long-term senior mortgage loans. In particular,
a
foreclosure by the holder of the senior loan could result in the mezzanine
loan
becoming unsecured. Accordingly, the Company may not recover some or all of
its
investment in such a mezzanine loan. Additionally, the Company may permit higher
loan-to-value ratios on mezzanine loans than it would on conventional mortgage
loans when the Company is entitled to share in the appreciation in value of
the
property securing the loan.
Prepayment
rates can increase which would adversely affect yields on the Company's
investments.
The
yield
on investments in mortgage loans and mortgage-backed securities and thus the
value of the Company's Common Stock is sensitive to not only changes in
prevailing interest rates but also changes in prepayment rates, which results
in
a divergence between the Company's borrowing rates and asset yields,
consequently reducing future net income derived from the Company's investments.
The Company's borrowing costs also may exceed its interest income from its
investments, and it could incur operating losses.
Limited
recourse loans limit the Company's recovery to the value of the mortgaged
property.
A
substantial portion of the commercial mortgage loans the Company acquires may
contain limitations on the mortgagee's recourse against the borrower. In other
cases, the mortgagee's recourse against the borrower is limited by applicable
provisions of the laws of the jurisdictions in which the mortgaged properties
are located or by the mortgagee's selection of remedies and the impact of those
laws on that selection. In those cases, in the event of a borrower default,
recourse may be limited to only the specific mortgaged property and other
assets, if any, pledged to secure the relevant commercial mortgage loan. As
to
those commercial mortgage loans that provide for recourse against the borrower
and their assets generally, such recourse may not provide a recovery in respect
of a defaulted commercial mortgage loan equal to the liquidation value of the
mortgaged property securing that commercial mortgage loan.
The
volatility of certain mortgaged property values may adversely affect the
Company's commercial mortgage
loans.
Commercial
and multifamily property values and net operating income derived from them
are
subject to volatility and may be affected adversely by a number of factors,
including, but not limited to, national, regional and local economic conditions
(which may be adversely affected by plant closings, industry slowdowns and
other
factors); local real estate conditions (such as an oversupply of housing,
retail, industrial, office or other commercial space); changes or continued
weakness in specific industry segments; perceptions by prospective tenants,
retailers and shoppers of the safety, convenience, services and attractiveness
of the property; the willingness and ability of the property's owner to provide
capable management and adequate maintenance; construction quality, age and
design; demographic factors; retroactive changes to building or similar codes;
and increases in operating expenses (such as energy costs).
Leveraging
the Company's investments may increase the Company's exposure to
loss.
The
Company leverages its investments and thereby increases the volatility of its
operating results and net asset value that may result in operating or capital
losses. If borrowing costs increase, or if the cash flow generated by the
Company's assets decreases, the Company's use of leverage will increase the
likelihood that the Company will experience reduced or negative cash flow and
reduced liquidity. The Company's use of leverage also increases the risk that
a
decrease in the value of its assets may cause its lenders to make margin calls,
which could force it to sell assets at a time when it does not wish to do so
or
adversely affect the Company's operating results and financial
condition.
The
Company's investments may be illiquid and their value may decrease, which could
adversely affect the Company's business.
Many
of
the Company's assets are relatively illiquid. In addition, certain of the
investments that the Company has acquired or will acquire, including interests
in certain mortgage-backed securities, have not been registered under the
relevant securities laws, resulting in a prohibition against transfer, sale,
pledge or other disposition of those investments except in a transaction that
is
exempt from the registration requirements of, or otherwise in accordance with,
those laws. The Company's ability to vary its portfolio in response to changes
in economic and other conditions may be relatively limited. The estimated fair
value of any of the Company's assets could decrease in the future.
The
Company's hedging transactions can limit the Company's gains and increase the
Company's exposure to losses.
The
Company uses hedging strategies that involve risk and that may not be successful
in insulating the Company from exposure to changing interest and prepayment
rates. A liquid secondary market may not exist for hedging instruments purchased
or sold, and the Company may be required to maintain a position until exercise
or expiration, which could result in losses or limit its gains.
The
Company may make non-U.S. dollar denominated investments and investments in
non-U.S. dollar denominated securities, which subject it to currency rate
exposure and the uncertainty of foreign laws and markets.
The
Company purchases mortgage-backed securities denominated in foreign currencies
and also acquires interests in loans to non-U.S. companies, which may expose
the
Company to risks not typically associated with U.S. or U.S. dollar denominated
investments. These risks include changes in exchange control regulations,
political and social instability, expropriation, imposition of foreign taxes,
multiple and conflicting tax laws, less liquid markets and less available
information than is generally the case in the United States, higher transaction
costs, less developed bankruptcy laws, difficulty in enforcing contractual
obligations, lack of uniform accounting and auditing standards, and greater
price volatility. Any of these risks could adversely affect the Company's
receipt of interest income from these investments.
To
the
extent that any of the Company's investments are denominated in foreign
currency, these non-U.S. dollar denominated investments will be subject to
the
risk that the value of a particular currency will change in relation to one
or
more other currencies. Among the factors that may affect currency values are
trade balances, the level of short-term interest rates, differences in relative
values of similar assets in different currencies, long-term opportunities for
investment and capital appreciation, and political developments. Although the
Company may employ hedging techniques to minimize foreign currency risk, it
can
offer no assurance that these strategies will be effective and
may
incur losses on these investments as a result of currency rate fluctuations.
The
Company's ability to grow its business depends on its ability to obtain external
financing.
To
qualify as a REIT, the Company generally must distribute to its stockholders
90%
of its REIT taxable income, including taxable income where the Company does
not
receive corresponding cash. The Company historically has obtained the cash
required for its operations through the issuance of equity, convertible
debentures and subordinated debt, and by borrowing money through credit
facilities, securitization transactions and repurchase agreements. The Company's
continued access to these and other types of external capital depends upon
a
number of factors, including general market conditions, the market's perception
of its growth potential, its current and potential future earnings, cash
distributions, and the market price of its Common Stock. The Company cannot
assure investors that sufficient funding or capital will be available to it
in
the future on terms that are acceptable to the Company. If the Company cannot
obtain sufficient funding on acceptable terms, there may be a negative impact
on
the market price of its Common Stock and its ability to pay dividends to its
stockholders.
The
Company is subject to significant competition.
The
Company is subject to significant competition in seeking investments. It
competes with other companies, including other REITs, insurance companies and
other investors, including funds and companies affiliated with the Manager.
Some
of its competitors have greater resources than it has and it may not be able
to
compete successfully for investments. Competition for investments may lead
to
the returns available from such investments decreasing which may further limit
its ability to generate its desired returns. The Company cannot assure you
that
additional companies will not be formed that compete with it for investments
or
otherwise pursue investment strategies similar to the Company's.
Adverse
changes in general economic conditions can adversely affect the Company's
business.
The
Company's success is dependent on the general economic conditions in the
geographic areas in which a substantial number of its investments are located.
Adverse changes in national economic conditions or in the economic conditions
of
the regions in which it conducts substantial business likely would have an
adverse effect on real estate values and, accordingly, the Company's financial
performance, the market prices of its securities and its ability to pay
dividends.
In
a
recession or under other adverse economic conditions, non-earning assets and
write-downs are likely to increase as debtors fail to meet their payment
obligations. Although the Company maintains reserves for credit losses and
an
allowance for doubtful accounts in amounts that it believe are sufficient to
provide adequate protection against potential write-downs in its portfolio,
these amounts could prove to be insufficient.
Maintenance
of the Company's Investment Company Act exemption imposes limits on its
operations. Failure to maintain its Investment Company Act exemption could
adversely affect the Company's ability to operate.
The
Company intends to continue to conduct its business so as not to become
regulated as an investment company under the Investment Company Act. Under
the
Investment Company Act, a non-exempt entity that is an investment company is
required to register with the SEC and is subject to extensive, restrictive
and
potentially adverse regulation relating to, among other things, operating
methods, management, capital structure, dividends and transactions with
affiliates. The Investment Company Act exempts entities that are "primarily
engaged in the business of purchasing or otherwise acquiring mortgages and
other
liens on and interests in real estate" ("Qualifying Interests"). Under current
interpretation by the staff of the SEC, to qualify for this exemption, the
Company, among other things, must maintain at least 55% of its assets in
Qualifying Interests.
A
portion
of the CMBS acquired by the Company are collateralized by pools of first
mortgage loans where the terms of the CMBS owned by it provide the right to
monitor the performance of the underlying mortgage loans through loan management
and servicing rights and the right to control workout/foreclosure rights in
the
event of default on the underlying mortgage loans. When such rights exist,
the
Company believes that the related Controlling Class CMBS constitute Qualifying
Interests for purposes of the Investment Company Act. Therefore, the Company
believes that it should not be required to register as an "investment company"
under the Investment Company Act as long as it continues to invest in a
sufficient amount of such Controlling Class CMBS and/or in other Qualifying
Interests.
If
the
SEC or its staff were to take a different position with respect to whether
the
Company's Controlling Class CMBS constitute Qualifying Interests, the Company
could be required to modify its business plan so that either (i) it would not
be
required to register as an investment company or (ii) it would register as
an
investment company under the Investment Company Act. Modification of the
Company's business plan so that it would not be required to register as an
investment company might entail a disposition of a significant portion of its
Controlling Class CMBS or the acquisition of significant additional assets,
such
as agency pass-through and other mortgage-backed securities, which are
Qualifying Interests. Modification of its business plan to register as an
investment company could result in increased operating expenses and could entail
reducing indebtedness, which also could require the Company to sell a
significant portion of its assets. No assurances can be given that any such
dispositions or acquisitions of assets, or de-leveraging, could be accomplished
on favorable terms. Consequently, any such modification of the Company's
business plan could have a material adverse effect. Further, if it were
established that the Company were operating as an unregistered investment
company, there would be a risk that it would be subject to monetary penalties
and injunctive relief in an action brought by the SEC, that it would be unable
to enforce contracts with third parties, and that third parties could seek
to
obtain rescission of transactions undertaken during the period it was
established that the Company was an unregistered investment company. Any such
result would likely have a material adverse effect on the Company.
The
Company may become subject to environmental liabilities.
The
Company may become subject to material environmental risks when it acquires
interests in properties with significant environmental problems. Such
environmental risks include the risk that operating costs and values of these
assets may be adversely affected by the obligation to pay for the cost of
complying with existing environmental laws, ordinances and regulations, as
well
as the cost of complying with future legislation. Such laws often impose
liability regardless of whether the owner or operator knows of, or was
responsible for, the presence of such hazardous or toxic substances. The costs
of investigation, remediation or removal of hazardous substances could exceed
the value of the property. The Company's income and ability to make
distributions to stockholders could be affected adversely by the existence
of an
environmental liability with respect to the Company's properties.
The
price of the Company's Common Stock may fluctuate significantly, which could
negatively affect holders of its Common Stock.
The
trading price of the Company's Common Stock may be volatile in response to
a
number of factors, including actual or anticipated variations in the Company's
quarterly financial results or dividends, changes in financial estimates by
securities analysts, additions or departures of key management personnel,
prevailing interest rates, issuances of the Company's Common Stock, preferred
stock or debt securities, and changes in market valuations of other companies
in
the real estate industry, even if not similar to the Company. In addition,
the
Company's financial results may be below the expectations of securities analysts
and investors. If this were to occur, the market price of its Common Stock
could
decrease significantly.
In
addition, the U.S. securities markets or sectors of these markets from time
to
time have experienced significant price and volume fluctuations. These
fluctuations often have been unrelated to the operating performance of companies
in these markets or sectors. Broad market and industry factors may negatively
affect the price of the Company's Common Stock, regardless of its operating
performance.
Future
offerings of debt securities, which would rank senior to the Company's Common
Stock upon its liquidation, and future offerings of equity securities, including
preferred stock senior to the Company's Common Stock for the purposes of
dividend and liquidating distributions, may adversely affect the market price
of
the Company's Common Stock.
The
Company may from time to time offer additional debt or equity securities. Upon
liquidation, holders of the Company's debt securities and shares of its
preferred stock and lenders with respect to other borrowings will receive a
distribution of the Company's available assets prior to the holders of its
Common Stock. Additional equity offerings may dilute the holdings of the
Company's existing stockholders and reduce the market price of its Common Stock.
Any preferred stock the Company issues may have a preference on liquidating
distributions or a preference on dividend payments that could limit its ability
to make a dividend distribution to the holders of its Common Stock.
Sales
of
substantial amounts of the Company's Common Stock, or the perception that these
sales could occur, could have a material adverse effect on the price of its
Common Stock. Holders of the Company's Common Stock bear the risk of its future
offerings causing the market price of its Common Stock to decline and diluting
their stock holdings in the Company.
The
Company's staggered board of directors and other provisions of its charter
and
bylaws may prevent a change in its control, which could adversely affect the
price of the Company's Common Stock.
The
Company's board of directors is divided into three classes of directors. The
current terms of the directors expire in 2008, 2009 and 2010. Directors of
each
class serve three-year terms, and each year one class of directors is elected
by
the stockholders. The staggered terms of the Company's directors may delay,
prevent or reduce the possibility of a tender offer or an attempt at a change
in
control, even though the Company's stockholders might consider a tender offer
or
change in control in their best interests. In addition, the Company's charter
and bylaws also contain other provisions that may delay or prevent a transaction
or a change in control that might be in the best interest of its stockholders.
See "—Restrictions on ownership of the Company's Common Stock may inhibit market
activity in the Company's Common Stock and restrict its business combination
opportunities."
Risks
Relating to Taxation as a REIT
The
Company's failure to qualify as a REIT would result in higher taxes and reduced
cash available for distribution to its stockholders.
The
Company operates in a manner intended to qualify as a REIT for federal income
tax purposes. The Company's ability to satisfy the asset tests depends upon
its
analysis of the fair market values of its assets, some of which are not
susceptible to a precise determination, and for which it will not obtain
independent appraisals. The Company's compliance with the REIT income and
quarterly asset requirements also depends upon its ability to successfully
manage the composition of its income and assets on an ongoing basis. Moreover,
the proper classification of an instrument as debt or equity for federal income
tax purposes, and the tax treatment of participation interests that the Company
holds in mortgage loans and mezzanine loans, may be uncertain in some
circumstances, which could affect the application of the REIT qualification
requirements. Accordingly, there can be no assurance that the Internal Revenue
Service ("IRS") will not contend that the Company's interests in subsidiaries
or
other issuers will not cause a violation of the REIT requirements.
If
the
Company were to fail to qualify as a REIT in any taxable year, it would be
subject to federal income tax, including any applicable alternative minimum
tax,
on its taxable income at regular corporate rates, and distributions to
stockholders would not be deductible by the Company in computing its taxable
income. Any such corporate tax liability could be substantial and would reduce
the amount of cash available for distribution to the Company's stockholders,
which in turn could have an adverse impact on the value of, and trading prices
for, its stock. Unless entitled to relief under certain Code provisions, the
Company also would be disqualified from taxation as a REIT for the four taxable
years following the year during which it ceased to qualify as a REIT.
If
the
Company fails to qualify as a REIT, the Company might need to borrow funds
or
liquidate some investments in order to pay the additional tax liability.
Accordingly, funds available for investment or distribution to the Company's
stockholders would be reduced for each of the years involved.
Qualification
as a REIT involves the application of highly technical and complex provisions
of
the Code to the Company's operations and the determination of various factual
matters and circumstances not entirely within the Company's control. There
are
only limited judicial or administrative interpretations of these provisions.
Although the Company believes that it operates in a manner consistent with
the
REIT qualification rules, the Company may not be able to remain so
qualified.
In
addition, the rules dealing with federal income taxation are constantly under
review by persons involved in the legislative process and by the IRS and the
United States Department of the Treasury. Changes to the tax law could adversely
affect the Company's stockholders.
REIT
distribution requirements could adversely affect the Company's ability to
execute its business plan.
The
Company generally must distribute annually at least 90% of its net taxable
income, excluding any net capital gain, in order for corporate income tax not
to
apply to earnings that it distributes. The Company intends to make distributions
to its stockholders to comply with the requirements of the Code. However,
differences in timing between the recognition of taxable income and the actual
receipt of cash could require the Company to sell assets or borrow funds on
a
short-term or long-term basis to meet the 90% distribution requirement of the
Code. Certain of the Company's assets may generate substantial mismatches
between taxable income and available cash. As a result, the requirement to
distribute a substantial portion of its net taxable income could cause the
Company to: (i) sell assets in adverse market conditions, (ii) borrow on
unfavorable terms or (iii) distribute amounts that would otherwise be invested
in future acquisitions, capital expenditures or repayment of debt, in order
to
comply with REIT requirements. Further, amounts distributed will not be
available to fund investment activities. If the Company fails to obtain debt
or
equity capital in the future, it could limit its ability to grow or continue
operations, which could adversely affect the value of its Common
Stock.
Restrictions
on ownership of the Company's Common Stock may inhibit market activity in the
Company's stock and restrict its business combination opportunities.
In
order
for the Company to maintain its qualification as a REIT under the Code, not
more
than 50% in value of its outstanding stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code) at any time during the
last half of each taxable year. To facilitate its meeting the requirements
for
qualification as a REIT at all times, the Company's charter generally prohibits
any person from acquiring or holding, directly or indirectly, shares of capital
stock in excess of 9.8% (in value or in number of shares, whichever is more
restrictive) of the aggregate of the outstanding shares of any class of its
capital stock. The Company's charter further prohibits (i) any person from
beneficially or constructively owning shares of capital stock that would result
in the Company being "closely held" under Section 856(h) of the Code or would
otherwise cause the Company to fail to qualify as a REIT, and (ii) any person
from transferring shares of capital stock if such transfer would result in
shares of capital stock being beneficially owned by fewer than 100 persons.
If
any transfer of shares of capital stock occurs which, if effective, would result
in a violation of one or more ownership limitations, then that number of shares
of capital stock, the beneficial or constructive ownership of which otherwise
would cause such person to violate such limitations (rounded to the nearest
whole share) shall be automatically transferred to a trustee of a trust for
the
exclusive benefit of one or more charitable beneficiaries, and the intended
transferee may not acquire any rights in such shares; provided, however, that
if
any transfer occurs which, if effective, would result in shares of capital
stock
being owned by fewer than 100 persons, then the transfer shall be null and
void
and the intended transferee shall acquire no rights to the stock. Subject to
certain limitations, the Company's board of directors may waive the limitations
for certain investors.
The
Company's authorized capital stock includes preferred stock issuable in one
or
more series. The issuance of preferred stock could have the effect of making
an
attempt to gain control of the Company by means of a merger, tender offer,
proxy
contest or otherwise more difficult. The currently outstanding preferred stock
has a preference on dividend payments that could affect the Company's ability
to
make dividend distributions to the common stockholders.
The
provisions of the Company's charter or relevant Maryland law may inhibit market
activity and the resulting opportunity for the holders of its Common Stock
to
receive a premium for their Common Stock that might otherwise exist in the
absence of such provisions. Such provisions also may make the Company an
unsuitable investment vehicle for any person seeking to obtain ownership of
more
than 9.8% of the outstanding shares of its Common Stock.
Material
provisions of the Maryland General Corporation Law ("MGCL") relating to
"business combinations" and a "control share acquisition" and of the Company's
charter and bylaws may also have the effect of delaying, deterring or preventing
a takeover attempt or other change in control of the Company that would be
beneficial to stockholders and might otherwise result in a premium over then
prevailing market prices. Although the Company's bylaws contain a provision
exempting the acquisition of its Common Stock by any person from the control
share acquisition statute, there can be no assurance that such provision will
not be amended or eliminated at any time in the future. These ownership limits
could delay or prevent a transaction or a change in its control that might
involve a premium price for its Common Stock or otherwise be in the best
interest of its stockholders.
Even
if the Company remains qualified as a REIT, it may face other tax liabilities
that reduce its cash flow.
Even
if
the Company remains qualified for taxation as a REIT, it may be subject to
certain federal, state, local and foreign taxes on its income and assets,
including taxes on any undistributed income, tax on income from certain
activities conducted as a result of a foreclosure, and state or local income,
property and transfer taxes, such as mortgage recording taxes. Any of these
taxes would decrease cash available for distribution to its stockholders. In
addition, in order to meet the REIT qualification requirements, or to avert
the
imposition of a 100% tax that applies to certain gains derived by a REIT from
dealer property or inventory, the Company may hold some of its assets through
taxable REIT subsidiaries. Such subsidiaries will be subject to corporate level
income tax at regular rates.
Complying
with REIT requirements may cause the Company to forgo otherwise attractive
opportunities.
To
qualify as a REIT for federal income tax purposes, the Company must continually
satisfy tests concerning, among other things, the sources of its income, the
nature and diversification of its assets, the amounts it distributes to its
stockholders and the ownership of its stock. The Company also may be required
to
make distributions to stockholders at disadvantageous times or when it does
not
have funds readily available for distribution. Thus, compliance with the REIT
requirements may hinder the Company's ability to make certain attractive
investments.
The
"taxable mortgage pool" rules may increase the taxes that the Company or its
stockholders may incur, and may limit the manner in which it effects future
securitizations.
Certain
of the Company's securitizations have resulted in the creation of taxable
mortgage pools for federal income tax purposes. As a REIT, so long as the
Company owns 100% of the equity interests in a taxable mortgage pool, it
generally would not be adversely affected by the characterization of the
securitization as a taxable mortgage pool. Certain categories of stockholders,
however, such as foreign stockholders eligible for treaty or other benefits,
stockholders with net operating losses, and certain tax-exempt stockholders
that
are subject to unrelated business income tax, could be subject to increased
taxes on a portion of their dividend income from the Company that is
attributable to the taxable mortgage pool. In addition, to the extent that
the
Company's stock is owned by tax-exempt "disqualified organizations," such as
certain government-related entities that are not subject to tax on unrelated
business income, it may incur a corporate level tax on a portion of its income
from the taxable mortgage pool. In that case, the Company may reduce the amount
of its distributions to any disqualified organization whose stock ownership
gave
rise to the tax.
ITEM
1B.
UNRESOLVED
STAFF COMMENTS
None.
ITEM
2. PROPERTIES
The
Company does not maintain an office. The Company uses the offices of the Manager
located at 40 East 52nd
Street,
New York, New York 10022, and does not pay rent for such use.
ITEM
3. LEGAL
PROCEEDINGS
At
December 31, 2007, there were no pending legal proceedings in which the Company
or any of its subsidiaries was a defendant or of which any of their property
was
subject.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of the Company's security holders during the
three months ended December 31, 2007 through the solicitation of proxies or
otherwise.
PART
II
ITEM
5. |
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
The
Company's Common Stock has been listed on the New York Stock Exchange and traded
under the symbol "AHR" since its initial public offering in March 1998. The
following table sets forth, for the periods indicated, the high, low and last
sale prices in dollars on the New York Stock Exchange for the Company's Common
Stock and the dividend per share declared by the Company.
2007
|
|
High
|
|
Low
|
|
Last
Sale
|
|
Dividends
Declared
|
|
Fourth
Quarter
|
|
$
|
10.20
|
|
$
|
6.67
|
|
$
|
7.24
|
|
$
|
0.30
|
|
Third
Quarter
|
|
|
12.11
|
|
|
6.53
|
|
|
9.10
|
|
|
0.30
|
|
Second
Quarter
|
|
|
12.94
|
|
|
11.50
|
|
|
11.70
|
|
|
0.30
|
|
First
Quarter
|
|
|
14.08
|
|
|
11.01
|
|
|
12.00
|
|
|
0.29
|
|
2006
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
14.48
|
|
$
|
10.77
|
|
$
|
12.73
|
|
$
|
0.29
|
|
Third
Quarter
|
|
|
13.57
|
|
|
11.65
|
|
|
12.86
|
|
|
0.29
|
|
Second
Quarter
|
|
|
12.44
|
|
|
10.25
|
|
|
12.16
|
|
|
0.29
|
|
First
Quarter
|
|
|
11.28
|
|
|
10.34
|
|
|
10.98
|
|
|
0.28
|
|
On
March
10, 2008, the closing sale price for the Company's Common Stock, as reported
on
the New York Stock Exchange, was $5.27. At February 22, 2008, there were
approximately 1,053 record holders of the Company's Common Stock. This figure
does not reflect beneficial ownership of shares held in nominee
name.
Information
relating to the Company's equity compensation plans in the Company's definitive
proxy statement for its 2008 Annual Meeting of Stockholders (the "Proxy
Statement"), to be filed with the SEC, is incorporated herein by
reference.
|
|
Issuer
Purchases of Equity Securities
|
|
|
|
Total
Number of Shares Purchased
|
|
Average
Price Paid per Share
|
|
Total
Number of Shares Purchased as Part of Publicly Announce Plans or
Programs
|
|
Maximum
Number of Shares That May Yet Be Purchased
|
|
January
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
February
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
March
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
April
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
May
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
June
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
July
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
August
2007
|
|
|
1,307,189
|
|
$
|
9.18
|
|
|
-
|
|
|
-
|
|
September
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
October
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
November
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
December
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
|
1,307,189
|
|
$
|
9.18
|
|
|
-
|
|
|
-
|
|
On
August
23, 2007, the Company repurchased 1,307,189 shares of its Common Stock on the
open market at $9.18 per share, the closing sales price of the Company's Common
Stock on the New York Stock Exchange on August 23, 2007. The repurchase settled
on August 29, 2007. The Company used approximately $12,100 of the net proceeds
from its Rule 144A sale of convertible senior notes in August 2007 to effect
this repurchase.
Recent
Sales of Unregistered Securities
During
the year ended December 31, 2007, the Company issued 514,595 shares
of unregistered Common Stock with an aggregate value of $6,169 as
follows. Pursuant to resolutions of the Board of Directors which authorized
that
a portion of incentive fees earned by the Manager may be paid in shares of
the
Company's Common Stock, the Company issued 509,595 restricted shares
to the Manager under the Company's 2006 Stock Award and Incentive Plan (the
"2006 Stock Plan") and pursuant to the provision of the amended and restated
investment advisory agreement between the Company and the Manager (the
"Management Agreement") providing that 30% of the Manager's incentive fees
earned under the Management Agreement shall be paid in shares of the Company's
Common Stock subject to certain provisions under the Management Agreement and
the 2006 Stock Plan. The Company issued 5,000 shares to
its unaffiliated directors pursuant to its annual grant of restricted
stock to unaffiliated directors as part of their annual compensation. The
issuances of Common Stock were made in reliance upon the exemption from
registration under Section 4(2) of the Securities Act.
ITEM
6. SELECTED
FINANCIAL DATA
The
selected financial data set forth below at and for the years ended December
31,
2007, 2006, 2005, 2004, and 2003 has been derived from the Company's audited
consolidated financial statements. This information should be read in
conjunction with "Item 1. Business", "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations", and the audited
consolidated financial statements and notes thereto included in "Item 8.
Financial Statements and Supplementary Data". The Company derived the selected
financial data as of December 31, 2005, 2004 and 2003 and for each of the two
years in the period ended December 31, 2004 from the Company's audited
consolidated financial statements and notes thereto not included elsewhere
in
this report.
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(In
thousands, except per share data)
|
|
Operating
Data:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
326,436
|
|
$
|
275,986
|
|
$
|
231,768
|
|
$
|
194,967
|
|
$
|
159,456
|
|
Earnings
from equity investments
|
|
|
32,093
|
|
|
27,431
|
|
|
12,146
|
|
|
8,899
|
|
|
4,322
|
|
Interest
expense
|
|
|
241,000
|
|
|
212,388
|
|
|
163,458
|
|
|
128,166
|
|
|
83,249
|
|
Other
operating expenses
|
|
|
27,521
|
|
|
25,830
|
|
|
19,181
|
|
|
12,383
|
|
|
11,707
|
|
Other
gain (loss) (1)
|
|
|
(6,032
|
)
|
|
13,906
|
|
|
9,322
|
|
|
(20,125
|
)
|
|
(77,464
|
)
|
Income
from continuing operations
|
|
|
83,976
|
|
|
79,105
|
|
|
70,597
|
|
|
43,192
|
|
|
(8,642
|
)
|
Income
from discontinued operations (2)
|
|
|
-
|
|
|
1,366
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
income (loss)
|
|
|
83,976
|
|
|
80,471
|
|
|
70,597
|
|
|
43,192
|
|
|
(8,642
|
)
|
Net
income (loss) available to common stockholders
|
|
|
72,320
|
|
|
75,079
|
|
|
65,205
|
|
|
25,768
|
|
|
(16,386
|
)
|
Net
income (loss) from continuing operations
per share of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1.18
|
|
|
1.29
|
|
|
1.20
|
|
|
0.50
|
|
|
(0.34
|
)
|
Diluted
|
|
|
1.18
|
|
|
1.29
|
|
|
1.20
|
|
|
0.50
|
|
|
(0.34
|
)
|
Income
from discontinued operations per
share of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
-
|
|
|
0.02
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Diluted
|
|
|
-
|
|
|
0.02
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1.18
|
|
|
1.31
|
|
|
1.20
|
|
|
0.50
|
|
|
(0.34
|
)
|
Diluted
|
|
|
1.18
|
|
|
1.31
|
|
|
1.20
|
|
|
0.50
|
|
|
(0.34
|
)
|
Balance
Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
5,247,710
|
|
|
5,218,263
|
|
|
4,234,825
|
|
|
3,729,134
|
|
|
2,398,846
|
|
Total
liabilities
|
|
|
4,796,339
|
|
|
4,562,154
|
|
|
3,636,807
|
|
|
3,215,396
|
|
|
1,981,416
|
|
Total
stockholders' equity
|
|
|
451,371
|
|
|
656,109
|
|
|
598,018
|
|
|
513,738
|
|
|
417,430
|
|
|
(1)
|
Other
gains (losses) for the year ended December 31, 2007 of $(6,032) consist
primarily of a loss of $(12,469) related to impairments on assets,
a loss
of $(5,151) related to securities held-for-trading, a gain of $6,272
related to foreign currency, and a gain of $5,316 related to the
sale of
securities available-for-sale. Other gains (losses) for the year
ended
December 31, 2006 of $13,906 consist primarily of a loss of $(7,880)
related to impairments on assets, a gain of $3,254 related to securities
held-for-trading, a gain of $2,161 related to foreign currency, a
loss of
$(12,661) related to a change in the Company's hedging policy and
a gain
of $29,032 related to the sale of securities available-for-sale.
Other
gains (losses) for the year ended December 31, 2005 of $9,322 consist
primarily of a loss of $(5,088) related to impairments on assets
and a
gain of $16,543 related to securities available-for-sale. Other gains
(losses) for the year ended December 31, 2004 of $(20,125) consist
primarily of a gain of $17,544 related to securities available-for-sale,
a
loss of $(26,018) related to impairments on assets and a loss of
$(11,464)
related to securities held-for-trading. Other gains (losses) for
the year
ended December 31, 2003 of $(77,464) consist primarily of a loss
of
$(32,426) related to impairments on assets and a loss of $(38,206)
related
to securities held-for-trading.
|
|
(2)
|
The
Company purchased a defaulted loan from a Controlling Class CMBS
trust
during the first quarter of 2006. The Company sold the property during
the
second quarter of 2006 and recorded a gain from discontinued operations
of
$1,366 on its consolidated statement of
operations.
|
ITEM
7.
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.
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 commenced operations on March 24, 1998.
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 and equity.
The
Company's Common Stock is traded on the New York Stock Exchange ("NYSE") 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's principal focus is to invest in a diverse portfolio of primarily
high
yield commercial real estate loans and CMBS. The CMBS that the Company purchases
are fixed income instruments similar to bonds that carry an interest coupon
and
stated principal. The cash flow used to pay the interest and principal on the
CMBS comes from a designated pool of first mortgage loans on commercial real
estate (the "Underlying Loans"). Underlying Loans usually are originated by
commercial banks or investment banks and are secured by a first mortgage on
office buildings, retail centers, apartment buildings, hotels and other types
of
commercial real estate. A typical loan pool may contain several hundred
Underlying Loans with principal amounts of as little as $1,000 to over $100,000.
The pooling concept permits significant geographic diversification. Converting
loans into CMBS in this fashion allows investors to purchase these securities
in
global capital markets and to participate in the commercial real estate sector
with significant diversification among property types, sizes and locations
in
one fixed income investment.
The
type
of CMBS issued from a typical loan pool is generally broken down by credit
rating. The highest rated CMBS will receive payments of principal first and
is
therefore least exposed to the credit performance of the Underlying Loan. These
securities typically will carry a credit rating of AAA and will be issued with
a
principal amount that represents some portion of the total principal amount
of
the Underlying Loan pool.
The
CMBS
that receive principal payments last are generally rated below investment grade
(BB+ or lower.) As the last to receive principal, these CMBS are also the first
to absorb any credit losses incurred in the Underlying Loan pool. Typically,
the
principal amount of these below investment grade classes represents 2.0% to
5.0%
of the principal of the Underlying Loan pools. The investor that owns the lowest
rated, or non-rated, CMBS class is designated as the controlling class
representative for the underlying loan pool. This designation allows the holder
to assert a significant degree of influence over any workouts or foreclosures
of
defaulted Underlying Loans. These securities are generally issued with a high
yield to compensate for the credit risk inherent in owning the CMBS class which
is the first to absorb losses.
The
Company's high yield commercial real estate loan strategy encompasses B notes
(defined below) and mezzanine loans. B notes and mezzanine loans are based
on a
similar concept of investing in a portion of the principal and interest of
a
specific loan instead of a pool of loans as in CMBS. In the case of B notes,
the
principal amount of a single loan is separated into a senior interest ("A note")
and a junior interest ("B note"). Prior to a borrower default, the A note and
the B note receive principal and interest pari passu; however, after a borrower
default, the A note would receive its principal and interest first and the
B
note would absorb the credit losses that occur, if any, up to the full amount
of
its principal. The B note holder generally has certain rights to influence
workouts or foreclosures. The Company invests in B notes as they provide
relatively high yields with a degree of influence over dispositions. Mezzanine
loans generally are secured by ownership interests in an entity that owns real
estate. These loans generally are subordinate to a first mortgage and would
absorb a credit loss prior to the senior mortgage holder.
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 $1.357
trillion of
assets
under management at December 31, 2007. The Company believes that the investment
in highly structured products requires significant expertise in traditional
real
estate underwriting as well as in the capital markets. Through its external
management contract with the Manager, the Company can source and manage more
opportunities by taking advantage of a unique platform that combines these
two
disciplines.
The
table
below is a summary of the Company's investments by asset class for the last
five
years:
|
|
Carrying
Value at December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Commercial
real
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
estate
securities
|
|
$
|
2,274,151
|
|
|
49.3
|
%
|
$
|
2,494,099
|
|
|
53.0
|
%
|
$
|
2,005,383
|
|
|
49.7
|
%
|
$
|
1,623,939
|
|
|
44.6
|
%
|
$
|
1,393,010
|
|
|
62.8
|
%
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgage
loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pools(1)
|
|
|
1,240,793
|
|
|
26.9
|
|
|
1,271,014
|
|
|
27.0
|
|
|
1,292,407
|
|
|
32.0
|
|
|
1,312,045
|
|
|
36.1
|
|
|
-
|
|
|
-
|
|
Commercial
real
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
estate
loans(2)
|
|
|
1,082,785
|
|
|
23.5
|
|
|
554,148
|
|
|
11.8
|
|
|
425,453
|
|
|
10.6
|
|
|
329,930
|
|
|
9.1
|
|
|
97,984
|
|
|
4.4
|
|
Commercial
real
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
estate
equity
|
|
|
9,350
|
|
|
0.2
|
|
|
109,744
|
|
|
2.3
|
|
|
51,003
|
|
|
1.3
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Commercial
real
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
estate
assets
|
|
|
4,607,079
|
|
|
99.9
|
|
|
4,429,005
|
|
|
94.1
|
|
|
3,774,246
|
|
|
93.6
|
|
|
3,265,914
|
|
|
89.8
|
|
|
1,490,994
|
|
|
67.2
|
|
Residential
mortgage-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
("RMBS")
|
|
|
10,183
|
|
|
0.1
|
|
|
276,344
|
|
|
5.9
|
|
|
259,026
|
|
|
6.4
|
|
|
372,071
|
|
|
10.2
|
|
|
726,717
|
|
|
32.8
|
|
Total
|
|
$
|
4,617,262
|
|
|
100.0
|
%
|
$
|
4,705,349
|
|
|
100.0
|
%
|
$
|
4,033,272
|
|
|
100.0
|
%
|
$
|
3,637,985
|
|
|
100.0
|
%
|
$
|
2,217,711
|
|
|
100.0
|
%
|
|
(1)
|
Represents
a Controlling Class CMBS that is consolidated for accounting purposes.
See
Note 4 of the consolidated financial
statements.
|
|
(2)
|
Includes
investments in the Carbon Funds and real estate joint
ventures.
|
Summary
of Commercial Real Estate Assets
A
summary
of the Company's commercial real estate assets with estimated fair values in
local currencies at December 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
|
|
$
|
1,881,328
|
|
$
|
445,618
|
|
$
|
-
|
|
$
|
1,240,793
|
|
$
|
3,567,739
|
|
$
|
3,567,739
|
|
GBP
|
|
£ |
35,247
|
|
£ |
45,944
|
|
|
-
|
|
|
-
|
|
£ |
81,191
|
|
|
161,618
|
|
Euro
|
|
€ |
131,645
|
|
€ |
354,458
|
|
|
-
|
|
|
-
|
|
€ |
486,103
|
|
|
710,707
|
|
Canadian
Dollars
|
|
C$ |
89,805
|
|
C$ |
6,249
|
|
|
-
|
|
|
-
|
|
C$ |
96,054
|
|
|
97,324
|
|
Japanese
Yen
|
|
¥ |
4,378,759
|
|
|
-
|
|
|
-
|
|
|
-
|
|
¥ |
4,378,759
|
|
|
39,196
|
|
Swiss
Francs
|
|
|
-
|
|
CHF |
23,939
|
|
|
-
|
|
|
-
|
|
CHF |
23,939
|
|
|
21,145
|
|
Indian
Rupees
|
|
|
-
|
|
|
-
|
|
Rs |
368,483
|
|
|
-
|
|
Rs |
368,483
|
|
|
9,350
|
|
Total
USD Equivalent
|
|
$
|
2,274,151
|
|
$
|
1,082,785
|
|
$
|
9,350
|
|
$
|
1,240,793
|
|
$
|
4,607,079
|
|
$
|
4,607,079
|
|
(1) |
Includes
the Company's investments of $99,398 in the Carbon Funds at December
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
|
|
C$ |
24,339
|
|
|
-
|
|
|
-
|
|
|
-
|
|
C$ |
24,339
|
|
|
20,885
|
|
Indian
Rupees
|
|
|
-
|
|
|
-
|
|
Rs |
169,823
|
|
|
-
|
|
Rs |
169,823
|
|
|
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 of $72,403 in the Carbon Funds 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. Outside its
collateralized debt obligations ("CDOs"), the Company mitigates this impact
by
utilizing local currency-denominated financing on its foreign investments and
foreign currency forward commitments to hedge the net exposure. In its seventh
CDO ("Euro CDO"), the Company mitigates the exposure to foreign exchange rates
with currency swaps agreements. Net foreign currency gain (loss) was $6,272,
$2,161 and $(134) for the years ended December 31, 2007, 2006 and 2005,
respectively.
Commercial
Real Estate Assets Portfolio Activity
The
following table details the par, estimated fair value, adjusted purchase price
(or "amortized cost"), and loss adjusted yield of the Company's commercial
real
estate securities included in as well as outside of the Company's CDOs at
December 31, 2007. The 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
|
|
Estimated
Fair Value
|
|
Dollar
Price
|
|
Adjusted
Purchase Price
|
|
Dollar
Price
|
|
Loss
Adjusted
Yield
|
|
Investment
grade CMBS
|
|
$
|
179,638
|
|
$
|
149,856
|
|
$
|
83.42
|
|
$
|
158,216
|
|
$
|
88.07
|
|
|
6.56
|
%
|
Investment
grade real estate investment trust ("REIT")debt
|
|
|
23,121
|
|
|
20,034
|
|
|
86.65
|
|
|
22,995
|
|
|
99.45
|
|
|
5.49
|
%
|
CMBS
rated BB+ to B
|
|
|
546,299
|
|
|
316,210
|
|
|
57.88
|
|
|
417,204
|
|
|
76.37
|
|
|
8.71
|
%
|
CMBS
rated B- or lower
|
|
|
513,189
|
|
|
144,797
|
|
|
28.21
|
|
|
166,381
|
|
|
32.42
|
|
|
10.73
|
%
|
CDO
Investments
|
|
|
347,807
|
|
|
46,241
|
|
|
13.30
|
|
|
63,987
|
|
|
18.40
|
|
|
20.56
|
%
|
CMBS
Interest Only securities ("IOs")
|
|
|
818,670
|
|
|
15,915
|
|
|
1.94
|
|
|
14,725
|
|
|
1.80
|
|
|
8.80
|
%
|
Multifamily
agency securities
|
|
|
35,955
|
|
|
37,123
|
|
|
103.25
|
|
|
36,815
|
|
|
102.39
|
|
|
5.37
|
%
|
Total
commercial real estate securities outside CDOs
|
|
|
2,464,679
|
|
|
730,176
|
|
|
29.61
|
|
|
880,323
|
|
|
35.70
|
|
|
9.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate loans and equity outside CDOs
|
|
|
|
|
|
|
Commercial
real estate loans
|
|
|
531,516
|
|
|
618,328
|
|
|
|
|
|
601,144
|
|
|
|
|
|
|
|
Commercial
mortgage loan pools
|
|
|
1,174,659
|
|
|
1,240,793
|
|
|
105.63
|
|
|
1,240,793
|
|
|
105.63
|
|
|
4.15
|
%
|
Commercial
real estate
|
|
|
9,350
|
|
|
9,350
|
|
|
|
|
|
9,350
|
|
|
|
|
|
|
|
Total
commercial real estate loans and equity outside CDOs
|
|
|
1,715,525
|
|
|
1,868,471
|
|
|
105.63
|
|
|
1,851,287
|
|
|
105.63
|
|
|
4.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate assets included in CDOs
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
|
801,748
|
|
|
768,671
|
|
|
95.87
|
|
|
759,524
|
|
|
94.73
|
|
|
7.09
|
%
|
Investment
grade REIT debt
|
|
|
223,324
|
|
|
226,060
|
|
|
101.23
|
|
|
224,608
|
|
|
100.57
|
|
|
5.85
|
%
|
CMBS
rated BB+ to B
|
|
|
627,550
|
|
|
466,564
|
|
|
74.35
|
|
|
486,162
|
|
|
77.47
|
|
|
10.01
|
%
|
CMBS
rated B- or lower
|
|
|
193,155
|
|
|
54,342
|
|
|
28.13
|
|
|
68,693
|
|
|
35.56
|
|
|
14.98
|
%
|
CDO
Investments
|
|
|
4,000
|
|
|
3,390
|
|
|
84.75
|
|
|
3,483
|
|
|
87.07
|
|
|
7.79
|
%
|
Credit
tenant lease
|
|
|
23,235
|
|
|
24,949
|
|
|
107.38
|
|
|
23,867
|
|
|
102.72
|
|
|
5.66
|
%
|
Commercial
real estate loans
|
|
|
476,782
|
|
|
464,456
|
|
|
97.41
|
|
|
434,364
|
|
|
91.10
|
|
|
8.73
|
%
|
Total
commercial real estate assets included in CDOs
|
|
|
2,349,794
|
|
|
2,008,432
|
|
|
85.47
|
|
|
2,000,701
|
|
|
85.14
|
|
|
8.28
|
%
|
Total
commercial real estate assets
|
|
$
|
6,529,998
|
|
$
|
4,607,079
|
|
|
|
|
$
|
4,732,311
|
|
|
|
|
|
|
|
During
the year ended December 31, 2007, the Company's commercial real estate assets
increased by 4.0% from $4,429,006 to $4,607,079. This increase was primarily
attributable to the purchase of subordinated CMBS and investment grade CMBS
that
have an estimated fair value at December 31, 2007 of $379,277 and $113,200,
respectively. The purchase of the aforementioned securities was offset by the
sale of assets with an estimated fair value of $541,676.
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
|
|
$
|
23,060
|
|
$
|
21,426
|
|
|
92.92
|
|
$
|
21,753
|
|
|
102.58
|
|
|
5.51
|
%
|
Investment
grade REIT debt
|
|
|
23,121
|
|
|
21,566
|
|
|
93.28
|
|
|
22,973
|
|
|
99.36
|
|
|
5.49
|
%
|
CMBS
rated BB+ to B
|
|
|
108,176
|
|
|
86,677
|
|
|
80.13
|
|
|
87,486
|
|
|
81.59
|
|
|
8.01
|
%
|
CMBS
rated B- or lower
|
|
|
148,310
|
|
|
50,165
|
|
|
33.82
|
|
|
46,043
|
|
|
31.27
|
|
|
9.06
|
%
|
CDO
Investments
|
|
|
406,605
|
|
|
117,246
|
|
|
28.84
|
|
|
114,482
|
|
|
28.16
|
|
|
14.19
|
%
|
CMBS
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
|
%
|
Total
commercial real estate securities outside CDOs
|
|
|
4,136,930
|
|
|
816,259
|
|
|
19.73
|
|
|
814,701
|
|
|
19.77
|
|
|
7.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate loans and equity outside CDOs
|
|
|
|
|
|
|
Commercial
real estate loans
|
|
|
63,439
|
|
|
140,985
|
|
|
|
|
|
141,951
|
|
|
|
|
|
|
|
Commercial
mortgage loan pools
|
|
|
1,207,212
|
|
|
1,271,014
|
|
|
105.29
|
|
|
1,271,014
|
|
|
105.29
|
|
|
4.14
|
%
|
Commercial
real estate
|
|
|
96,453
|
|
|
109,744
|
|
|
|
|
|
96,453
|
|
|
|
|
|
|
|
Total
commercial real estate loans and equity outside CDOs
|
|
|
1,367,104
|
|
|
1,521,743
|
|
|
105.29
|
|
|
1,509,418
|
|
|
105.29
|
|
|
4.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate assets included in CDOs
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
|
779,653
|
|
|
794,622
|
|
|
101.92
|
|
|
750,662
|
|
|
94.34
|
|
|
7.00
|
%
|
Investment
grade REIT debt
|
|
|
223,324
|
|
|
227,678
|
|
|
101.95
|
|
|
224,964
|
|
|
100.73
|
|
|
5.92
|
%
|
CMBS
rated BB+ to B
|
|
|
614,780
|
|
|
554,185
|
|
|
90.14
|
|
|
508,908
|
|
|
78.28
|
|
|
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
|
|
|
357,111
|
|
|
413,163
|
|
|
115.70
|
|
|
400,559
|
|
|
96.95
|
|
|
8.36
|
%
|
Total
commercial real estate assets included in CDOs
|
|
|
2,191,897
|
|
|
2,091,004
|
|
|
95.40
|
|
|
1,980,259
|
|
|
85.91
|
|
|
8.01
|
%
|
Total
commercial real estate assets
|
|
$
|
7,695,931
|
|
$
|
4,429,006
|
|
|
|
|
$
|
4,304,378
|
|
|
|
|
|
|
|
During
the year ended December 31, 2006, the Company's commercial real estate assets
increased by 17% from $3,774,246 to $4,429,006. This increase was primarily
attributable to the purchase of subordinated CMBS, multifamily agency
securities, and investment grade CMBS that have an estimated fair value at
December 31, 2006 of $336,176, $193,395, and $75,841, respectively. The purchase
of the aforementioned securities was offset by the sale of assets with an
estimated fair value of $182,211.
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 December 31, 2007,
over 81% 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 December 31,
2007.
|
|
Collateral
at
December
31, 2007
|
|
Debt
at
December
31, 2007
|
|
|
|
|
|
Adjusted
Purchase Price
|
|
Loss
Adjusted Yield
|
|
Adjusted
Issue Price
|
|
Weighted
Average Cost of Funds *
|
|
Net
Spread
|
|
CDO
I
|
|
$
|
463,751
|
|
|
8.12
|
%
|
$
|
396,176
|
|
|
7.29
|
%
|
|
0.83
|
%
|
CDO
II
|
|
|
328,380
|
|
|
7.64
|
%
|
|
291,991
|
|
|
6.03
|
%
|
|
1.61
|
%
|
CDO
III
|
|
|
379,757
|
|
|
7.13
|
%
|
|
376,581
|
|
|
5.15
|
%
|
|
1.98
|
%
|
CDO
HY3
|
|
|
414,109
|
|
|
9.79
|
%
|
|
373,330
|
|
|
6.29
|
%
|
|
3.50
|
%
|
Euro
CDO
|
|
|
420,320
|
|
|
8.50
|
%
|
|
385,250**
|
|
|
5.71
|
%
|
|
2.79
|
%
|
Total
**
|
|
$
|
2,006,317
|
|
|
8.28
|
%
|
$
|
1,823,328
|
|
|
6.11
|
%
|
|
2.17
|
%
|
* |
Weighted
Average Cost of Funds is the current cost of funds plus hedging
expenses.
|
** |
The
Company chose not to sell $12,500 of par of Euro CDO debt rated
BB.
|
On
May
23, 2006, the Company closed its sixth CDO issuance ("CDO HY3") resulting in
the
issuance of $417,000 of non-recourse debt to investors. The debt is secured
by a
portfolio of CMBS and subordinated commercial real estate loans. This debt
was
rated AAA through BBB- and the Company retained additional debt rated BB and
100% of the preferred shares issued by CDO HY3.
On
December 14, 2006, the Company closed the Euro CDO. The Euro CDO sold €263,500
of non-recourse debt at a weighted average spread to Euro LIBOR of 60 basis
points. The €263,500 consists of €251,000 of investment grade debt at a weighted
average spread to Euro LIBOR of 50 basis points and €12,500 of below investment
grade debt. The Company retained an additional €12,500 of below investment grade
debt and all of the CDO's preferred shares. This transaction was the Company's
first CDO that was not U.S. dollar denominated.
There
were no CDOs issued in 2007.
Securitizations
On
July
26, 2005, the Company closed its fifth CDO ("CDO HY2") and issued non-recourse
debt with a face amount of $365,010. Senior investment grade notes with a face
amount of $240,134 were issued. The Company retained the floating rate BBB-
note, the below investment grade notes, and the preferred shares. The Company
recorded CDO HY2 as a secured financing for accounting purposes and consolidated
the assets, liabilities, income and expenses of CDO HY2 until the sale of the
floating rate BBB- note in December 2005, at which point CDO HY2 qualified
as a
sale under FAS 140.
There
were no securitizations closed during 2006 and 2007.
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 where it maintains the right to control the
foreclosure/workout process on the underlying loans as 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 December 31, 2007, the Company owns 39
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 $59,534,400. At December
31, 2007, subordinated Controlling Class CMBS with a par of $1,586,172 were
included on the Company's consolidated statement of financial condition and
subordinated Controlling Class CMBS with a par of $233,136 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 December 31, 2007 was $2,561,897; the average credit protection, or
subordination level, of this portfolio is 0.76%.
The
Company's investment in its subordinated Controlling Class CMBS by credit rating
category at December 31, 2007 is as follows:
|
|
Par
|
|
Estimated
Fair Value
|
|
Dollar
Price
|
|
Adjusted
Purchase Price
|
|
Dollar
Price
|
|
Weighted
Average Subordination Level
|
|
BB+
|
|
$
|
277,946
|
|
$
|
189,351
|
|
|
68.13
|
|
$
|
228,054
|
|
|
82.05
|
|
|
3.59
|
%
|
BB
|
|
|
191,808
|
|
|
117,702
|
|
|
61.36
|
|
|
154,916
|
|
|
80.77
|
|
|
2.55
|
%
|
BB-
|
|
|
192,875
|
|
|
121,665
|
|
|
63.08
|
|
|
137,092
|
|
|
71.08
|
|
|
4.33
|
%
|
B+
|
|
|
103,352
|
|
|
55,664
|
|
|
53.86
|
|
|
67,214
|
|
|
65.03
|
|
|
2.15
|
%
|
B
|
|
|
140,275
|
|
|
71,947
|
|
|
51.29
|
|
|
83,949
|
|
|
59.85
|
|
|
1.76
|
%
|
B-
|
|
|
123,683
|
|
|
49,817
|
|
|
40.28
|
|
|
63,282
|
|
|
51.17
|
|
|
1.29
|
%
|
CCC
|
|
|
22,313
|
|
|
6,293
|
|
|
28.21
|
|
|
7,814
|
|
|
35.01
|
|
|
0.88
|
%
|
NR
|
|
|
533,920
|
|
|
118,473
|
|
|
22.19
|
|
|
139,714
|
|
|
26.17
|
|
|
n/a
|
|
Total
|
|
$
|
1,586,172
|
|
$
|
730,912
|
|
|
46.08
|
|
$
|
882,035
|
|
|
55.61
|
|
|
|
|
The
Company's investment in its subordinated Controlling Class CMBS by credit rating
category at December 31, 2006 is 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
|
|
|
|
|
During
2007, the par amount of the Company's Controlling Class CMBS was reduced by
$4,600; of this amount, $1,001 of the par reductions were related to Controlling
Class CMBS held in CDO HY1 and CDO HY2. Further delinquencies and losses may
cause the par reductions to continue 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 consolidated statement of operations
according to Emerging Issues Task Force ("EITF") Issue 99-20, Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial Interests
in Securitized Financial Assets
("EITF
99-20"). Also during 2007, the loan pools were paid down by $2,402,486. 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 year ended December 31,
2007,
14 securities in eight of the Company's Controlling Class CMBS were upgraded
by
at least one rating agency and two securities in two of the Company's
Controlling Class CMBS were downgraded by at least one rating agency.
Additionally, at least one rating agency upgraded 48 of the Company's
non-Controlling Class commercial real estate securities. Seven of the Company's
investment grade REIT debt securities were downgraded during the year ended
December 31, 2007.
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 to 2007. Comparable delinquency
statistics referenced by vintage year as a percentage of par outstanding at
December 31, 2007 are shown in the table below:
Vintage
Year
|
|
Underlying
Collateral
|
|
Delinquencies
Outstanding
|
|
Lehman
Brothers Conduit Guide
|
|
1998
|
|
|
3,362,368
|
|
|
0.84
|
%
|
|
0.81
|
%
|
1999
|
|
|
520,718
|
|
|
2.12
|
%
|
|
0.83
|
%
|
2001
|
|
|
811,079
|
|
|
0.00
|
%
|
|
0.83
|
%
|
2002
|
|
|
954,414
|
|
|
0.00
|
%
|
|
0.62
|
%
|
2003
|
|
|
1,958,317
|
|
|
1.71
|
%
|
|
0.87
|
%
|
2004
|
|
|
6,366,795
|
|
|
0.98
|
%
|
|
0.39
|
%
|
2005
|
|
|
12,005,784
|
|
|
0.55
|
%
|
|
0.41
|
%
|
2006
|
|
|
13,740,025
|
|
|
0.73
|
%
|
|
0.27
|
%
|
2007
|
|
|
19,814,900
|
|
|
0.25
|
%
|
|
0.17
|
%
|
Total
|
|
$
|
59,534,400
|
|
|
0.59
|
%* |
|
0.35
|
%* |
*
Weighted average based on current principal balance.
Delinquencies
on the Company's CMBS collateral as a percent of principal are in line with
expectations. 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 December 31, 2007
and 2006:
|
|
December
31, 2007
|
|
December
31, 2006
|
|
|
|
Principal
|
|
Number
of Loans
|
|
%
of
Collateral
|
|
Principal
|
|
Number
of
Loans
|
|
%
of
Collateral
|
|
Past
due 30 days to 60 days
|
|
$
|
93,934
|
|
|
17
|
|
|
0.16
|
%
|
$
|
70,123
|
|
|
10
|
|
|
0.17
|
%
|
Past
due 60 days to 90 days
|
|
|
9,655
|
|
|
5
|
|
|
0.02
|
%
|
|
19,767
|
|
|
5
|
|
|
0.05
|
|
Past
due 90 days or more
|
|
|
169,710
|
|
|
25
|
|
|
0.29
|
%
|
|
11,365
|
|
|
7
|
|
|
0.03
|
|
Real
Estate owned
|
|
|
41,202
|
|
|
13
|
|
|
0.07
|
%
|
|
56,486
|
|
|
10
|
|
|
0.13
|
|
Foreclosure
|
|
|
29,674
|
|
|
4
|
|
|
0.05
|
%
|
|
7,164
|
|
|
2
|
|
|
0.02
|
|
Total
Delinquent
|
|
|
344,175
|
|
|
64
|
|
|
0.59
|
%
|
$
|
164,905
|
|
|
34
|
|
|
0.39
|
%
|
Total
Collateral Balance
|
|
$
|
59,534,400
|
|
|
4,632
|
|
|
|
|
$
|
42,398,701
|
|
|
4,667
|
|
|
|
|
Of
the 64
delinquent loans at December 31, 2007, 13 loans were real estate owned and
being
marketed for sale, four loans were in foreclosure and the remaining 47 loans
were in some form of workout negotiations. The Controlling Class CMBS owned
by
the Company have a delinquency rate of 0.59%, which generally tracks industry
averages. During 2007, the underlying collateral experienced early payoffs
of
$2,402,486 representing 4.0% of the year-end pool balance. These loans were
paid
off at par with no loss. Aggregate losses related to the underlying collateral
of $17,454 were realized during year ended December 31, 2007. This brings
cumulative realized losses to $126,903, which is 16.3% of the Company's total
estimated loss of $779,338. 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 December 31, 2007 and 2006
are
as follows:
|
|
12/31/07
Exposure
|
|
12/31/06
Exposure
|
|
Property
Type
|
|
Collateral
Balance
|
|
%
of Total
|
|
Collateral
Balance
|
|
%
of Total
|
|
Office
|
|
$
|
19,541,064
|
|
|
32.8
|
%
|
$
|
13,415,671
|
|
|
31.6
|
%
|
Retail
|
|
|
17,154,342
|
|
|
28.8
|
|
|
13,217,676
|
|
|
31.2
|
|
Multifamily
|
|
|
13,503,618
|
|
|
22.7
|
|
|
8,978,823
|
|
|
21.2
|
|
Industrial
|
|
|
4,473,917
|
|
|
7.5
|
|
|
3,332,194
|
|
|
7.9
|
|
Lodging
|
|
|
3,970,017
|
|
|
6.7
|
|
|
2,726,441
|
|
|
6.4
|
|
Healthcare
|
|
|
400,409
|
|
|
0.7
|
|
|
305,612
|
|
|
0.7
|
|
Other
|
|
|
491,033
|
|
|
0.8
|
|
|
422,284
|
|
|
1.0
|
|
Total
|
|
$
|
59,534,400
|
|
|
100
|
%
|
$
|
42,398,701
|
|
|
100
|
%
|
At
December 31, 2007 and 2006, the commercial mortgage loans underlying the
Controlling Class CMBS held by the Company were secured by properties at the
locations identified below:
|
|
Percentage
(1)
|
|
Geographic
Location
|
|
2007
|
|
2006
|
|
California
|
|
|
16.8
|
%
|
|
16.1
|
%
|
New
York
|
|
|
12.2
|
|
|
12.5
|
|
Texas
|
|
|
9.6
|
|
|
8.8
|
|
Florida
|
|
|
8.6
|
|
|
7.2
|
|
Other
(2)
|
|
|
52.8
|
|
|
55.4
|
|
Total
|
|
|
100
|
%
|
|
100
|
%
|
|
(1)
|
Based
on a percentage of the total unpaid principal balance of the underlying
loans.
|
|
(2)
|
No
other individual category comprises more than 5% of the
total.
|
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 generally accepted accounting principles 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 $84,507 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 December 31, 2007, 2006, and 2005:
|
|
Loans
Outstanding
|
|
Weighted
Average
|
|
|
|
December 31,
2007
|
|
December
31, 2006
|
|
December
31, 2005
|
|
Yield
|
|
Property
Type
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
2007
|
|
2006
|
|
2005
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
52,209
|
|
|
5.3
|
%
|
$
|
51,553
|
|
|
10.7
|
%
|
$
|
21,456
|
|
|
5.9
|
%
|
|
9.6
|
%
|
|
9.6
|
%
|
|
9.8
|
%
|
Office
|
|
|
45,640
|
|
|
4.6
|
|
|
65,812
|
|
|
13.6
|
|
|
65,126
|
|
|
17.8
|
|
|
10.3
|
|
|
8.5
|
|
|
8.5
|
|
Multifamily
|
|
|
174,873
|
|
|
17.8
|
|
|
51,368
|
|
|
10.7
|
|
|
28,480
|
|
|
7.8
|
|
|
9.7
|
|
|
11.1
|
|
|
10.6
|
|
Storage
|
|
|
32,307
|
|
|
3.3
|
|
|
32,625
|
|
|
6.8
|
|
|
32,913
|
|
|
9.0
|
|
|
9.1
|
|
|
9.1
|
|
|
9.1
|
|
Land
|
|
|
25,000
|
|
|
2.5
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9.6
|
|
|
-
|
|
|
-
|
|
Hotel
|
|
|
12,208
|
|
|
1.2
|
|
|
33,028
|
|
|
6.9
|
|
|
67,881
|
|
|
18.6
|
|
|
10.9
|
|
|
10.3
|
|
|
9.4
|
|
Communication
Tower
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
20,000
|
|
|
5.5
|
|
|
-
|
|
|
-
|
|
|
9.1
|
|
Other
Mixed Use
|
|
|
3,983
|
|
|
0.5
|
|
|
3,983
|
|
|
0.8
|
|
|
-
|
|
|
-
|
|
|
8.5
|
|
|
9.1
|
|
|
-
|
|
Total
U.S.
|
|
|
346,220
|
|
|
35.2
|
|
|
238,369
|
|
|
49.5
|
|
|
235,856
|
|
|
64.6
|
|
|
9.7
|
|
|
9.6
|
|
|
9.3
|
|
Non
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
278,669
|
|
|
28.3
|
|
|
143,385
|
|
|
29.7
|
|
|
55,047
|
|
|
15.0
|
|
|
8.9
|
|
|
7.0
|
|
|
6.9
|
|
Office
|
|
|
238,691
|
|
|
24.3
|
|
|
64,204
|
|
|
13.3
|
|
|
29,307
|
|
|
8.0
|
|
|
8.8
|
|
|
8.0
|
|
|
9.7
|
|
Multifamily
|
|
|
41,403
|
|
|
4.2
|
|
|
6,550
|
|
|
1.4
|
|
|
28,986
|
|
|
7.9
|
|
|
8.6
|
|
|
7.3
|
|
|
6.5
|
|
Storage
|
|
|
51,272
|
|
|
5.2
|
|
|
1,384
|
|
|
0.3
|
|
|
-
|
|
|
-
|
|
|
9.5
|
|
|
6.9
|
|
|
-
|
|
Industrial
|
|
|
17,274
|
|
|
1.8
|
|
|
19,317
|
|
|
4.0
|
|
|
2,423
|
|
|
0.7
|
|
|
10.6
|
|
|
9.1
|
|
|
8.1
|
|
Hotel
|
|
|
5,016
|
|
|
0.5
|
|
|
5,870
|
|
|
1.2
|
|
|
11,958
|
|
|
3.3
|
|
|
10.1
|
|
|
8.6
|
|
|
8.1
|
|
Other
Mixed Use
|
|
|
4,842
|
|
|
0.5
|
|
|
2,666
|
|
|
0.6
|
|
|
2,229
|
|
|
0.5
|
|
|
9.0
|
|
|
8.2
|
|
|
8.1
|
|
Total
Non U.S.
|
|
|
637,167
|
|
|
64.8
|
|
|
243,376
|
|
|
50.5
|
|
|
129,950
|
|
|
35.4
|
|
|
8.9
|
|
|
7.5
|
|
|
7.6
|
|
Total
|
|
$
|
983,387
|
|
|
100.0
|
%
|
$
|
481,745
|
|
|
100.0
|
%
|
$
|
365,806
|
|
|
100.0
|
%
|
|
9.2
|
%
|
|
8.6
|
%
|
|
8.5
|
%
|
For
the
year ended December 31, 2007, the Company purchased $767,730 of commercial
real
estate loans. These acquisitions include commercial real estate loans
denominated in British pounds of £24,882 ($49,239) and loans denominated in
Euros of €331,249 ($449,801). For the year ended December 31, 2007, the Company
experienced repayments of $310,464 related to its commercial real estate loan
portfolio.
Also
included in commercial real estate loans are the Company's investments in Carbon
Capital, Inc. ("Carbon I") and Carbon Capital II, Inc. ("Carbon II", and
collectively with Carbon I, the "Carbon Funds.") For the year ended December
31,
2007, the Company recorded $13,303 of income for the Carbon Funds. During 2007,
Carbon II increased its investment in U.S. commercial real estate assets by
originating 15 loans for a total investment of $467,036, a commercial real
estate security of $25,000 and an additional funding of real estate, held for
sale of $5,000. Paydowns in Carbon II during 2007 totaled $429,086. As loans
are
repaid, Carbon II has redeployed capital into acquisitions of additional loans
for the portfolio. The Carbon I investment period has expired and as repayments
continue to occur, capital will be returned to investors.
The
Company's investments in the Carbon Funds are as follows:
|
|
December
31,
2007
|
|
December
31,
2006
|
|
Carbon
I
|
|
$
|
1,636
|
|
$
|
3,144
|
|
Carbon
II
|
|
|
97,762
|
|
|
69,259
|
|
|
|
$
|
99,398
|
|
$
|
72,403
|
|
One
of
the loans held by Carbon II, of which the Company owns 26%, includes a $24,546
commercial real estate mezzanine loan which defaulted during July 2006 and
was
subsequently cured. The underlying property is a hotel located in the
South Beach area of Miami, Florida. In the second quarter of 2007, Carbon
II purchased for $17,103 the controlling class position of the senior loan.
This
position is senior in the capital structure to Carbon II's existing investment
and provides Carbon II with the ability to direct the workout process of the
senior loan. Both loans matured in March 2007, and the borrower failed to
repay, triggering a maturity default. The borrower has reached a
settlement agreement that allows the borrower a specified period of time to
obtain a purchaser for the hotel. Based on a recent proposal for this
property, the loan to value of this loan is approximately 90% and Carbon II
believes a loan loss reserve is not necessary at December 31, 2007.
Two
other
loans held by Carbon II have defaulted. The aggregate carrying value of
the two assets on Carbon II's consolidated financial statements is
$23,779. The underlying properties, located in Orlando and Boynton Beach,
Florida, are multifamily assets. With respect to the property in Orlando,
Carbon II has concluded 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
continues to hold title and implement its sales strategy. To date, 240 of
the 336 units have been sold and closed. An additional 26 units are under
contract with deposits and 30 contracts are being prepared. During 2007,
Carbon II established a loss reserve of $3,332 for this loan of which the
Company's share is $833.
With
respect to the 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
and is operating it as a rental property. During 2006 Carbon II
established a loss reserve of $5,180 for this loan, of which the Company's
share
is $1,361. Carbon II determined that no change to the carrying value of
the property was necessary at December 31, 2007.
The
above
three loans are the only defaulted loans held by Carbon II as of December 31,
2007. Subsequent to December 31, 2007, two additional loans had maturity
defaults, one of which has since been cured. Carbon II and the lending group
are
in discussions to extend the remaining loan. All other commercial real estate
loans in the Carbon Funds are performing as expected.
Commercial
Real Estate
BlackRock
Diamond Property Fund, Inc. ("BlackRock Diamond") is a private REIT managed
by
BlackRock Realty Advisors, Inc., a subsidiary of the Company's Manager.
The
Company invested
$100,000 in BlackRock Diamond.
The
Company redeemed $25,000 of its investment on June 30, 2007 and redeemed the
remaining $75,000 on September 30, 2007. Over the life of this investment,
the
Company recognized a cumulative profit of $34,853, an annualized return of
20.8%.
The
Company has an indirect investment in a commercial real estate development
fund
located in India. At December 31, 2007, the Company's capital committed was
$11,000, of which $9,350 had been drawn. The entity conducts its operations
in
the local currency, Indian Rupees.
The
Company purchased a defaulted loan from a Controlling Class CMBS trust during
the first quarter of 2006. The loan was secured by a first mortgage on a
multifamily property in Texas. Subsequent to the loan purchase, the Company
foreclosed on the loan and acquired title to the property in the process. The
Company sold the property during the second quarter of 2006 and recorded a
gain
from discontinued operations of $1,366 on the consolidated statement of
operations.
Critical
Accounting Estimates
Management's
discussion and analysis of financial condition and results of operations are
based on the amounts reported on the Company's consolidated financial
statements. These consolidated financial statements are prepared in accordance
with GAAP. In preparing the consolidated financial statements, management is
required to make various judgments, estimates and assumptions that affect the
reported amounts. Changes in these estimates and assumptions could have a
material effect on the Company's consolidated financial statements. The
following is a summary of the Company's accounting policies that are the most
affected by management judgments, estimates and assumptions:
Valuation
The
Company carries its investments in mortgage-backed securities and derivative
instruments at fair value, with changes in fair value included in other
comprehensive income and in the consolidated statement of operations,
respectively. The fair values of certain of these securities are determined
by
references to index pricing for those securities. However, for certain
securities, index prices for identical or similar assets are not available.
In
these cases, management uses broker quotes as being indicative of fair values.
Broker quotes are only indicative of fair value, and do not necessarily
represent what the Company would receive in an actual trade for the applicable
instrument. At December 31, 2007 and 2006, approximately $932,871 and
$1,222,154, respectively, of the Company's investment securities were valued
using broker quotes. At December 31, 2007 and 2006, all of the Company's
derivative instruments were valued using broker quotes.
The
Company performs an additional analysis on prices received based on index
pricing and broker quotes. This process includes analyzing the securities based
on vintage year, rating and asset type and converting the price received to
a
spread to relevant index (i.e., 10-year treasury or swap curve). The calculated
spread is then compared to market information available for securities of
similar asset type, vintage year and rating. This process is used by the
Company to validate the prices received from brokers and index
pricing.
Securities
Available-for-Sale
The
Company has designated certain investments in mortgage-backed securities,
mortgage-related securities and certain other securities as available-for-sale.
Securities available-for-sale are carried at estimated fair value with the
net
unrealized gains or losses reported as a component of accumulated other
comprehensive income in stockholders' equity. Changes in the valuations do
not
affect the Company's reported net income or cash flows, but impact stockholders'
equity and, accordingly, book value per share.
Income
on
these securities is recognized based upon a number of assumptions that are
subject to uncertainties and contingencies. Examples include, among other
things, the rate and timing of principal payments (including prepayments,
repurchases, defaults and liquidations), the pass-through or coupon rate and
interest rate fluctuations. Additional factors that may affect the Company's
reported interest income on its commercial real estate securities include
interest payment shortfalls due to delinquencies on the underlying commercial
mortgage loans, the timing and magnitude of credit losses on the commercial
mortgage loans underlying the securities 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. These uncertainties
and contingencies are difficult to predict and are subject to future events
that
may alter the assumptions.
The
Company recognizes interest income from its purchased beneficial interests
in
securitized financial interests ("beneficial interests") (other than beneficial
interests of high credit quality, sufficiently collateralized to ensure that
the
possibility of credit loss is remote, or that cannot contractually be prepaid
or
otherwise settled in such a way that the Company would not recover substantially
all of its recorded investment) in accordance with EITF 99-20. Accordingly,
on a
quarterly basis, when changes in estimated cash flows from the cash flows
previously estimated occur due to actual prepayment and credit loss experience,
the Company calculates a revised yield based on the current amortized cost
of
the investment (including any other-than-temporary impairments recognized to
date) and the revised cash flows. The revised yield is then applied
prospectively to recognize interest income.
For
other
mortgage-backed and related mortgage securities, the Company accounts for
interest income under SFAS No. 91, Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases
("FAS
91"),
using the effective yield method which includes the amortization of discount
or
premium arising at the time of purchase and the stated or coupon interest
payments.
Impairment
- Securities
Management
must also assess whether unrealized losses on securities reflect a decline
in
value that is other than temporary, and, accordingly, write the impaired
security down to its fair value, through earnings. Significant judgment by
management is required in this analysis, which includes, but is not limited
to,
making assumptions regarding the collectability of the principal and interest,
net of related expenses, on the underlying loans.
In
accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("FAS
115"), when the estimated fair value of the security classified as
available-for-sale has been below amortized cost for a significant period of
time and the Company concludes that it no longer has the ability or intent
to
hold the security for the period of time over which the Company expects the
values to recover to amortized cost, the investment is written down to its
fair
value. The resulting charge is included in income, and a new cost basis is
established. Additionally, under EITF 99-20, when changes in estimated cash
flows from the cash flows previously estimated occur due to actual prepayment
and credit loss experience, and the present value of the revised cash flows
using the current expected yield is less than the present value of the
previously estimated remaining cash flows (adjusted for cash receipts during
the
intervening period), an other-than-temporary impairment is deemed to have
occurred. Accordingly, the security is written down to fair value with the
resulting change being included in income, and a new cost basis established.
In
both instances, the original discount or premium is written off when the new
cost basis is established.
After
taking into account the effect of an impairment charge, income is recognized
under EITF 99-20 or FAS 91, as applicable, using the revised market yield for
the security used in establishing the write-down.
Impairment
- Commercial Mortgage Loan Pools
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 would result in an impairment charge recorded
on the consolidated statement of operations. An increase in estimated cash
flows
will increase the amount of interest income recorded in future periods.
Variable
Interest Entities
The
consolidated financial statements include the financial statements of the
Company and its subsidiaries, which are wholly owned or controlled by the
Company or entities which are variable interest entities ("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 VIEs expected losses and/or the majority of the expected
returns. The Company has evaluated its investments for potential variable
interests by evaluating the sufficiency of the entity's equity investment at
risk to absorb losses. All significant inter-company balances and transactions
have been eliminated in consolidation.
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 FAS 140. Additionally, the standard setters continue to
review the FIN 46R 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.
Commercial
Mortgage Loans
The
Company purchases and originates commercial mortgage loans to be held as
long-term investments. The Company also has investments in the Carbon Funds
that
invest in commercial mortgage loans that are managed by the Manager. Management
periodically must evaluate each loan for possible impairment. Impairment is
indicated when it is deemed probable that the Company will not be able to
collect all amounts due according to the contractual terms of the loan. If
a
loan were determined to be impaired, the Company would establish a reserve
for
probable losses and a corresponding charge to earnings. Given the nature of
the
Company's loan portfolio and the underlying commercial real estate collateral,
significant judgment of management is required in determining impairment and
the
resulting loan loss allowance, which includes but is not limited to making
assumptions regarding the value of the real estate that secures the commercial
mortgage loan.
Equity
Investments
For
those
investments in real estate entities where the Company does not control the
investee, or is not the primary beneficiary of a VIE, but can exert significant
influence over the financial and operating policies of the investee, the Company
uses the equity method of accounting. The Company recognizes its share of each
investee's income or loss, and reduces its investment balance by distributions
received. The Company owned an equity method investment in BlackRock Diamond,
a
privately held REIT that maintains its financial records on a fair value basis.
The Company has retained such accounting relative to its investment in this
REIT
pursuant to EITF Issue 85-12, Retention
of Specialized Accounting for Investments in Consolidation.
Derivative
Instruments
The
Company utilizes various hedging instruments (derivatives) to hedge interest
rate and foreign currency exposures or to modify the interest rate or foreign
currency characteristics of related Company investments. For accounting
purposes, the Company's management must decide whether to designate these
derivatives as either a hedge of an asset or liability, securities
available-for-sale, securities held-for-trading, or foreign currency exposure.
This designation decision affects the manner in which the changes in the fair
value of the derivatives are reported.
Securitizations
When
the
Company sells assets in securitizations, it can retain certain tranches which
are considered retained interests in the securitization. Gain or loss on the
sale of assets depends in part on the previous carrying amount of the financial
assets securitized, allocated between the assets sold and the retained interests
based on their relative fair value at the date of securitization. To obtain
fair
values, quoted market prices are used. Gain or loss on securitizations of
financial assets is reported as a component of sale of securities
available-for-sale on the consolidated statement of operations. Retained
interests are carried at estimated fair value on the consolidated statement
of
financial condition. Adjustments to estimated fair value for retained interests
classified as securities available-for-sale are included in accumulated other
comprehensive income on the consolidated statement of financial
condition.
Recent
Accounting Pronouncements
Fair
Value Measurements
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements ("FAS
157"). FAS 157 defines fair value, establishes a framework for measuring fair
value and requires enhanced disclosures about fair value measurements. FAS
157
requires companies to disclose the fair value of their 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 have inputs to the valuation
techniques that are unobservable and require significant management judgment),
including a reconciliation of the beginning and ending balances separately
for
each major category of assets and liabilities. FAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and all interim periods within those fiscal years. FAS 157 is not expected
to
materially affect how the Company determines fair value, but will result in
certain additional disclosures.
Fair
Value Accounting
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
("FAS
159"). FAS 159 permits entities to elect to measure eligible financial
instruments at fair value. The unrealized gains and losses on items for which
the fair value option has been elected will reported in earnings. The decision
to elect the fair value option is determined on an instrument by instrument
basis, it is applied to an entire instrument, and is irrevocable. Assets and
liabilities measured at fair value pursuant to the fair value option will be
reported separately on the consolidated statement of financial condition from
those instruments measured using another measurement attribute. FAS 159 is
effective as of the beginning of the first fiscal year that begins after
November 15, 2007. The Company adopted FAS 159 as of the beginning of 2008
and
elected to apply the fair value option to the following financial assets and
liabilities existing at the time of adoption:
|
(1)
|
All
securities which were previously accounted for as
available-for-sale;
|
|
(2)
|
All
unsecured long-term liabilities, consisting of all senior unsecured
notes,
senior convertible notes, junior unsecured notes and junior subordinated
notes; and
|
Upon
adoption, the Company expects total stockholders' equity to increase by
approximately $372,000, substantially all of which relates to applying the
fair
value option to the Company's long-term liabilities. Subsequent to January
1,
2008, all changes in the estimated fair value of the Company's
available-for-sale securities, CDOs, senior unsecured notes, senior convertible
notes, junior unsecured notes and junior subordinated notes will be recorded
in
earnings.
Reverse
Repurchase Agreements
On
February 20, 2008, the FASB issued FSP FAS 140-3, Accounting
for Transfers of Financial Assets and Repurchase Financing
Transactions.
This
FSP addresses the accounting for the transfer of financial assets and a
subsequent repurchase financing and shall be effective for financial statements
issued for fiscal years beginning after November 15, 2008 and interim periods
within those years. The FSP focuses on the circumstances that would permit
a
transferor and a transferee to separately evaluate the accounting for a transfer
of a financial asset and a repurchase financing under FAS 140, Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities.
The
FSP
states that a transfer of a financial asset and a repurchase agreement involving
the transferred financial asset should be considered part of the same
arrangement when the counterparties to the two transactions are the same unless
certain criteria are met. The criteria in the FSP are intended to identify
whether (1) there is a valid and distinct business or economic purpose for
entering separately into the two transactions and (2) the repurchase financing
does not result in the initial transferor regaining control over the previously
transferred financial assets. The FASB has stated that the FSP's purpose is
to
limit diversity of practice in accounting for these situations, resulting in
more consistent financial reporting. This FSP shall be applied prospectively
to
initial transfers and repurchase financings for which the initial transfer
is
executed on or after the beginning of the fiscal year in which this FSP is
initially applied.
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 FAS 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. The
Company has not completed its evaluation of the impact of FSP FAS 140-3 but
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 stockholders'
equity would not be materially affected. At December 31, 2007, the Company
has
identified available-for-sale securities with a fair value of approximately
$147,552 which had been purchased from and financed with reverse repurchase
agreements totaling approximately $127,094 with the same counterparty since
their purchase. If the Company were to change the current accounting
treatment for these transactions at December 31, 2007 to that required by the
FSP, total assets and total liabilities would be reduced by approximately
$127,094.
Investment
Companies
In
June
2007, the American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position ("SOP") 07-1, Clarification
of the Scope of the Audit and Accounting Guide Investment Companies and
Accounting for Parent Companies and Equity Method Investors for Investments
in
Investment Companies.
This
SOP provides guidance for determining whether an entity is within the scope
of
the AICPA Audit and Accounting Guide- Investment Companies (the "Guide").
Entities that are within the scope of the Guide are required, among other
things, to carry their investments at fair value, with changes in fair value
included in earnings. On October 17, 2007, the FASB decided to indefinitely
defer the effective date of this SOP.
Variable
Interest Entities
The
consolidated financial statements include the financial statements of the
Company and its subsidiaries, which are wholly owned or controlled by the
Company or entities which are VIEs in which the Company is the primary
beneficiary under 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 significant inter-company balances and transactions have been
eliminated in consolidation.
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 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 FAS 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 ("FAS 155"),
which
amends SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities ("FAS 133"),
and FAS
140. FAS 155 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 FAS 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 FAS 133.
|
FAS
155
is effective for all financial instruments acquired, issued or subject to
re-measurement 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 FAS 155 on January 1,
2007
did not have a material impact to 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
("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 was effective for public companies
as
of the beginning of fiscal years that began after December 15, 2006. The
adoption of FIN 48 on January 1, 2007 did not have a material impact to the
Company's consolidated financial statements.
Interest
Income: The
following tables set forth information regarding interest income from certain
of
the Company's interest-earning assets.
|
|
|
|
Variance
|
|
|
|
Year
Ended December 31,
|
|
2007
vs 2006
|
|
2006
vs 2005
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Variance
|
|
%
|
|
Variance
|
|
%
|
|
U.S.
dollar denominated income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities
|
|
$
|
171,994
|
|
|
161,589
|
|
|
141,151
|
|
|
10,405
|
|
|
6.4
|
%
|
$
|
20,438
|
|
|
14.5
|
%
|
Commercial
real estate loans
|
|
|
30,066
|
|
|
23,745
|
|
|
19,441
|
|
|
6,321
|
|
|
26.6
|
%
|
|
4,304
|
|
|
22.1
|
%
|
Commercial
mortgage loan pools
|
|
|
52,037
|
|
|
52,917
|
|
|
54,024
|
|
|
(880
|
)
|
|
(1.7
|
)%
|
|
(1,107
|
)
|
|
(2.0
|
)%
|
Residential
mortgage-backed securities
|
|
|
3,982
|
|
|
11,427
|
|
|
9,850
|
|
|
(7,445
|
)
|
|
(65.2
|
)%
|
|
1,577
|
|
|
16.0
|
%
|
Cash
and cash equivalents
|
|
|
3,837
|
|
|
1,545
|
|
|
2,078
|
|
|
2,292
|
|
|
148.3
|
%
|
|
(533
|
)
|
|
(25.6
|
)%
|
Total
U.S. interest income
|
|
|
261,916
|
|
|
251,223
|
|
|
226,544
|
|
|
10,693
|
|
|
4.3
|
%
|
|
24,679
|
|
|
10.9
|
%
|
Non
-U.S dollar denominated income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities
|
|
|
22,585
|
|
$
|
6,681
|
|
$
|
1,482
|
|
|
15,904
|
|
|
238.0
|
%
|
|
5,199
|
|
|
350.8
|
%
|
Commercial
real estate loans
|
|
|
39,915
|
|
|
17,224
|
|
|
3,742
|
|
|
22,691
|
|
|
131.7
|
%
|
|
13,482
|
|
|
360.3
|
%
|
Cash
and cash equivalents
|
|
|
2,020
|
|
|
858
|
|
|
0
|
|
|
1,162
|
|
|
135.4
|
%
|
|
858
|
|
|
100.0
|
%
|
Total
Non-U.S. interest income
|
|
|
64,520
|
|
|
24,763
|
|
|
5,224
|
|
|
39,757
|
|
|
160.6
|
%
|
|
19,539
|
|
|
374.0
|
%
|
Total
Interest Income
|
|
$
|
326,436
|
|
$
|
275,986
|
|
$
|
231,768
|
|
$
|
50,450
|
|
|
18.3
|
%
|
$
|
44,218
|
|
|
19.1
|
%
|
The
following table reconciles interest income and total income for the years ended
December 31, 2007, 2006 and 2005.
|
|
|
|
Variance
|
|
|
|
Year
Ended December 31,
|
|
2007
vs 2006
|
|
2006
vs 2005
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Variance
|
|
%
|
|
Variance
|
|
%
|
|
Interest
income
|
|
$
|
326,436
|
|
$
|
275,986
|
|
$
|
231,768
|
|
$
|
50,450
|
|
|
18.3
|
%
|
$
|
44,218
|
|
|
19.1
|
%
|
Earnings
from BlackRock Diamond
|
|
|
18,790
|
|
|
15,763
|
|
|
299
|
|
|
3,027
|
|
|
19.2
|
%
|
|
15,464
|
|
|
5,171.9
|
%
|
Earnings
from Carbon I
|
|
|
700
|
|
|
924
|
|
|
4,983
|
|
|
(224
|
)
|
|
(24.2
|
)%
|
|
(4,059
|
)
|
|
(81.5
|
)%
|
Earnings
from Carbon II
|
|
|
12,603
|
|
|
10,744
|
|
|
6,805
|
|
|
1,859
|
|
|
17.3
|
%
|
|
3,939
|
|
|
57.9
|
%
|
Earnings
from real estate joint ventures
|
|
|
-
|
|
|
-
|
|
|
59
|
|
|
-
|
|
|
n/a
|
|
|
(59
|
)
|
|
n/a
|
|
Total
Income
|
|
$
|
358,529
|
|
$
|
303,417
|
|
$
|
243,914
|
|
$
|
55,112
|
|
|
18.1
|
%
|
$
|
59,503
|
|
|
24.4
|
%
|
U.S.
dollar denominated income
For
the
year ended December 31, 2007 versus December 31, 2006, interest income from
U.S.
assets increased $10,693, or 4.3%. For the year ended December 31, 2006 versus
December 31, 2005, interest income from U.S. assets increased $24,679, or 10.9%.
The Company has continued to acquire commercial real estate securities and
loans
throughout the year which has offset the decline in interest income from the
sale of residential mortgage-back securities. The Company redeemed its interest
in BlackRock Diamond on September 30, 2007 in order to monetize its
investment.
Non-U.S.
dollar denominated income
For
the
year ended December 31, 2007 versus December 31, 2006, interest income from
non
- U.S. assets increased $39,757, or 160.6%. For the year ended December 31,
2006
versus 2005, interest income from non -U.S. assets increased $19,539, or 374.0%.
The Company continues to increase its investment in non-U.S. dollar assets
resulting in higher interest income from non-U.S. commercial real estate
securities and loans. The Company has increased its investment portfolio outside
the U.S. in order to provide geographical diversification.
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.
|
|
|
|
Variance
|
|
|
|
Year
Ended December 31,
|
|
2007
vs 2006
|
|
2006
vs 2005
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Variance
|
|
%
|
|
Variance
|
|
%
|
|
U.S.
dollar denominated interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized
debt obligations
|
|
$
|
90,805
|
|
$
|
80,572
|
|
$
|
69,794
|
|
$
|
10,233
|
|
|
12.7
|
%
|
$
|
10,778
|
|
|
15.4
|
%
|
Commercial
real estate securities
|
|
|
27,889
|
|
|
35,994
|
|
|
16,468
|
|
|
(8,105
|
)
|
|
(22.5
|
)%
|
|
19,526
|
|
|
118.6
|
%
|
Commercial
real estate loans
|
|
|
5,271
|
|
|
4,069
|
|
|
5,166
|
|
|
1,202
|
|
|
29.5
|
%
|
|
(1,097
|
)
|
|
(21.2
|
)%
|
Commercial
real estate
|
|
|
587
|
|
|
-
|
|
|
-
|
|
|
587
|
|
|
100.0
|
%
|
|
-
|
|
|
0.0
|
%
|
Commercial
mortgage loan pools
|
|
|
49,527
|
|
|
50,213
|
|
|
50,988
|
|
|
(686
|
)
|
|
(1.4
|
)%
|
|
(775
|
)
|
|
(1.5
|
)%
|
Residential
mortgage-backed securities
|
|
|
5,957
|
|
|
14,916
|
|
|
9,821
|
|
|
(8,959
|
)
|
|
(60.1
|
)%
|
|
5,095
|
|
|
51.9
|
%
|
Convertible
debt
|
|
|
3,219
|
|
|
-
|
|
|
-
|
|
|
3,219
|
|
|
100.0
|
%
|
|
-
|
|
|
0.0
|
%
|
Senior
unsecured notes
|
|
|
9,613
|
|
|
1,299
|
|
|
-
|
|
|
8,314
|
|
|
640.0
|
%
|
|
1,299
|
|
|
100.0
|
%
|
Junior
unsecured notes
|
|
|
3,561
|
|
|
-
|
|
|
-
|
|
|
3,561
|
|
|
100.0
|
%
|
|
-
|
|
|
0.0
|
%
|
Cash
flow hedges
|
|
|
(841
|
)
|
|
1,966
|
|
|
7,110
|
|
|
(2,807
|
)
|
|
(142.8
|
)%
|
|
(5,144
|
)
|
|
(72.3
|
)%
|
Hedge
ineffectiveness*
|
|
|
488
|
|
|
262
|
|
|
1,188
|
|
|
226
|
|
|
86.3
|
%
|
|
926
|
|
|
(77.9
|
)%
|
Total
U.S. Interest Expense
|
|
|
196,076
|
|
|
189,291
|
|
|
160,535
|
|
|
6,785
|
|
|
3.6
|
%
|
|
28,756
|
|
|
17.9
|
%
|
Non-U.S.
dollar denominated interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
CDO
|
|
|
18,143
|
|
|
765
|
|
$
|
-
|
|
|
17,378
|
|
|
2271.6
|
%
|
|
765
|
|
|
100.0
|
%
|
Commercial
real estate securities
|
|
|
5,470
|
|
|
3,328
|
|
|
639
|
|
|
2,142
|
|
|
64.4
|
%
|
|
2,689
|
|
|
420.8
|
%
|
Commercial
real estate loans
|
|
|
7,861
|
|
|
6,557
|
|
|
741
|
|
|
1,304
|
|
|
19.9
|
%
|
|
5,816
|
|
|
784.9
|
%
|
Junior
subordinated notes
|
|
|
13,450
|
|
|
12,447
|
|
|
1,543
|
|
|
1,003
|
|
|
8.1
|
%
|
|
10,904
|
|
|
706.7
|
%
|
Total
Non-U.S. Interest Expense
|
|
|
44,924
|
|
|
23,097
|
|
|
2,923
|
|
|
21,827
|
|
|
94.5
|
%
|
|
20,174
|
|
|
690.2
|
%
|
Total
Interest Expense
|
|
$
|
241,000
|
|
$
|
212,388
|
|
$
|
163,458
|
|
$
|
28,612
|
|
|
13.5
|
%
|
$
|
48,930
|
|
|
29.9
|
%
|
*See
Note
16 of the consolidated financial statements, Derivative Instruments and Hedging
Activities, for a further description of the Company's hedge
ineffectiveness.
U.S.
dollar denominate interest expense
For
the
year ended December 31 2007 versus December 31, 2006, U.S. dollar interest
expense increased $6,785, or 3.6%. For the year ended December 31, 2006 versus
December 31, 2005, U.S. dollar interest expense increased $28,756, or 17.9%.
The
December 31, 2007 versus December 31, 2006 increase was due to the sale of
residential mortgage-backed securities during 2007, offset by the issuance
of
convertible debt, senior notes, and junior notes.
Non-U.S.
dollar denominated interest expense
For
the
year ended December 31, 2007 versus 2006, non-U.S. dollar interest expense
increased $21,827 or 94.5%. The Euro CDO was issued in December 2006 and as
a
result, is the major contributing factor for the year end increase. For the
year
ended December 31, 2006 versus December 31, 2005, non-U.S. dollar interest
expense increased $20,174, or 690.2%, as the Company began committing more
capital to non-U.S. dollar denominated assets in 2006.
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 Funds, 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 variable
interest entity pursuant to FIN 46R 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 charts reconcile interest income and expense to adjusted interest
income and adjusted interest expense.
|
|
For
the Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Interest
income
|
$
|
326,436
|
|
$
|
275,986
|
|
$
|
231,768
|
|
Interest
expense related to the consolidation of commercial mortgage loan
pools
|
|
(49,527
|
)
|
|
(50,213
|
)
|
|
(50,864
|
)
|
Adjusted
interest income
|
$
|
276,909
|
|
$
|
225,773
|
|
$
|
180,904
|
|
|
|
For
the Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Interest
expense
|
|
$
|
241,000
|
|
$
|
212,388
|
|
$
|
163,458
|
|
Interest
expense related to the consolidation of commercial mortgage loan
pools
|
|
|
(49,527
|
)
|
|
(50,213
|
)
|
|
(50,864
|
)
|
Hedge
ineffectiveness
|
|
|
(488
|
)
|
|
(262
|
)
|
|
(1,188
|
)
|
Adjusted
interest expense
|
|
$
|
190,985
|
|
$
|
161,913
|
|
$
|
111,406
|
|
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
following chart includes the adjusted interest income, adjusted interest
expense, net interest margin and net interest spread for the Company's
portfolio. The 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 Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Adjusted
interest income
|
|
$
|
276,909
|
|
$
|
225,773
|
|
$
|
180,904
|
|
Adjusted
interest expense
|
|
$
|
190,985
|
|
$
|
161,913
|
|
$
|
111,406
|
|
Adjusted
net interest income ratios
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
2.5
|
%
|
|
2.1
|
%
|
|
3.0
|
%
|
Average
yield
|
|
|
8.1
|
%
|
|
7.4
|
%
|
|
7.8
|
%
|
Cost
of funds
|
|
|
6.2
|
%
|
|
6.1
|
%
|
|
5.5
|
%
|
Net
interest spread
|
|
|
1.9
|
%
|
|
1.3
|
%
|
|
2.3
|
%
|
Ratios
including income from equity investments
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
3.3
|
%
|
|
2.9
|
%
|
|
3.4
|
%
|
Average
yield
|
|
|
8.6
|
%
|
|
7.9
|
%
|
|
8.1
|
%
|
Cost
of funds
|
|
|
6.2
|
%
|
|
6.1
|
%
|
|
5.5
|
%
|
Net
interest spread
|
|
|
2.4
|
%
|
|
1.8
|
%
|
|
2.6
|
%
|
For
2007,
net interest margin and net interest spread increased due to the widening of
CMBS spreads. For 2006, net interest margin and net interest spread declined
due
to CMBS spread tightening and the yield curve having been flat to
inverted.
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 years ended December 31, 2007, 2006, and 2005,
respectively.
|
|
|
|
|
|
Variance
|
|
|
|
For
the Year Ended December 31,
|
|
2007
vs. 2006
|
|
2006
vs. 2005
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Variance
|
|
%
|
|
Variance
|
|
%
|
|
Management
fee
|
|
$
|
13,468
|
|
$
|
12,617
|
|
$
|
10,974
|
|
$
|
851
|
|
|
6.8
|
%
|
$
|
1,643
|
|
|
15.0
|
%
|
Incentive
fee
|
|
|
5,645
|
|
|
5,919
|
|
|
4,290
|
|
|
(274
|
)
|
|
(4.6
|
)%
|
|
1,629
|
|
|
38.0
|
%
|
Incentive
fee- stock based
|
|
|
2,427
|
|
|
2,761
|
|
|
-
|
|
|
(334
|
)
|
|
(12.1
|
)%
|
|
2,761
|
|
|
-
|
|
General
and administrative expense
|
|
|
5,981
|
|
|
4,533
|
|
|
3,917
|
|
|
1,448
|
|
|
32.0
|
%
|
|
616
|
|
|
15.8
|
%
|
Total
other expenses
|
|
$
|
27,521
|
|
$
|
25,830
|
|
$
|
19,181
|
|
$
|
1,691
|
|
|
6.5
|
%
|
$
|
6,649
|
|
|
34.7
|
%
|
Management
fees are based on 2% of average quarterly stockholders' equity. The increase
of
$851, or 6.8%, from 2006 and $1,643, or 15.0%, from 2005 is primarily due to
the
increase in the Company's average stockholders' equity. The Manager earned
an
incentive fee of $5,645, $5,919 and $4,290 in 2007, 2006 and 2005, respectively,
as the Company achieved the necessary performance goals specified in the
Management Agreement. The expense of $2,427 and $2,761 for 2007 and 2006,
respectively, is related to the stock based incentive fee that was approved
by
the Company's Board of Directors in February 2006. See Note 14 of the
consolidated financial statements, Transactions with Related Parties, for
further discussion of the Company's Management Agreement.
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 year ended December 31, 2007 and 2006 is
primarily attributable to increased professional fees and expenses related
to
the Company's global expansion.
Other
Gains (Losses): During
the year ended December 31, 2007, the Company sold a portion of its securities
available-for-sale resulting in realized gains of $5,316. The Company sold
a
retained CDO bond resulting in a gain of $6,630. This was partially offset
by
the sale of the majority of the Company's CMBS IOs and multifamily agency
securities during 2007, which generated a loss of $13,352, and a related gain
of
$10,899 recorded in connection with hedges that no longer qualified for hedge
accounting. (See Note 16 of the consolidated financial statements.)
During
2006, the Company sold a portion of its securities available-for-sale resulting
in realized gains of $29,032. The Company's sale of seven CMBS held as
collateral for three of its CDOs resulted in a realized gain of $28,520. The
gain from these seasoned CMBS was a result of increased value of the securities
due to multiple credit upgrades and spread tightening of approximately 475
basis
points. Investment grade CMBS owned by the Company outside of its CDOs were
used
to replace this collateral. During 2006, the Company changed its financing
strategy and de-designated a portion of its cash flows hedges and incurred
a
loss of $12,661. The Company changed its financing strategy to emphasize the
use
of 90-day reverse repurchase agreements and concurrently reduced the use of
30-day reverse repurchase agreements.
During
the year ended December 31, 2005, the Company sold a portion of its securities
available-for-sale resulting in realized gains of $16,543. The gain on sales
of
securities available-for-sale during 2005 is primarily attributable to CDO
HY2.
The
gain
(loss) on securities held-for-trading of $(5,151), $3,254, and $(1,999) for
the
years ended December 31, 2007, 2006, and 2005, respectively, consisted primarily
of realized and unrealized gains and losses on the Company's securities
held-for-trading and trading derivatives. The net foreign currency gain (loss)
of $6,272, $2,161 and $(134), for the years ended December 31, 2007, 2006 and
2005, respectively, relates to the Company's hedging of its net investment
in
commercial mortgage loans denominated in pounds sterling and euros. The losses
on impairment of assets of $12,469, $7,880, and $5,088 for the years ended
December 31, 2007, 2006, and 2005, respectively, were related to the impairment
charges of Controlling Class CMBS and franchise loan backed securities under
EITF 99-20. (See Note 3 of the consolidated financial statements.)
Income
from Discontinued Operations:
The
Company purchased a defaulted loan from a Controlling Class CMBS trust during
the first quarter of 2006. The Company sold the property during the second
quarter of 2006 and recorded a gain from discontinued operations of $1,366
on
the consolidated statements of operations.
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 December 31, 2007 and 2006:
U.S.
dollar denominated securities
available-for-sale
|
|
December
31, 2007 Estimated Fair
Value
|
|
Percentage
|
|
December
31, 2006 Estimated
Fair
Value
|
|
Percentage
|
|
Commercial
real estate securities:
|
|
|
|
|
|
|
|
CMBS
IOs
|
|
$
|
15,915
|
|
|
0.7
|
%
|
$
|
69,352
|
|
|
2.7
|
%
|
Investment
grade CMBS
|
|
|
751,073
|
|
|
33.1
|
|
|
738,766
|
|
|
28.2
|
%
|
Non-investment
grade rated subordinated securities
|
|
|
629,688
|
|
|
27.8
|
|
|
562,748
|
|
|
21.5
|
%
|
Non-rated
subordinated securities
|
|
|
109,552
|
|
|
4.8
|
|
|
78,619
|
|
|
3.0
|
%
|
Credit
tenant lease
|
|
|
24,949
|
|
|
1.1
|
|
|
24,318
|
|
|
0.9
|
%
|
Investment
grade REIT debt
|
|
|
246,095
|
|
|
10.9
|
|
|
249,244
|
|
|
9.5
|
%
|
Multifamily
agency securities
|
|
|
37,123
|
|
|
1.5
|
|
|
449,827
|
|
|
17.2
|
%
|
CDO
investments
|
|
|
49,630
|
|
|
2.2
|
|
|
117,246
|
|
|
4.5
|
%
|
Total
|
|
|
1,864,025
|
|
|
82.1
|
|
|
2,290,120
|
|
|
87.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
Agency
adjustable rate securities
|
|
|
1,193
|
|
|
0.1
|
|
|
1,774
|
|
|
0.1
|
%
|
Residential
CMOs
|
|
|
156
|
|
|
0.0
|
|
|
130,850
|
|
|
5.0
|
%
|
Hybrid
adjustable rate mortgages ("ARMs")
|
|
|
7,934
|
|
|
0.4
|
|
|
11,516
|
|
|
0.4
|
%
|
Total
RMBS
|
|
|
9,283
|
|
|
0.5
|
|
|
144,140
|
|
|
5.5
|
%
|
Total
U.S. dollar denominated
securities
available-for-sale
|
|
|
1,873,308
|
|
|
82.6
|
%
|
|
2,434,260
|
|
|
93.1
|
%
|
Non-U.S.
dollar denominated securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
Commercial
mortgage-backed securities:
|
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
|
151,532
|
|
|
6.7
|
|
|
56,778
|
|
|
2.2
|
%
|
Non-investment
grade rated subordinated securities
|
|
|
212,433
|
|
|
9.4
|
|
|
123,271
|
|
|
4.7
|
%
|
Non-rated
subordinated securities
|
|
|
28,857
|
|
|
1.3
|
|
|
1,547
|
|
|
0.1
|
%
|
Total
Non-U.S. dollar denominated
securities
available-for-sale
|
|
|
392,822
|
|
|
17.4
|
%
|
|
181,597
|
|
|
6.9
|
%
|
Total
securities available-for-sale
|
|
$
|
2,266,130
|
|
|
100.0
|
%
|
$
|
2,615,856
|
|
|
100.0
|
%
|
The
Company continues to purchase additional investments outside the U.S. in order
to increase geographical diversification. In addition, during 2007, the Company
sold the majority of its multifamily agency securities and RMBS for total
proceeds of $605,281.
Borrowings: At
December 31, 2007 and 2006, the Company's debt consisted of credit facilities,
CDOs, senior unsecured notes, senior convertible notes, junior unsecured notes,
junior subordinated notes, reverse repurchase agreements, 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
December 31, 2007 and 2006, the Company had obtained financing in amounts and
at
interest rates consistent with the Company's short-term financing
objectives.
The
following table sets forth information regarding the Company's
borrowings:
|
|
For
the Year Ended
December
31, 2007
|
|
|
|
December
31, 2007
Balance
|
|
Maximum
Balance
|
|
Range
of
Maturities
|
|
CDO
debt
|
|
$
|
1,823,328
|
|
$
|
1,828,168
|
|
|
54
days to 8.7 years
|
|
Commercial
mortgage loan pools
|
|
|
1,219,095
|
|
|
1,250,503
|
|
|
1.0
to 11.0 years
|
|
Reverse
repurchase agreements
|
|
|
80,119
|
|
|
951,194
|
|
|
1
to 10 days
|
|
Credit
facilities
|
|
|
671,601
|
|
|
736,832
|
|
|
172
days to 1.7 years
|
|
Senior
convertible notes
|
|
|
80,000
|
|
|
80,000
|
|
|
19.7
years
|
|
Senior
unsecured notes*
|
|
|
162,500
|
|
|
162,500
|
|
|
9.3
years
|
|
Junior
unsecured notes
|
|
|
73,103
|
|
|
73,103
|
|
|
14.3
years
|
|
Junior
subordinated notes**
|
|
|
180,477
|
|
|
180,477
|
|
|
28.1
years
|
|
Total
Borrowings
|
|
$
|
4,290,223
|
|
|
|
|
|
|
|
|
|
For
the Year Ended
December
31, 2006
|
|
|
|
December
31, 2006
Balance
|
|
Maximum
Balance
|
|
Range
of
Maturities
|
|
CDO
debt
|
|
$
|
1,812,574
|
|
$
|
1,812,574
|
|
|
5.3
to 9.7 years
|
|
Commercial
mortgage loan pools
|
|
|
1,250,503
|
|
|
1,278,908
|
|
|
2.0
to 12.0 years
|
|
Reverse
repurchase agreements
|
|
|
799,669
|
|
|
1,079,980
|
|
|
8
to 81 days
|
|
Credit
facilities
|
|
|
75,447
|
|
|
403,188
|
|
|
8
days to 1.1 years
|
|
Senior
unsecured notes*
|
|
|
75,000
|
|
|
75,000
|
|
|
10.0
years
|
|
Junior
subordinated notes**
|
|
|
180,477
|
|
|
180,407
|
|
|
29.1
years
|
|
Total
Borrowings
|
|
$
|
4,193,670
|
|
|
|
|
|
|
|
*The
senior unsecured notes can be redeemed at par by the Company beginning in 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 year ended December 31, 2007 were $226,666.
At
December 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
|
|
Collateralized
Debt Obligations
|
|
Commercial
Mortgage Loan Pools
|
|
Junior
Subordinated Notes
|
|
Senior
Unsecured Notes
|
|
Junior
Unsecured Notes
|
|
Senior
Convertible
Notes
|
|
Total
Collateralized Borrowings
|
|
Weighted
average yield
|
|
|
5.44
|
%
|
|
6.06
|
%
|
|
6.11
|
%
|
|
3.99
|
%
|
|
7.64
|
%
|
|
7.59
|
%
|
|
6.56
|
%
|
|
11.75
|
%
|
|
5.72
|
%
|
Interest
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
-
|
%
|
|
-
|
%
|
|
6.80
|
%
|
|
3.99
|
%
|
|
7.64
|
%
|
|
7.59
|
%
|
|
6.56
|
%
|
|
11.75
|
%
|
|
6.16
|
%
|
Floating
|
|
|
5.44
|
%
|
|
6.06
|
%
|
|
5.46
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
5.62
|
%
|
Effective
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
-
|
%
|
|
-
|
%
|
|
7.30
|
%
|
|
3.99
|
%
|
|
7.64
|
%
|
|
7.59
|
%
|
|
6.56
|
%
|
|
11.75
|
%
|
|
6.43
|
%
|
Floating
|
|
|
5.44
|
%
|
|
6.06
|
%
|
|
5.46
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
5.62
|
%
|
Hedging
Instruments:
The
Company may modify its exposure to market interest and foreign exchange rates
by
entering into various financial instruments. These financial instruments are
intended to mitigate the effect of changes in interest and foreign exchange
rates on the value of the Company's assets and the cost of borrowing.
Interest
rate hedging instruments at December 31, 2007 and 2006 consisted of the
following:
|
|
December
31, 2007
|
|
|
|
Notional
Value
|
|
Estimated
Fair Value
|
|
Unamortized
Cost
|
|
Average
Remaining Term (years)
|
|
Cash
flow hedges
|
|
$
|
231,500
|
|
$
|
(12,646
|
)
|
|
-
|
|
|
7.0
|
|
CDO
cash flow hedges
|
|
|
875,548
|
|
|
(25,410
|
)
|
|
-
|
|
|
6.2
|
|
Trading
swaps
|
|
|
1,218,619
|
|
|
(1,296
|
)
|
|
-
|
|
|
1.2
|
|
CDO
trading swaps
|
|
|
279,527
|
|
|
5
|
|
|
-
|
|
|
4.8
|
|
CDO
LIBOR cap
|
|
|
85,000
|
|
|
195
|
|
|
1,407
|
|
|
5.4
|
|
|
|
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
trading swaps
|
|
|
223,445
|
|
|
212
|
|
|
-
|
|
|
6.1
|
|
CDO
LIBOR cap
|
|
|
85,000
|
|
|
(38
|
)
|
|
1,407
|
|
|
6.4
|
|
Foreign
currency agreements at December 31, 2007 and 2006 consisted of the
following:
|
|
At
December 31, 2007
|
|
|
|
Estimated
Fair Value
|
|
Unamortized
Cost
|
|
Average
Remaining Term
|
|
Currency
swaps
|
|
$
|
(12,060
|
)
|
|
-
|
|
|
7.5
years
|
|
CDO
currency swaps
|
|
|
9,967
|
|
|
-
|
|
|
9.9
years
|
|
Forwards
|
|
|
4,041
|
|
|
-
|
|
|
23
days
|
|
|
|
|
At
December 31, 2006
|
|
|
|
|
Estimated
Fair Value
|
|
|
Unamortized
Cost
|
|
|
Average
Remaining Term
|
|
Currency
swaps
|
|
$
|
1,179
|
|
|
-
|
|
|
12.53
years
|
|
CDO
currency swaps
|
|
|
(1,418
|
)
|
|
-
|
|
|
12.53
years
|
|
Forwards
|
|
|
(2,659
|
)
|
|
-
|
|
|
10
days
|
|
Liquidity and Capital
Resources
The
ongoing weaknesses in the subprime mortgage sector and in the broader mortgage
market have resulted in reduced liquidity for mortgage-backed securities.
Although this reduction in liquidity has been directly linked to subprime
residential assets, to which the Company continues to have no direct exposure,
there has been an overall reduction in liquidity across the credit spectrum
of
commercial and residential mortgage products. The Company received and funded
margin calls totaling $82,570 during 2007, $73,793 from January 1, 2008 through
March 10, 2008, and will fund another $11,118 on March 14, 2008. The Company's
ability to maintain adequate liquidity is dependent on several factors, many
of
which are outside of the Company's control, including the Company's continued
access to credit facilities on acceptable terms, the Company's compliance with
REIT distribution requirements, the timing and amount of margin calls by lenders
that are dependent on the Company's investments, the valuation of the Company's
investments and credit risk of the underlying collateral.
The
aforementioned market factors could adversely affect one or more of the
Company's repurchase counterparties providing funding for the Company's
portfolio and could cause one or more of the Company's counterparties to be
unwilling or unable to provide the Company with additional financing. This
could
potentially increase the Company's financing costs and reduce the Company's
liquidity. If one or more major market participants fails or decides to withdraw
from the market, it could negatively affect the marketability of all fixed
income securities, and this event could negatively affect the value of the
securities in the Company's portfolio, thus reducing the Company's net book
value. Furthermore, if many of the Company's counterparties are unwilling or
unable to provide the Company with additional financing, the Company could
be
forced to sell its investments at a time when prices are depressed. If this
were
to occur, it potentially could have a negative effect on the Company's
compliance with the REIT asset and income tests necessary to fulfill the
Company's REIT qualification requirements. In addition, 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.
In
addition, the Company's liquidity also may be adversely affected by margin
calls
under the Company's repurchase agreements and credit facilities that are
dependent in part on the valuation of the collateral to secure the financing.
The Company's repurchase agreements and credit facilities allow the lender,
to
varying degrees, to revalue the collateral to values that the lender considers
to reflect market. If a counterparty determines that the value of the collateral
has decreased, it may initiate a margin call requiring the Company to post
additional collateral to cover the decrease. When subject to such a margin
call,
the Company repays a portion of the outstanding borrowing with minimal notice.
The Company has hedged a significant amount of its portfolio to offset market
value declines due to changes in interest rates but is exposed to market value
fluctuations due to spread widening. A significant increase in margin calls
as a
result of spread widening could harm the Company's liquidity, results of
operations, financial condition and business prospects. Additionally, in order
to obtain cash to satisfy a margin call, the Company may be required to
liquidate assets at a disadvantageous time, which could cause the Company to
incur further losses and consequently adversely affect its results of operations
and financial condition.
To
date,
the credit performance of the Company's investments remains consistent both
with
the Company's expectations and with the broader commercial real estate finance
industry experience; nevertheless, subsequent to December 31, 2007, the capital
markets have been marking down the value of all credit sensitive securities
regardless of performance. The
Company believes it has sufficient sources of
liquidity to fund operations for
the
next twelve months.
The
Company's ability to meet its long-term (greater than twelve months) 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 December 31, 2007 is
summarized as follows:
Borrowing
Type
|
|
Outstanding
borrowings
|
|
Weighted
average borrowing rate
|
|
Weighted
average remaining maturity
|
|
Estimated
fair value of assets pledged
|
|
Reverse
repurchase agreements
|
|
$
|
80,119
|
|
|
5.44
|
%
|
|
7
days
|
|
$
|
93,116
|
|
Credit
facilities
|
|
|
671,601
|
|
|
6.06
|
|
|
1.2
years
|
|
|
969,140
|
|
Commercial
mortgage loan pools
|
|
|
1,219,095
|
|
|
3.99
|
|
|
4.9
years
|
|
|
1,240,793
|
|
CDOs
|
|
|
1,823,328
|
|
|
6.11
|
|
|
4.8
years
|
|
|
2,014,047
|
|
Senior
unsecured notes
|
|
|
162,500
|
|
|
7.59
|
|
|
9.3
years
|
|
|
-
|
|
Junior
unsecured notes
|
|
|
73,103
|
|
|
6.56
|
|
|
14.3
years
|
|
|
-
|
|
Senior
convertible notes(1)
|
|
|
80,000
|
|
|
11.75
|
|
|
19.7
years
|
|
|
-
|
|
Junior
subordinated notes
|
|
|
180,477
|
|
|
7.64
|
|
|
28.1
years
|
|
|
-
|
|
Total
Borrowings
|
|
$
|
4,290,223
|
|
|
5.72
|
%
|
|
6.4
years
|
|
$
|
4,317,096
|
|
(1) Assumes
holders of senior convertible notes do not exercise their right to require
the
Company to repurchase their notes on September 1, 2012, September 1, 2017 and
September 1, 2022.
At
December 31, 2007, the Company's borrowings had the following remaining
maturities:
Borrowing
Type
|
|
Within
30 days
|
|
31
to 59 days
|
|
60
days to less than 1 year
|
|
1
year to 3 years
|
|
3
years to 5 years
|
|
Over
5 years
|
|
Total
|
|
Reverse
repurchase agreements
|
|
$
|
80,119
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
80,119
|
|
Credit
facilities
|
|
|
-
|
|
|
-
|
|
|
261,892
|
|
|
409,709
|
|
|
-
|
|
|
-
|
|
|
671,601
|
|
Commercial
mortgage loan pools
|
|
|
-
|
|
|
17,932
|
|
|
44,270
|
|
|
368,433
|
|
|
130,683
|
|
|
657,777
|
|
|
1,219,095
|
|
CDOs
|
|
|
-
|
|
|
16,736
|
|
|
16,433
|
|
|
149,544
|
|
|
548,800
|
|
|
1,091,815
|
|
|
1,823,328
|
|
Senior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
162,500
|
|
|
162,500
|
|
Senior
convertible notes(1)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
80,000
|
|
|
80,000
|
|
Junior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
73,103
|
|
|
73,103
|
|
Junior
subordinated notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
180,477
|
|
|
180,477
|
|
Total
Borrowings
|
|
$
|
80,119
|
|
$
|
34,668
|
|
$
|
322,595
|
|
$
|
927,686
|
|
$
|
679,483
|
|
$
|
2,245,672
|
|
$
|
4,290,223
|
|
(1) |
Assumes
holders of senior convertible notes do not exercise their right to
require
the Company to repurchase their notes on September 1, 2012, September
1,
2017 and September 1, 2022.
|
Reverse
Repurchase Agreements and Credit Facilities
The
Company has entered into reverse repurchase agreements to finance its securities
that are not financed under its credit facilities or CDOs. Reverse repurchase
agreements are secured loans generally with a term of 30 to 90 days. After
the
initial 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
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. 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 and bear interest at a variable rate. A committed facility
provider generally is required to provide financing for the full term of the
agreement, rather than for thirty or ninety days as is customary in reverse
repurchase transactions. This longer term makes the financing of less liquid
assets viable.
Under
the
credit facilities and the reverse repurchase agreements, the respective lenders
retain the right to mark the underlying collateral to estimated fair value.
A
reduction in the value of pledged assets will require the Company to provide
additional collateral or fund cash margin calls. From time to time, the Company
expects that it will be required to provide such additional collateral or fund
margin calls. The Company received and funded margin calls totaling $82,570
during 2007, $73,793 from January 1, 2008 through March 10, 2008, and will
fund
another $11,118 on March 14, 2008.
During
the second quarter of 2007, the Company entered into a $150,000 committed U.S.
dollar and non-U.S. dollar credit facility with Lehman Commercial Paper, Inc.
Outstanding borrowings bear interest at a LIBOR-based variable rate. The
facility matured and was fully repaid on August 23, 2007.
On
July
20, 2007, the Company entered into a $200,000 committed U.S. dollar facility
with Bank of America, N.A. Outstanding borrowings under this credit facility
bear interest at a LIBOR-based variable rate. During the third quarter of 2007,
the Company increased the commitment to $275,000.
On
July
20, 2007, the Company amended its $200,000 committed non-U.S. dollar credit
facility with Morgan Stanley Bank. The amendment increases the committed
facility to $300,000. The amendment also allows for borrowings in Japanese
Yen
to fund the Company's Yen-denominated asset acquisitions. (See February 15,
2008
renewal discussion below.)
On
August
27, 2007, the Company borrowed $50,000 from KeyBank National Association. The
loan was secured by a pledge of all of the Company's ownership interest in
the
redemption proceeds of BlackRock Diamond and was repaid in full in October
2007.
On
October 22, 2007, the Company notified Deutsche Bank, AG that it had elected
to
extend the $200,000 credit facility for one year. The new maturity date will
be
December 20, 2008. In connection with this extension, the Company is required
to
amortize the loan by 50% in June 2008 and by 25% in September of 2008. The
remaining 25% is due in December 2008.
The
Company is subject to financial covenants in its credit facilities.
On
December 28, 2007, the Company received a waiver from its compliance with the
tangible net worth covenant at December 31, 2007 from Bank of America, N.A.,
the
lender under a $100,000 multicurrency secured credit facility. Without the
waiver, the Company would have been required to maintain tangible net worth
of
at least $520,416 at December 31, 2007 pursuant to the covenant. On January
25,
2008, this lender agreed to amend the covenant so that the Company would be
required to maintain tangible net worth at the end of each fiscal quarter of
not
less than the sum of (i) $400,000 plus (ii) an amount equal to 75% of any equity
proceeds received by the Company on or after July 20, 2007.
As
a
result of the aforementioned waiver, the most restrictive covenants at December
31, 2007 were as follows: (1) net tangible net worth of $400,000 determined
based on GAAP increased by 75% of any future preferred and common stock
issuances by the Company, (2) a maximum recourse debt-to-equity ratio of 3.0
to
1.0, (3) a minimum unrestricted cash requirement of $10,000, (4) a minimum
debt
service coverage ratio of 1.2 to 1.0 and (5) minimum net income for two
consecutive quarters of more than one dollar. At December 31, 2007, the Company
was in compliance with the aforementioned financial covenants.
On
February 15, 2008, Morgan Stanley Bank agreed to renew its $300,000 non-USD
facility until February 7, 2009. In connection with this extension, certain
financial covenants were added or modified so that: (i) the Company is required
to have a minimum debt service coverage ratio of 1.4 to 1.0 for any calendar
quarter, (ii) on any date, the Company's tangible net worth shall not decline
20% or more from its tangible net worth as of the last business day in the
third
month preceding such date, (iii) on any date, the Company's tangible net worth
shall not decline 40% or more from its tangible net worth as of the last
business day in the twelfth month preceding such date, (iv) on any date, the
Company's tangible net worth shall not be less than the sum of $400,000 plus
75%
of any equity offering proceeds received from and after February 15, 2008,
(v)
at all times, the ratio of the Company's total indebtedness to tangible net
worth shall not be greater than 3:1 and (vi) the Company's liquid assets (as
defined in the related guaranty) shall not at any time be less than 5% of its
mark-to-market indebtedness (as defined in the related guaranty), subject to
certain exceptions before March 31, 2008. Mark-to-market indebtedness is
generally defined under the related guaranty to mean short-term liabilities
that
have a margin call feature. As of December 31, 2007, $751,721 of the Company's
short-term debt had a margin call feature. If the liquid assets covenant had
been in effect as of December 31, 2007, the Company would have been required
to
have an unrestricted cash balance of $37,586.
On
February 29, 2008, the Company entered into a binding loan commitment letter
(the "Commitment Letter") with BlackRock HoldCo 2, Inc. ("HoldCo 2"), pursuant
to the terms of which HoldCo 2 or its affiliates (together, the "Lender")
commits to provide a revolving credit loan facility (the "Facility") to the
Company for general working capital purposes. HoldCo 2 is a wholly-owned
subsidiary of BlackRock, Inc., the parent of BlackRock Financial Management,
Inc., the manager of the Company.
On
March
7, 2008, the Company and HoldCo 2 entered into the credit agreement. The
Facility has a term of 364 days with two 364-day extension periods, subject
to
the Lender's approval. The Facility is collateralized by a pledge of equity
shares that the Company holds in Carbon II. The principal amount of the Facility
is the lesser of $60,000 or a number determined in accordance with a borrowing
base calculation equal to 60% of the value of the shares of Carbon II that
are
pledged to secure the Facility.
The
interest rate payable on the Facility generally shall be a variable rate equal
to LIBOR plus 2.5%. The fee letter, dated February 29, 2008, between the Company
and HoldCo 2, sets forth certain terms with respect to fees.
Amounts
borrowed under the Facility may be repaid and reborrowed from time to time.
The
Company, however, has agreed to use commercially reasonable efforts to obtain
other financing to replace the Facility and reduce the outstanding
balance.
The
terms
of the Facility gives the Lender the option to purchase from the Company the
shares of Carbon II that serve as collateral for the Facility, up to the
Facility commitment amount, at a price equal to the fair market value (as
determined by the terms of the credit agreement) of those shares, unless the
Company elects to prepay outstanding loans under the Facility in an amount
equal
to the Lender's desired share purchase amount and reduce the Facility's
commitment amount accordingly, which may require termination of the Facility.
If
any loans are outstanding at the time of such purchase, the share purchase
amount shall be reduced by the amount, and applied towards the repayment, of
all
outstanding loans (and the reduction of the Facility's commitment amount) in
the
same manner as if the Company had prepaid such loans, and the balance of the
share purchase amount available after such repayment, if any, shall be paid
to
the Company.
On
March
7, 2008, the Company borrowed $37,500 under the Facility.
Senior
Unsecured Recourse Notes
In
October 2006, the Company issued $75,000 of unsecured senior notes due in 2016
with a weighted average cost of funds of 7.21%. The unsecured senior notes
can
be redeemed in whole by the Company subject to certain provisions, which could
include the payment of fees.
During
2007, the Company issued $87,500 of senior unsecured notes due in 2017. The
notes bear interest at a weighted average fixed rate of 7.93% until July 2012
and thereafter at a rate equal to 3-month LIBOR plus 2.55%. The senior unsecured
notes contain a covenant whereby total borrowings cannot exceed 95% of the
sum
of total borrowings plus stockholders' equity and the Company must maintain
a
minimum net worth of $400,000. The senior unsecured notes can be redeemed in
whole by the Company subject to certain provisions, which could include the
payment of fees.
Senior
Convertible Recourse Notes
On
August
29, 2007 and September 10, 2007, the Company completed an offering of a total
of
$80,000 aggregate principal amount of convertible senior notes due in 2027.
The
notes bear interest at a rate of 11.75% per annum and are convertible only
under
certain conditions, including a 20-day period of trading above $14.02 per share,
as adjusted. The initial conversion rate of 92.7085 shares of Common Stock
per
$1,000 principal amount of notes (equal to an initial conversion price of
approximately $10.79 per share), subject to adjustment, represented a premium
of
17.5% to the last reported sale price of the Company's Common Stock on August
23, 2007 of $9.18.
Holders
of convertible senior notes have the right to require the Company to repurchase
their notes on September 1, 2012, September 1, 2017 and September 1, 2022 for
a
cash price equal to 100% of the principal amount of the notes to be purchased,
plus accrued and unpaid interest. The Company may redeem the notes, in whole
or
in part, from time to time, (i) on or after September 1, 2012 or (ii) to
preserve its status as a REIT, at 100% of the principal amount of the notes
to
be redeemed, plus accrued and unpaid interest.
CDOs
On
May
23, 2006, the Company issued nine tranches of secured debt through CDO HY3.
In
this transaction, a wholly owned subsidiary of the Company issued secured debt
in the par amount of $417,000 secured by the subsidiary's assets. The adjusted
issue price of the CDO HY3 debt at December 31, 2007 is $373,330. Three tranches
were issued at a fixed rate coupon and six tranches were issued at a floating
rate coupon with a combined weighted average remaining maturity of 7.2 years
at
December 31, 2007. All floating rate coupons were swapped to fixed rate coupons
resulting in a total fixed rate cost of funds for CDO HY3 of approximately
6.3%.
The Company incurred $7,057 of issuance costs that will be amortized over the
weighted average life of CDO HY3. CDO HY3 was structured to match fund the
cash
flows from a significant portion of the Company's CMBS and commercial real
estate loans. The par amount at December 31, 2007 of the collateral securing
CDO
HY3 consisted of 50.9% CMBS rated B or higher and 25.5% commercial real estate
loans. At December 31, 2007, the collateral securing CDO HY3 had a fair value
of
$348,671.
On
December 14, 2006, the Company closed the Euro CDO. The Euro CDO sold €263,500
of non-recourse debt at a weighted average spread to Euro Libor of 60 basis
points. The €263,500 consists of €251,000 of investment grade debt at a weighted
average spread to Euro Libor of 50 basis points and €12,500 of below investment
grade debt. The Company retained an additional €12,500 of below investment grade
debt and all of Euro CDO's preferred shares. The Company incurred €3,489 of
issuance costs that will be amortized over the weighted average life of the
Euro
CDO.
Junior
Unsecured Recourse Notes
During
April 2007, the Company issued €50,000 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.
Trust
Preferred (Recourse)
On
September 26, 2005, the Company issued $75,000 of trust preferred securities
through its wholly owned subsidiary, Anthracite Capital Trust I, a Delaware
statutory trust ("Trust I"). The trust preferred securities have a thirty-year
term ending October 30, 2035 with interest at a fixed rate of 7.497% for the
first ten years and at a floating rate of three-month LIBOR plus 2.9%
thereafter. The trust preferred securities can be redeemed at par by the Company
beginning in October 2010. Trust I issued $2,380 aggregate liquidation amount
of
common securities, representing 100% of the voting common stock of Trust I
to
the Company for a purchase price of $2,380. The Company realized net
proceeds from this offering of approximately $72,618.
On
January 31, 2006, the Company issued $50,000 of trust preferred securities
through its wholly owned subsidiary, Anthracite Capital Trust II, a Delaware
statutory trust ("Trust II"). The trust preferred securities have a thirty-year
term ending April 30, 2036 with interest at a fixed rate of 7.73% for the first
ten years and at a floating rate of three-month LIBOR plus 2.7% thereafter.
The
trust preferred securities can be redeemed at par by the Company beginning
in
April 2011. Trust II issued $1,550 aggregate liquidation amount of common
securities, representing 100% of the voting common stock of Trust II to the
Company for a purchase price of $1,550. The Company realized net proceeds
from this offering of approximately $48,491.
On
March
16, 2006, the Company issued $50,000 of trust preferred securities through
its
wholly owned subsidiary, Anthracite Capital Trust III, a Delaware statutory
trust ("Trust III"). The trust preferred securities have a thirty-year term
ending March 15, 2036 with interest at a fixed rate of 7.77% for the first
ten
years and at a floating rate of three-month LIBOR plus 2.7% thereafter. The
trust preferred securities can be redeemed at par by the Company beginning
in
March 2011. Trust III issued $1,547 aggregate liquidation amount of common
securities, representing 100% of the voting common stock of Trust III to the
Company for a purchase price of $1,547. The Company realized net proceeds
from this offering of approximately $48,435.
Preferred
Equity Issuances
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
On
June
12, 2007, the Company completed a follow-on offering of 5,750,000 shares of
its
Common Stock at a price of $11.75, which included a 15% option to purchase
additional shares exercised by the underwriter. Net proceeds (after deducting
underwriting fees and expenses) were approximately $62,412. The Company utilized
a portion of the net proceeds from the convertible senior notes offering to
repurchase 1,307,189 shares of its Common Stock with value of $12,100.
Additionally,
for the years ended December 31, 2007 and 2006, respectively, the Company issued
327,928 and 608,747 shares of Common Stock under its Dividend Reinvestment
and
Stock Purchase Plan (the "Dividend Reinvestment Plan"). Net proceeds to the
Company under the Dividend Reinvestment Plan were approximately $3,106 and
$6,517, respectively.
For
the
year ended December 31, 2007, the Company issued 147,700 shares of Common Stock
under a sales agency agreement with Brinson Patrick Securities Corporation.
Net
proceeds to the Company were approximately $1,770. For the year ended December
31, 2006, the Company issued 664,900 shares of Common Stock under this sales
agency agreement with Brinson Patrick Securities Corporation. Net proceeds
to
the Company were approximately $8,625.
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.
FAS
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.
At
December 31, 2007, the Company owned securities of 39 Controlling Class CMBS
trusts with a par of $1,861,213. The total par amount of CMBS issued by the
39
trusts was $59,534,400. One of the Company's 39 Controlling Class trusts does
not qualify as a QSPE and has been consolidated by the Company (see Note 4
of
the consolidated financial statements).
The
Company's maximum exposure to loss as a result of its investment in these VIEs
totaled $746,396 and $762,567 at December 31, 2007 and 2006, respectively.
In
addition, the Company has completed two securitizations that qualify as QSPEs
under FAS 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 QSPEs, 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 December 31, 2007 and 2006, respectively, was $61,206 and
$111,076.
The
Company also owns non-investment debt and preferred securities in LEAFs CMBS
I
Ltd ("Leaf"), a QSPE under FAS 140. Leaf issued non-recourse liabilities secured
by investment grade commercial real estate securities. At December 31, 2007
and
2006, the Company's total maximum exposure to loss as a result of its investment
in Leaf was $6,264 and $6,796, respectively.
Cash
Flows
Cash
provided by operating activities is net income adjusted for certain non-cash
items and changes in operating assets and liabilities including the Company's
trading securities. Operating activities provided cash flows of $218,368,
$114,829, and $106,716 for the year ended December 31, 2007, 2006, and 2005,
respectively. Operating cash flow is affected by the purchase and sale of fixed
income securities classified as trading securities. Proceeds received from
the
sale and repayment of trading securities also increases operating cash flows.
The Company received $131,232, $36,140, and $43,477 from trading securities
for
the year ended December 31, 2007, 2006, and 2005, respectively. In addition,
in
2007 the Company closed interest rate swaps classified as a cash flow hedges
and
received cash of $18,665.
Net
cash
provided by investing activities 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 $323,966, $705,476, and $419,992 during the years
ended December 31, 2007, 2006, and 2005, respectively. The variance in investing
cash flows is primarily attributable to significant purchases of securities
and
commercial mortgage loans and offset by the sale of securities, repayments
from
commercial mortgage loan pools and the redemption of equity
investments.
Net
cash
provided by financing activities was $116,739, $614,335, and $329,547 for the
years ended December 31, 2007, 2006, and 2005, respectively, primarily due
to
borrowings and repayments under reverse repurchase agreements and credit
facilities, dividends payments, Common Stock issuances and CDO issuances.
Transactions
with Related Parties
The
Company has a Management Agreement, an administrative services agreement and
an
accounting services agreement with the Manager, the employer, with its
affiliates, 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.
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 ($11.33 adjusted per share issue price at December
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 2007. The Board of Directors also authorized a stock based
incentive plan pursuant to which one-half of one percent of common shares
outstanding are paid to the Manager at the end of each calendar year. 289,155
shares were paid to the Manager on March 30, 2007.
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 year
ended December 31, 2007, 2006 and 2005:
|
|
For
the Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Management
fee
|
|
$
|
13,468
|
|
$
|
12,617
|
|
$
|
10,974
|
|
Incentive
fee
|
|
|
5,645
|
|
|
5,919
|
|
|
4,290
|
|
Incentive
fee- stock based
|
|
|
2,427
|
|
|
2,761
|
|
|
-
|
|
Total
management and incentive fees
|
|
$
|
21,540
|
|
$
|
21,297
|
|
$
|
15,264
|
|
At
December 31, 2007, 2006, and 2005, respectively, management and incentive fees
of $7,067, $8,989, and $5,734 remain payable to the Manager and are included
on
the 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 $293, $400, and $350 for certain expenses
incurred on behalf of the Company during 2007, 2006, and 2005,
respectively.
The
Company also has administration and accounting services agreements with the
Manager. Under the terms of the administration 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 years ended
December 31, 2007, 2006, and 2005, the Company paid administration and
accounting service fees of $473, $234, and $209, respectively, which are
included in general and administrative expense on the consolidated statement
of
operations.
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 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.
ITEM
7A.
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 December 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 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 December 31, 2007. This means
that a 100 basis point increase in interest rates would cause a margin call
of
approximately $9,000.
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 December 31, 2007, economic duration
for
the Company's entire portfolio was 2.4 years. This implies that for each 100
basis points of change in interest rates the Company's economic value will
change by approximately 2.4%. At December 31, 2007, the Company estimates its
economic value, or net asset value of its Common Stock to be $11.32.
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 December 31, 2007
|
|
|
5.7
|
|
Less:
|
|
|
|
|
Duration
contribution of CDO liabilities
|
|
|
(1.7
|
)
|
Duration
contribution of preferred stock
|
|
|
(0.4
|
)
|
Duration
contribution of senior unsecured notes
|
|
|
(1.0
|
)
|
Duration
contribution of junior unsecured notes
|
|
|
-
|
|
Duration
contribution of junior subordinated notes
|
|
|
(0.8
|
)
|
Duration
contribution of convertible senior notes
|
|
|
(0.3
|
)
|
Economic
duration at December 31, 2007
|
|
|
2.4
|
|
The
GAAP
book value of the Company's Common Stock is $4.86 per share. As indicated in
the
table above a 100 basis point change in interest rates will change reported
book
value by approximately 5.7%, or $26,000. 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 $9,000.
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 December
31, 2007.
Actual
results could differ significantly from these estimates.
Projected
Percentage Change Net Interest Income Per Share Given LIBOR
Movements
|
|
Change
in LIBOR,
+/-
Basis Points
|
|
Projected
Change in Earnings per Share
|
|
-200
|
|
$
|
(0.03
|
)
|
-100
|
|
$
|
(0.02
|
)
|
-50
|
|
$
|
(0.01
|
)
|
Base
Case
|
|
|
|
|
+50
|
|
$
|
0.01
|
|
+100
|
|
$
|
0.02
|
|
+200
|
|
$
|
0.03
|
|
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 yields on
higher rated securities (B or higher) are generally sensitive to changes in
timing of projected losses and prepayments rather than the severity of the
losses themselves. The yields lowest rated securities (B- or lower) are more
sensitive to the severity of losses and the resulting impact on future 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 $1.00 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 $3.13 to $3.33 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 December 31, 2007, assets with a total estimated
fair
value of $1,998,810 are collateralizing the CDO borrowings of $1,823,328;
therefore, the Company's preferred equity interest in the five CDOs is $175,482
($2.77 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, British pound and Canadian dollar. 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
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
INDEX
TO
FINANCIAL STATEMENTS AND SCHEDULE
|
|
PAGE
|
|
Report
of Independent Registered Public Accounting Firm on Internal
Control Over
Financial Reporting
|
|
|
78
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
79
|
|
|
|
|
|
|
Consolidated
Financial Statements:
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Financial Condition at December 31, 2007 and
2006
|
|
|
80
|
|
|
|
|
|
|
Consolidated
Statements of Operations For the Years Ended December 31, 2007,
2006, and
2005
|
|
|
81
|
|
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders' Equity For the Years Ended
December
31, 2007, 2006, and 2005
|
|
|
82
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows For the Years Ended December 31, 2007,
2006, and
2005
|
|
|
83
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
85
|
|
|
|
|
|
|
Schedules
|
|
|
|
|
|
|
|
|
|
Schedule
IV - Mortgage Loans on Real Estate as of December 31,
2007
|
|
|
124
|
|
All
other
schedules have been omitted because either the required information is not
applicable or the information is shown in the consolidated financial statements
or notes thereto.
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
Anthracite
Capital, Inc.
New
York,
New York
We
have
audited the internal control over financial reporting of Anthracite Capital,
Inc. and subsidiaries (the "Company") as of December 31, 2007, based on criteria
established in Internal
Control — Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management's
Report on Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Company's internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed by,
or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by
the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented
or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In
our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on the criteria
established in Internal
Control — Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway
Commission.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated statement of financial
condition as
of
December 31, 2007 and the related consolidated statements of operations,
changes
in stockholders' equity and cash flows for each of the three years in the
period
ended December 31, 2007 of the Company and our report dated March 12, 2008
expressed an
unqualified opinion on those financial statements and financial statement
schedules.
DELOITTE
& TOUCHE LLP
New
York,
New York
March
12,
2008
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
Anthracite
Capital, Inc.
New
York,
New York
We
have
audited the accompanying consolidated statements of financial condition of
Anthracite Capital, Inc. and subsidiaries (the "Company") as of December 31,
2007 and 2006, and the related consolidated statements of operations, changes
in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2007. Our audits also included the financial statement
schedules listed in the Index at Item 15. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedules based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Anthracite Capital, Inc. and subsidiaries
as
of December 31, 2007 and 2006, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2007,
in
conformity with accounting principles generally accepted in the United States
of
America. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken
as a
whole, present fairly, in all material respects, the information set forth
therein.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2007, based on the criteria established in
Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission and
our
report dated March 12, 2008 expressed an unqualified opinion on the Company's
internal control over financial reporting.
DELOITTE
& TOUCHE LLP
New
York,
New York
March
12,
2008
Anthracite
Capital, Inc.
Consolidated
Statements of Financial Condition
(in
thousands, except share data)
|
|
December
31, 2007
|
|
December
31, 2006
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
91,547
|
|
|
|
|
$
|
66,388
|
|
Restricted
cash equivalents
|
|
|
|
|
|
32,105
|
|
|
|
|
|
59,801
|
|
Securities
available-for-sale, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
mortgage-backed securities ("CMBS")
|
|
$
|
1,026,773
|
|
|
|
|
$
|
883,432
|
|
|
|
|
Investment
grade CMBS
|
|
|
1,230,075
|
|
|
|
|
|
1,588,284
|
|
|
|
|
Residential
mortgage-backed securities ("RMBS")
|
|
|
9,282
|
|
|
|
|
|
144,140
|
|
|
|
|
Total
securities available-for-sale
|
|
|
|
|
|
2,266,130
|
|
|
|
|
|
2,615,856
|
|
Commercial
mortgage loan pools, at amortized cost
|
|
|
|
|
|
1,240,793
|
|
|
|
|
|
1,271,014
|
|
Securities
held-for-trading, at estimated fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS
|
|
|
17,303
|
|
|
|
|
|
22,383
|
|
|
|
|
RMBS
|
|
|
901
|
|
|
|
|
|
132,204
|
|
|
|
|
Total
securities held-for-trading
|
|
|
|
|
|
18,204
|
|
|
|
|
|
154,587
|
|
Commercial
mortgage loans, net
|
|
|
|
|
|
983,387
|
|
|
|
|
|
481,745
|
|
Equity
investments
|
|
|
|
|
|
108,748
|
|
|
|
|
|
182,147
|
|
Derivative
instruments, at fair value
|
|
|
|
|
|
404,910
|
|
|
|
|
|
317,574
|
|
Other
assets
|
|
|
|
|
|
101,886
|
|
|
|
|
|
69,151
|
|
Total
Assets
|
|
|
|
|
$
|
5,247,710
|
|
|
|
|
$
|
5,218,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
by pledge of subordinated CMBS
|
|
$
|
293,287
|
|
|
|
|
$
|
48,628
|
|
|
|
|
Secured
by pledge of other securities available-for-sale
|
|
|
207,829
|
|
|
|
|
|
666,275
|
|
|
|
|
Secured
by pledge of securities held-for-trading
|
|
|
-
|
|
|
|
|
|
127,249
|
|
|
|
|
Secured
by pledge of commercial mortgage loans
|
|
|
244,476
|
|
|
|
|
|
26,570
|
|
|
|
|
Senior
unsecured notes
|
|
|
162,500
|
|
|
|
|
|
75,000
|
|
|
|
|
Senior
convertible notes
|
|
|
80,000
|
|
|
|
|
|
-
|
|
|
|
|
Junior
unsecured notes
|
|
|
73,103
|
|
|
|
|
|
-
|
|
|
|
|
Junior
subordinated notes to subsidiary trust issuing preferred securities
|
|
|
180,477
|
|
|
|
|
|
180,477
|
|
|
|
|
Secured
by pledge of commercial mortgage loan pools
|
|
|
1,225,223
|
|
|
|
|
|
1,256,897
|
|
|
|
|
Collateralized
debt obligations ("CDOs")
|
|
|
1,823,328
|
|
|
|
|
|
1,812,574
|
|
|
|
|
Total
borrowings
|
|
|
|
|
|
4,290,223
|
|
|
|
|
|
4,193,670
|
|
Payable
for investments purchased
|
|
|
|
|
|
4,693
|
|
|
|
|
|
23,796
|
|
Distributions
payable
|
|
|
|
|
|
21,064
|
|
|
|
|
|
17,669
|
|
Derivative
instruments, at fair value
|
|
|
|
|
|
442,114
|
|
|
|
|
|
304,987
|
|
Other
liabilities
|
|
|
|
|
|
38,245
|
|
|
|
|
|
22,032
|
|
Total
Liabilities
|
|
|
|
|
|
4,796,339
|
|
|
|
|
|
4,562,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, 100,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.375%
Series C Preferred stock, liquidation preference $57,500
|
|
|
|
|
|
55,435
|
|
|
|
|
|
55,435
|
|
8.25%
Series D Preferred stock, liquidation preference $86,250
|
|
|
|
|
|
83,259
|
|
|
|
|
|
-
|
|
Common
Stock, par value $0.001 per share; 400,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,263,998
shares issued and outstanding in 2007;
57,830,964
shares issued and outstanding in 2006
|
|
|
|
|
|
63
|
|
|
|
|
|
58
|
|
Additional
paid-in capital
|
|
|
|
|
|
691,071
|
|
|
|
|
|
629,785
|
|
Distributions
in excess of earnings
|
|
|
|
|
|
(122,738
|
)
|
|
|
|
|
(120,976
|
)
|
Accumulated
other comprehensive income (loss)
|
|
|
|
|
|
(255,719
|
)
|
|
|
|
|
91,807
|
|
Total
Stockholders' Equity
|
|
|
|
|
|
451,371
|
|
|
|
|
|
656,109
|
|
Total
Liabilities and Stockholders' Equity
|
|
|
|
|
$
|
5,247,710
|
|
|
|
|
$
|
5,218,263
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Anthracite
Capital, Inc.
Consolidated
Statements of Operations (in thousands, except share and per share
data)
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Income:
|
|
|
|
|
|
|
|
Interest
from securities available-for-sale
|
|
$
|
195,904
|
|
$
|
171,686
|
|
$
|
141,113
|
|
Interest
from commercial mortgage loans
|
|
|
69,981
|
|
|
41,773
|
|
|
23,183
|
|
Interest
from commercial mortgage loan pools
|
|
|
52,037
|
|
|
52,917
|
|
|
54,025
|
|
Interest
from securities held-for-trading
|
|
|
2,657
|
|
|
7,207
|
|
|
11,370
|
|
Earnings
from equity investments
|
|
|
32,093
|
|
|
27,431
|
|
|
12,146
|
|
Interest
from cash and cash equivalents
|
|
|
5,857
|
|
|
2,403
|
|
|
2,077
|
|
Total
Income
|
|
|
358,529
|
|
|
303,417
|
|
|
243,914
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
241,000
|
|
|
212,388
|
|
|
163,458
|
|
Management
and incentive fees
|
|
|
21,540
|
|
|
21,297
|
|
|
15,264
|
|
General
and administrative expense
|
|
|
5,981
|
|
|
4,533
|
|
|
3,917
|
|
Total
Expenses
|
|
|
268,521
|
|
|
238,218
|
|
|
182,639
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
gain (loss):
|
|
|
|
|
|
|
|
|
|
|
Sale
of securities available-for-sale
|
|
|
5,316
|
|
|
29,032
|
|
|
16,543
|
|
Dedesignation
of derivative instruments
|
|
|
-
|
|
|
(12,661
|
)
|
|
-
|
|
Securities
held-for-trading
|
|
|
(5,151
|
)
|
|
3,254
|
|
|
(1,999
|
)
|
Foreign
currency gain (loss)
|
|
|
6,272
|
|
|
2,161
|
|
|
(134
|
)
|
Loss
on impairment of assets
|
|
|
(12,469
|
)
|
|
(7,880
|
)
|
|
(5,088
|
)
|
Total
other gain (loss)
|
|
|
(6,032
|
)
|
|
13,906
|
|
|
9,322
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
83,976
|
|
|
79,105
|
|
|
70,597
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
-
|
|
|
1,366
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
83,976
|
|
|
80,471
|
|
|
70,597
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on preferred stock
|
|
|
11,656
|
|
|
5,392
|
|
|
5,392
|
|
Net
income available to Common Stockholders
|
|
$
|
72,320
|
|
$
|
75,079
|
|
$
|
65,205
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share, basic
|
|
$
|
1.18
|
|
$
|
1.31
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share, diluted
|
|
$
|
1.18
|
|
$
|
1.31
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from continuing operations per share of Common Stock, after
preferred dividends
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.18
|
|
$
|
1.29
|
|
$
|
1.20
|
|
Diluted
|
|
$
|
1.18
|
|
$
|
1.29
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations per share of Common Stock
|
|
|
|
|
|
|
Basic
|
|
|
-
|
|
$
|
0.02
|
|
|
-
|
|
Diluted
|
|
|
-
|
|
$
|
0.02
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
61,136,269
|
|
|
57,182,434
|
|
|
54,144,243
|
|
Diluted
|
|
|
61,375,193
|
|
|
57,401,664
|
|
|
54,152,820
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share of Common Stock
|
|
$
|
1.19
|
|
$
|
1.15
|
|
$
|
1.12
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Anthracite
Capital, Inc.
Consolidated
Statements of Changes in Stockholders' Equity
for
the Year Ended December 31, 2007, 2006 and 2005 (in thousands)
|
|
|
|
|
|
|
|
Additional
Paid-In
Capital
|
|
Distributions
In
Excess
Of
Earnings
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
|
|
Total
Stockholders'
Equity
|
|
Balance
at December 31, 2004
|
|
$
|
55,435
|
|
|
|
|
$
|
53
|
|
$
|
578,919
|
|
$
|
(134,075
|
)
|
$
|
13,406
|
|
|
|
|
$
|
513,738
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,597
|
|
|
|
|
$
|
70,597
|
|
|
70,597
|
|
Unrealized
gain on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,626
|
|
|
26,626
|
|
|
26,626
|
|
Reclassification
adjustments from cash flow hedges included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,129
|
|
|
6,129
|
|
|
6,129
|
|
Change
in net unrealized gain on securities available-for-sale, net of
reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,036
|
|
|
14,036
|
|
|
14,036
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,791
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
117,388
|
|
|
|
|
Dividends
declared-Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,168
|
)
|
|
|
|
|
|
|
|
(61,168
|
)
|
Dividends
on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,392
|
)
|
|
|
|
|
|
|
|
(5,392
|
)
|
Issuance
of Common Stock
|
|
|
|
|
|
|
|
|
3
|
|
|
33,449
|
|
|
|
|
|
|
|
|
|
|
|
33,452
|
|
Balance
at December 31, 2005
|
|
$
|
55,435
|
|
|
|
|
$
|
56
|
|
$
|
612,368
|
|
$
|
(130,038
|
)
|
$
|
60,197
|
|
|
|
|
$
|
598,018
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,471
|
|
|
|
|
$
|
80,471
|
|
|
80,471
|
|
Unrealized
gain on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,961
|
|
|
2,961
|
|
|
2,961
|
|
Reclassification
adjustments from cash flow hedges included in net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,029
|
|
|
5,029
|
|
|
5,029
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
204
|
|
|
204
|
|
|
204
|
|
Dedesignation
of cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,661
|
|
|
12,661
|
|
|
12,661
|
|
Change
in net unrealized gain on securities available-for-sale, net of
reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,755
|
|
|
10,755
|
|
|
10,755
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,610
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
112,081
|
|
|
|
|
Dividends
declared-Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66,017
|
)
|
|
|
|
|
|
|
|
(66,017
|
)
|
Dividends
on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,392
|
)
|
|
|
|
|
|
|
|
(5,392
|
)
|
Issuance
of Common Stock
|
|
|
|
|
|
|
|
|
2
|
|
|
17,417
|
|
|
|
|
|
|
|
|
|
|
|
17,419
|
|
Balance
at December 31, 2006
|
|
$
|
55,435
|
|
|
|
|
$
|
58
|
|
$
|
629,785
|
|
$
|
(120,976
|
)
|
$
|
91,807
|
|
|
|
|
$
|
656,109
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,976
|
|
|
|
|
$
|
83,976
|
|
|
83,976
|
|
Unrealized
loss on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,657
|
)
|
|
(34,657
|
)
|
|
(34,657
|
)
|
Reclassification
adjustments from cash flow hedges included in net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,206
|
|
|
1,206
|
|
|
1,206
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269
|
|
|
269
|
|
|
269
|
|
Change
in net unrealized loss on securities available-for-sale, net of
reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(314,344
|
)
|
|
(314,344
|
)
|
|
(314,344
|
)
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(347,526
|
)
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(263,550
|
)
|
|
|
|
Dividends
declared-Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,082
|
)
|
|
|
|
|
|
|
|
(74,082
|
)
|
Dividends
on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,656
|
)
|
|
|
|
|
|
|
|
(11,656
|
)
|
Issuance
of Common Stock
|
|
|
|
|
|
|
|
|
5
|
|
|
61,286
|
|
|
|
|
|
|
|
|
|
|
|
61,291
|
|
Issuance
of preferred stock
|
|
|
|
|
$
|
83,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,259
|
|
Balance
at December 31, 2007
|
|
$
|
55,435
|
|
$
|
83,259
|
|
$
|
63
|
|
$
|
691,071
|
|
$
|
(122,738
|
)
|
$
|
(255,719
|
)
|
|
|
|
$
|
451,371
|
|
Disclosure
of reclassification adjustment:
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Unrealized
holding gain (loss) on securities available-for-sale
|
|
$
|
(319,163
|
)
|
$
|
7,249
|
|
$
|
(2,507
|
)
|
Reclassification
for realized gains previously recorded as unrealized
|
|
|
5,316
|
|
|
16,371
|
|
|
16,543
|
|
|
|
$
|
(313,847
|
)
|
$
|
23,620
|
|
$
|
14,036
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Anthracite
Capital, Inc.
Consolidated
Statements of Cash Flow (in thousands)
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
83,976
|
|
$
|
80,471
|
|
$
|
70,597
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Decrease
in trading securities
|
|
|
131,232
|
|
|
36,140
|
|
|
43,447
|
|
Net
gain on sale of securities
|
|
|
(166
|
)
|
|
(19,625
|
)
|
|
(14,544
|
)
|
Gain
on sale of real estate held for sale
|
|
|
-
|
|
|
(1,366
|
)
|
|
-
|
|
Earnings
from subsidiary trust
|
|
|
(423
|
)
|
|
(388
|
)
|
|
(47
|
)
|
Distributions
from subsidiary trust
|
|
|
423
|
|
|
363
|
|
|
45
|
|
Earnings
from equity investments
|
|
|
(32,093
|
)
|
|
(27,431
|
)
|
|
(12,146
|
)
|
Distributions
of earnings from equity investments
|
|
|
45,944
|
|
|
19,725
|
|
|
8,483
|
|
Premium
amortization, net
|
|
|
10,573
|
|
|
4,462
|
|
|
7,673
|
|
Loss
on impairment of assets
|
|
|
12,469
|
|
|
7,880
|
|
|
5,088
|
|
Realized/Unrealized
net foreign currency (gain) loss
|
|
|
(56,863
|
)
|
|
(24,051
|
)
|
|
(24
|
) |
Non-cash
management and incentive fees
|
|
|
4,123
|
|
|
4,537
|
|
|
1,287
|
|
Non-cash
directors compensation
|
|
|
42
|
|
|
64
|
|
|
65
|
|
Proceeds
(disbursements) from sale of interest rate swap agreements
|
|
|
18,665
|
|
|
11,634
|
|
|
(2,108
|
)
|
(Increase)
decrease in other assets
|
|
|
(16,317
|
)
|
|
33,832
|
|
|
(251
|
)
|
Increase
(decrease) in other liabilities
|
|
|
16,783
|
|
|
(11,418
|
)
|
|
(849
|
)
|
Net
cash provided by operating activities
|
|
|
218,368
|
|
|
114,829
|
|
|
106,716
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase
of securities available-for-sale
|
|
|
(614,166
|
)
|
|
(808,477
|
)
|
|
(517,022
|
)
|
Proceeds
from sale of securities available-for-sale
|
|
|
605,281
|
|
|
236,945
|
|
|
172,737
|
|
Principal
payments received on securities available-for-sale
|
|
|
62,255
|
|
|
51,193
|
|
|
53,779
|
|
Repayments
received from commercial mortgage loan pools
|
|
|
17,374
|
|
|
9,004
|
|
|
7,876
|
|
Purchase
of real estate held-for-sale
|
|
|
-
|
|
|
(5,435
|
)
|
|
-
|
|
Proceeds
from sale of real estate held-for-sale
|
|
|
-
|
|
|
6,801
|
|
|
-
|
|
Funding
of commercial mortgage loans
|
|
|
(781,978
|
)
|
|
(270,362
|
)
|
|
(243,557
|
)
|
Repayments
received from commercial mortgage loans
|
|
|
296,724
|
|
|
197,094
|
|
|
112,830
|
|
Sale
of commercial mortgage loans
|
|
|
-
|
|
|
-
|
|
|
20,072
|
|
Investment
in equity investments
|
|
|
(38,555
|
)
|
|
(78,533
|
)
|
|
(72,009
|
)
|
Return
of capital from equity investments
|
|
|
101,403
|
|
|
14,742
|
|
|
26,868
|
|
Decrease
(increase) in restricted cash equivalents
|
|
|
27,696
|
|
|
(58,448
|
)
|
|
18,434
|
|
Net
cash used in investing activities
|
|
|
(323,966
|
)
|
|
(705,476
|
)
|
|
(419,992
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in borrowings under reverse repurchase agreements
and
credit
facilities
|
|
|
(120,090
|
)
|
|
(225,926
|
)
|
|
293,810
|
|
Repayments
of borrowings secured by commercial mortgage loan pools
|
|
|
(17,641
|
)
|
|
(8,587
|
)
|
|
(2,672
|
)
|
Issuance
of collateralized debt obligations
|
|
|
23,875
|
|
|
765,388
|
|
|
-
|
|
Repayments
of collateralized debt obligations
|
|
|
(51,707
|
)
|
|
(20,115
|
)
|
|
(1,955
|
)
|
Issuance
costs for collateralized debt obligations
|
|
|
(1,537
|
)
|
|
(11,662
|
)
|
|
-
|
|
Issuance
of senior convertible notes
|
|
|
80,000
|
|
|
-
|
|
|
-
|
|
Issuance
costs of senior convertible notes
|
|
|
(2,419
|
)
|
|
-
|
|
|
-
|
|
Issuance
of junior subordinated notes to subsidiary trust
|
|
|
-
|
|
|
100,000
|
|
|
75,000
|
|
Issuance
costs of junior subordinated notes
|
|
|
-
|
|
|
(3,208
|
)
|
|
(2,382
|
)
|
Issuance
of senior unsecured notes
|
|
|
87,500
|
|
|
75,000
|
|
|
-
|
|
Issuance
costs of senior unsecured notes
|
|
|
(2,760
|
)
|
|
(1,396
|
)
|
|
-
|
|
Issuance
of junior unsecured notes
|
|
|
67,687
|
|
|
-
|
|
|
-
|
|
Issuance
costs of junior unsecured notes
|
|
|
(2,207
|
)
|
|
-
|
|
|
-
|
|
Issuance
of Series D preferred stock, net of offering costs
|
|
|
83,259
|
|
|
-
|
|
|
-
|
|
Dividends
paid on preferred stock
|
|
|
(10,470
|
)
|
|
(5,392
|
)
|
|
(5,392
|
)
|
Proceeds
from issuance of Common Stock, net of offering costs
|
|
|
67,222
|
|
|
15,256
|
|
|
33,452
|
|
Repurchase
of Common Stock
|
|
|
(12,100
|
)
|
|
-
|
|
|
-
|
|
Dividends
paid on Common Stock
|
|
|
(71,873
|
)
|
|
(65,023
|
)
|
|
(60,314
|
)
|
Net
cash provided by financing activities
|
|
|
116,739
|
|
|
614,335
|
|
|
329,547
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
14,018
|
|
|
2,144
|
|
|
530
|
|
Net
increase in cash and cash equivalents
|
|
|
25,159
|
|
|
25,832
|
|
|
16,801
|
|
Cash
and cash equivalents, beginning of year
|
|
|
66,388
|
|
|
40,556
|
|
|
23,755
|
|
Cash
and cash equivalents, end of year
|
|
$
|
91,547
|
|
$
|
66,388
|
|
$
|
40,556
|
|
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
226,666
|
|
$
|
208,879
|
|
$
|
156,480
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Securitizations:
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities retained
|
|
$
|
-
|
|
$
|
-
|
|
$
|
75,844
|
|
Residual
interests
|
|
$
|
-
|
|
$
|
-
|
|
$
|
20,317
|
|
Investment
in subsidiary trust
|
|
$
|
-
|
|
$
|
3,097
|
|
$
|
2,380
|
|
Investments
purchased not settled
|
|
$
|
4,693
|
|
$
|
23,796
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Anthracite
Capital, Inc.
Notes
to Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
1 ORGANIZATION
AND SIGNIFICANT ACCOUNTING POLICIES
Anthracite
Capital, Inc., a Maryland corporation, and subsidiaries (collectively, the
"Company") was incorporated in Maryland in November 1997 and commenced
operations on March 24, 1998. The Company's principal business activity is
to
invest in a diversified portfolio of CMBS and commercial mortgage loans, and
other real estate related assets in the U.S. and non-U.S. markets. The Company
is organized and managed as a single business segment.
A
summary
of the Company's significant accounting policies follows:
Use
of Estimates
In
preparing the consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America ("GAAP"),
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 consolidated statements of financial
condition and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates and assumptions.
Significant estimates in the consolidated financial statements include the
valuation of the Company's securities and estimates pertaining to credit
performance related to CMBS and commercial real estate loans.
Principles
of Consolidation
The
consolidated financial statements include the financial statements of the
Company, its majority owned subsidiaries and those variable interest entities
("VIEs") in which the Company is the primary beneficiary under Financial
Accounting Standards Board ("FASB") Interpretation No. 46, Consolidation
of Variable Interest Entities
(revised
December 2003) ("FIN 46R"). All inter-company balances and transactions have
been eliminated in consolidation.
Variable
Interest Entities
The
Company's ownership of the subordinated classes of CMBS from a single issuer
gives it the right to control the foreclosure/workout process on the underlying
loans ("Controlling Class CMBS"). FIN 46R has certain scope exceptions, one
of
which provides that an enterprise that holds a variable interest in a qualifying
special-purpose entity ("QSPE") does not consolidate that entity unless that
enterprise has the unilateral ability to cause the entity to liquidate.
Statement of Financial Accounting Standards ("SFAS") No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities ("FAS
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 46R 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 industry standard
and
are consistent with the 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 discussed above,
as well as varying and evolving interpretations of the QSPE criteria under
FAS
140. Additionally, the standard setters continue to review the FIN 46R
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
December 31, 2007, the Company owned securities of 39 Controlling Class CMBS
trusts with a par of $1,861,213. However, portions of the non-rated securities
of 17 of the 39 Controlling Class CMBS transactions are included the Company's
fifth and sixth CDOs ("CDO HY1" and "CDO HY2", respectively). The total par
amount of CMBS issued by the 39 trusts was $59,534,400. One of the Company's
39
Controlling Class trusts does not qualify as a QSPE and has been consolidated
by
the Company (see Note 4 to the consolidated financial statements). The Company's
maximum exposure to loss as a result of its investment in these VIEs totaled
$1,126,441 and $762,567 at December 31, 2007 and 2006, respectively.
In
addition, the Company has completed two securitizations that qualify as QSPEs
under FAS 140. Through CDO HY1 and CDO HY2 the Company issued non-recourse
liabilities primarily secured by non-investment grade commercial real estate
assets including portions of 17 Controlling Class CMBS. Should future guidance
from the standard setters determine that Controlling Class CMBS are not QSPEs,
the Company would be required to consolidate the assets, liabilities, income
and
expenses 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 December 31, 2007 and
2006
is $61,206 and $111,076, respectively.
Valuation
The
Company carries its investments in mortgage-backed securities and derivative
instruments at fair value, with changes in fair value included in other
comprehensive income and in the consolidated statement of operations,
respectively. The fair values of certain of these securities are determined
by
references to index pricing for those securities. However, for certain
securities, index prices for identical or similar assets are not available.
In
these cases, management uses broker quotes as being indicative of fair values.
Broker quotes are only indicative of fair value, and do not necessarily
represent what the Company would receive in an actual trade for the applicable
instrument. At December 31, 2007 and 2006, approximately $932,871 and
$1,222,154, respectively, of the Company's investment securities were valued
using broker quotes. At December 31, 2007 and 2006, all of the Company's
derivative instruments were valued using broker quotes.
The
Company performs an additional analysis on prices received based on index
pricing and broker quotes. This process includes analyzing the securities based
on vintage year, rating and asset type and converting the price received to
a
spread to relevant index (i.e., 10-year treasury or swap curve). The calculated
spread is then compared to market information available for securities of
similar asset type, vintage year and rating. This process is used by the
Company to validate the prices received from brokers and index
pricing.
Foreign
currency translation
Assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars using foreign exchange rates at the end of the reporting period. Income
and expenses are translated at the approximate weighted average exchange rates
for each reporting period. The effects of translating income with a functional
currency other than the U.S. dollar are included in stockholders' equity along
with the related hedge effects. The effects of translating operations with
the
U.S. dollar as the functional currency are included in foreign currency gain
(loss) along with the related hedge effects.
Cash
and Cash Equivalents
Cash
and
cash equivalents consist of cash and short-term, highly liquid investments
with
original maturities of three months or less. Cash and cash equivalents are
held
at major financial institutions, to which the Company is exposed to credit
risk.
Restricted
Cash
At
December 31, 2007, the Company had restricted cash of $32,105, consisting of
$3,955 on deposit with the trustees for the Company's CDOs and $28,150 pledged
as collateral for interest rate swap agreements. At December 31, 2006, the
Company had restricted cash of $59,801, consisting of $56,266 on deposit with
the trustees for the Company's CDOs and $3,535 pledged as collateral for
interest rate swap agreements.
Deferred
Financing Costs
Deferred
financing costs, which are included in other assets on the Company's
consolidated statements of financial condition, includes issuance costs related
to the Company's debt. These costs are amortized by applying the effective
interest rate method and the amortization is reflected in interest
expense.
Securities
Available-for-Sale
The
Company has designated certain investments in mortgage-backed securities,
mortgage-related securities and certain other securities as assets
available-for-sale because the Company may dispose of them prior to maturity
and
does not hold them principally for the purpose of selling them in the near
term.
Securities available-for-sale are carried at estimated fair value with the
net
unrealized gains or losses reported as a component of accumulated other
comprehensive income (loss) in stockholders' equity. Unrealized losses on
securities that reflect a decline in value that is judged by management to
be
other than temporary, if any, are charged to earnings. At disposition, the
realized net gain or loss is included in income on a specific identification
basis.
In
accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("FAS
115"), when the estimated fair value of a security classified as
available-for-sale has been below amortized cost for a significant period of
time and the Company concludes that it no longer has the ability or intent
to
hold the security for the period of time over which the Company expects the
values to recover to amortized cost, the investment is written down to its
fair
value. The resulting charge is included in income, and a new cost basis
established. Additionally, under Emerging Issues Task Force ("EITF") Issue
99-20, Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial Interests
in Securitized Financial Assets
("EITF
99-20"), when changes in estimated cash flows from the cash flows previously
estimated occur due to actual prepayment and credit loss experience, and the
present value of the revised cash flows using the current expected yield is
less
than the present value of the previously estimated remaining cash flows
(adjusted for cash receipts during the intervening period), an
other-than-temporary impairment is deemed to have occurred. Accordingly, the
security is written down to fair value with the resulting change included in
income, and a new cost basis established. In both instances, the original
discount or premium is written off when the new cost basis is
established.
Revenue
Recognition
The
Company recognizes interest income from its purchased beneficial interests
in
securitized financial interests ("beneficial interests") (other than beneficial
interests of high credit quality, sufficiently collateralized to ensure that
the
possibility of credit loss is remote, or that cannot contractually be prepaid
or
otherwise settled in such a way that the Company would not recover substantially
all of its recorded investment) in accordance with EITF 99-20. Accordingly,
on a
quarterly basis, when changes in estimated cash flows from the cash flows
previously estimated occur due to actual prepayment and credit loss experience,
the Company calculates a revised yield based on the current amortized cost
of
the investment (including any other-than-temporary impairments recognized to
date.) The revised yield is then applied prospectively to recognize interest
income.
For
other
mortgage-backed and related mortgage securities, the Company accounts for
interest income under SFAS No. 91, Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases
("FAS
91"),
by applying the effective yield method which includes the amortization of
discount or premium arising at the time of purchase and the stated or coupon
interest payments. Actual prepayment experience is reviewed quarterly and
effective yields are recalculated when differences arise between prepayments
and
originally anticipated and amounts actually received plus anticipated future
prepayments.
After
taking into account the effect of the impairment charge, income is recognized
under EITF 99-20 or FAS 91, as applicable, by applying the yield used in
establishing the write-down.
Securities
Held-for-Trading
Securities
held-for-trading are carried at estimated fair value with net realized and
unrealized gains or losses included in the consolidated statements of
operations.
Securitizations
When
the
Company sells assets in securitizations, it retains certain tranches which
are
considered retained interests in the securitization. Gain or loss on the sale
of
assets depends in part on the previous carrying amount of the financial assets
securitized, allocated between the assets sold and the retained interests based
on their relative fair value at the date of securitization. To obtain fair
values, quoted market prices are used. Gain or loss on securitizations of
financial assets is reported as a component of sale of securities
available-for-sale on the consolidated statement of operations. Retained
interests are carried at estimated fair value on the consolidated statement
of
financial condition. Adjustments to estimated fair value for retained interests
classified as securities available-for-sale are included in accumulated other
comprehensive income (loss) on the consolidated statements of financial
condition.
Commercial
Mortgage Loans and Loan Pools
The
Company purchases and originates certain commercial mortgage loans to be held
as
long-term investments. In accordance with SFAS No. 65, Accounting
for Certain Mortgage Banking Activities,
commercial mortgage loans and loan pools are classified as long term investments
because the Company has the ability and the intent to hold these loans to
maturity. Loans are recorded at cost at the date of purchase. Premiums and
discounts related to these loans are amortized over their estimated lives using
the effective interest method. Any origination fee income and application fee
income, net of direct costs, associated with originating or purchasing
commercial mortgage loans are deferred and included in the basis of the loans
on
the consolidated statements of financial condition. The net fees on originated
loans are amortized over the life of the loans using the effective interest
method and fees recognized on purchased loans are expense as incurred. The
Company recognizes impairment on the loans when it is probable that the Company
will not be able to collect all amounts due according to the contractual terms
of the loan agreement. The Company measures impairment (both interest and
principal) based on the present value of expected future cash flows discounted
at the loan's effective interest rate or the fair value of the collateral if
the
loan is collateral dependent.
Equity
Investments
For
those
investments in real estate entities where the Company does not control the
investee, or is not the primary beneficiary of a VIE, but can exert significant
influence over the financial and operating policies of the investee, the Company
uses the equity method of accounting. The Company recognizes its share of each
investee's income or loss, and reduces its investment balance by distributions
received. The Company owned an equity method investment in a privately held
real
estate investment trust ("REIT") that maintained its financial records on a
fair
value basis. The Company had retained such accounting relative to its investment
in this REIT pursuant to EITF Issue 85-12, Retention
of Specialized Accounting for Investments in Consolidation. During
2007, the Company redeemed its entire investment in the aforementioned
REIT.
Derivative
Instruments
As
part
of its asset/liability risk management activities, the Company may enter into
interest rate swap agreements, forward currency exchange contracts and other
financial instruments to hedge interest rate and foreign currency exposures
or
to modify the interest rate or foreign currency characteristics of related
items
on its consolidated statement of financial condition.
Income
and expense from interest rate swap agreements that are designated for
accounting purposes as cash flow hedges are recognized as a net adjustment
to
the interest expense of the hedged item and changes in fair value are recognized
as a component of accumulated other comprehensive income (loss) in stockholders'
equity, to the extent effective. Ineffective portions of changes in the fair
value of cash flow hedges are recognized as a component of interest expense
in
the consolidated statements of operations. If the underlying hedged items are
sold, the amount of unrealized gain or loss in accumulated other comprehensive
income (loss) relating to the corresponding interest rate swap agreement is
included in the determination of gain or loss on the sale of the securities.
If
interest rate swap agreements are terminated, the associated gain or loss is
deferred and amortized over the shorter of the remaining term of the original
swap agreement, or the underlying hedged item, provided that the underlying
hedged item has not been sold.
Income
and expense from interest rate swap agreements that are, for accounting
purposes, designated as trading derivatives are recognized as a net adjustment
to gain (loss) on securities held-for-trading in the consolidated statement
of
operations. During the term of the interest rate swap agreement, changes in
fair
value are recognized as a component of gain (loss) on securities
held-for-trading on the consolidated statements of operations.
Gains
and
losses from forward currency exchange contracts are recognized as a net
adjustment to foreign currency gain or loss on the consolidated statements
of
operations. During the term of the forward currency exchange contracts, changes
in fair value are recognized on the consolidated statements of financial
condition and included in other assets (if there is an unrealized gain) or
in
other liabilities (if there is an unrealized loss). A corresponding amount
is
included as a component of net foreign currency gain or loss on the consolidated
statements of operations.
The
Company monitors its hedging instruments throughout their terms to ensure that
they remain effective for their intended purpose. The Company is exposed to
interest rate and/or currency risk on these hedging instruments, as well as
to
credit loss in the event of nonperformance by any other party to the Company's
hedging instruments. The Company's policy is to enter into hedging agreements
with counterparties rated A or better.
Share-Based
Compensation
In
December 2004, the FASB issued SFAS No. 123R, Share-Based
Payment ("FAS 123R") .
This
statement is a revision to SFAS No. 123, Accounting
for Stock-Based Compensation,
and
superseded APB Opinion No. 25, Accounting
for Stock Issued to Employees.
This
statement establishes standards for the accounting for transactions in which
an
entity exchanges its equity instruments for goods or services, primarily
focusing on the accounting for transactions in which an entity obtains employee
services in share-based payment transactions. Entities are required to measure
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited
exceptions). That cost is recognized over the period during which an employee
is
required to provide service (usually the vesting period) in exchange for the
award. The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models. If an equity award
is
modified after the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the modified award over
the fair value of the original award immediately before the modification. The
Company adopted FAS 123R, effective January 1, 2006 with no impact on the
consolidated financial statements as there were no unvested options at December
31, 2005 and the Company applied the fair value method to all options issued
after January 1, 2003.
Income
Taxes
The
Company has elected to be taxed as a REIT and to comply with the provisions
of
the United States Internal Revenue Code of 1986, as amended (the "Code") with
respect thereto. Accordingly, the Company generally will not be subject to
federal, state or local income tax as long as distributions to stockholders
are
equal to or greater than taxable income and as long as certain asset, income
and
stock ownership tests are met. At December 31, 2007, the Company had a federal
capital loss carryover of approximately $35,178 available to offset future
capital gains.
Recent
Accounting Pronouncements
Fair
Value Measurements
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements
("FAS
157"). SFAS No. 157 defines fair value, establishes a framework for measuring
fair value and requires enhanced disclosures about fair value measurements.
FAS
157 requires companies to disclose the fair value of their 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 have inputs to the valuation
techniques that are unobservable and require significant management judgment),
including a reconciliation of the beginning and ending balances separately
for
each major category of assets and liabilities. FAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and all interim periods within those fiscal years. FAS 157 is not expected
to
materially affect how the Company determines fair value, but will result in
certain additional disclosures.
Fair
Value Accounting
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
("FAS
159"). FAS 159 permits entities to elect 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 option is determined on an instrument by
instrument basis, is applied to an entire instrument and is irrevocable. Assets
and liabilities measured at fair value pursuant to the fair value option will
be
reported separately on the consolidated statement of financial condition from
those instruments measured using another measurement attribute. FAS 159 is
effective as of the beginning of the first fiscal year that begins after
November 15, 2007. The Company adopted FAS 159 as of the beginning of 2008
and
elected to apply the fair value option to the following financial assets and
liabilities existing at the time of adoption:
(1)
All
securities which were previously accounted for as
available-for-sale;
(2)
All
unsecured long-term liabilities, consisting of all senior unsecured notes,
senior convertible notes, junior unsecured notes and junior subordinated notes;
and
(3)
All
CDO liabilities
Upon
adoption, the Company expects total stockholders' equity to increase by
approximately $372,000, substantially all of which relates to applying the
fair
value option to the Company's long-term liabilities. Subsequent to January
1,
2008, all changes in the estimated fair value of the Company's
available-for-sale securities, CDOs, senior unsecured notes, senior convertible
notes, junior unsecured notes and junior subordinated notes will be recorded
in
earnings.
Reverse
Repurchase Agreements
In
February 2008, the FASB issued FASB Staff Position ("FSP") FAS 140-3,
Accounting
for Transfers of Financial Assets and Repurchase Financing
Transactions
("FAS
140-3"). This FSP addresses the accounting for the transfer of financial assets
and a subsequent repurchase financing and shall be effective for financial
statements issued for fiscal years beginning after November 15, 2008 and interim
periods within those years. The FSP focuses on the circumstances that would
permit a transferor and a transferee to separately evaluate the accounting
for a
transfer of a financial asset and a repurchase financing under SFAS
140.
The
FSP
states that a transfer of a financial asset and a repurchase agreement involving
the transferred financial asset should be considered part of the same
arrangement when the counterparties to the two transactions are the same unless
certain criteria are met. The criteria in the FSP are intended to identify
whether (1) there is a valid and distinct business or economic purpose for
entering separately into the two transactions and (2) the repurchase financing
does not result in the initial transferor regaining control over the previously
transferred financial assets. The FASB has stated that the FSP's purpose is
to
limit diversity of practice in accounting for these situations, resulting in
more consistent financial reporting. This FSP shall be applied prospectively
to
initial transfers and repurchase financings for which the initial transfer
is
executed on or after the beginning of the fiscal year in which this FSP is
initially applied.
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 115, 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 FAS 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. The Company has not
completed its evaluation of the impact of FAS 140-3 but the Company may be
precluded from presenting the assets gross on the Company's consolidated
statement of financial condition and should instead treat 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 stockholders' equity would
not be materially affected. At December 31, 2007, the Company has identified
available-for-sale securities with a fair value of approximately $147,552 which
had been purchased from and financed with reverse repurchase agreements totaling
approximately $127,094 with the same counterparty since their purchase. If
the Company were to change the current accounting treatment for these
transactions at December 31, 2007 to that required by the FSP, total assets
and
total liabilities would be reduced by approximately $127,094.
Investment
Companies
In
June,
2007, the American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position ("SOP") 07-1, Clarification
of the Scope of the Audit and Accounting Guide Investment Companies and
Accounting for Parent Companies and Equity Method Investors for Investments
in
Investment Companies.
This
SOP provides guidance for determining whether an entity is within the scope
of
the AICPA Audit and Accounting Guide- Investment Companies (the "Guide").
Entities that are within the scope of the Guide are required, among other
things, to carry their investments at fair value, with changes in fair value
included in earnings. On October 17, 2007, the FASB decided to indefinitely
defer the effective date of this SOP.
Variable
Interest Entities
The
consolidated financial statements include the financial statements of the
Company and its subsidiaries, which are wholly owned or controlled by the
Company or entities which are VIEs in which the Company is the primary
beneficiary under 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 significant inter-company balances and transactions have been
eliminated in consolidation.
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 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 FAS 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
("SFAS
155"), which amends SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities
("SFAS
133"),
and SFAS
No. 140. FAS 155 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 FAS 133, an irrevocable election may be made on an
instrument-by-instrument basis to measure the 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.
|
|
·
|
Interest-only
strips and principal-only strips are not subject to the requirements
of
FAS 133.
|
FAS
155
was effective for all financial instruments acquired, issued or subject to
re-measurement 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 were
required to be recognized as a cumulative effect adjustment to beginning
retained earnings. Restatement was not permitted for prior periods. The adoption
of FAS 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
("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 was effective for public companies
as
of the beginning of fiscal years that began 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.
Reclassifications
Certain
items previously reported have been reclassified to conform to the current
year's presentation.
Note
2 SECURITIES
AVAILABLE-FOR-SALE
The
Company's securities available-for-sale are carried at estimated fair value.
The
amortized cost and estimated fair value of securities available-for-sale at
December 31, 2007 are summarized as follows:
Security
Description
|
|
Amortized
Cost
|
|
Gross
Unrealized Gain
|
|
Gross
Unrealized
Loss
|
|
Estimated
Fair
Value
|
|
U.S.
Dollar Denominated:
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities:
|
|
|
|
|
|
|
|
|
|
CMBS
interest only securities ("CMBS IOs")
|
|
$
|
14,725
|
|
$
|
1,190
|
|
$
|
-
|
|
$
|
15,915
|
|
Investment
grade CMBS
|
|
|
743,790
|
|
|
32,475
|
|
|
(25,192
|
)
|
|
751,073
|
|
Non-investment
grade rated subordinated CMBS
|
|
|
761,103
|
|
|
24,255
|
|
|
(155,670
|
)
|
|
629,688
|
|
Non-rated
subordinated CMBS
|
|
|
130,940
|
|
|
1,331
|
|
|
(22,719
|
)
|
|
109,552
|
|
Credit
tenant leases
|
|
|
23,867
|
|
|
1,082
|
|
|
-
|
|
|
24,949
|
|
Investment
grade REIT debt
|
|
|
247,602
|
|
|
3,664
|
|
|
(5,171
|
)
|
|
246,095
|
|
Multifamily
agency securities
|
|
|
36,815
|
|
|
547
|
|
|
(239
|
)
|
|
37,123
|
|
CDO
investments
|
|
|
67,470
|
|
|
20,711
|
|
|
(38,551
|
)
|
|
49,630
|
|
Total
|
|
|
2,026,312
|
|
|
85,255
|
|
|
(247,542
|
)
|
|
1,864,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
adjustable rate securities
|
|
|
1,196
|
|
|
-
|
|
|
(3
|
)
|
|
1,193
|
|
Residential
CMOs
|
|
|
76
|
|
|
79
|
|
|
-
|
|
|
155
|
|
Hybrid
adjustable rate mortgages ("ARMs")
|
|
|
7,991
|
|
|
-
|
|
|
(57
|
)
|
|
7,934
|
|
Total
RMBS
|
|
|
9,263
|
|
|
79
|
|
|
(60
|
)
|
|
9,282
|
|
Total
U.S. dollar denominated securities
available-for-sale
|
|
|
2,035,575
|
|
|
85,334
|
|
|
(247,602
|
)
|
|
1,873,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
Dollar Denominated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
|
153,384
|
|
|
2,837
|
|
|
(4,689
|
)
|
|
151,532
|
|
Non-investment
grade rated subordinated CMBS
|
|
|
217,046
|
|
|
6,406
|
|
|
(11,018
|
)
|
|
212,434
|
|
Non-rated
subordinated CMBS
|
|
|
27,772
|
|
|
1,211
|
|
|
(126
|
)
|
|
28,857
|
|
Total
non-U.S. dollar denominated securities
available-for-sale
|
|
|
398,202
|
|
|
10,454
|
|
|
(15,833
|
)
|
|
392,823
|
|
Total
securities available-for-sale
|
|
$
|
2,433,777
|
|
$
|
95,788
|
|
$
|
(263,435
|
)
|
$
|
2,266,130
|
|
At
December 31, 2007, an aggregate of $2,209,820 in estimated fair value of the
Company's securities available-for-sale was pledged to secure its collateralized
borrowings.
The
amortized cost and estimated fair value of securities available-for-sale at
December 31, 2006 are summarized as follows:
Security
Description
|
|
Amortized
Cost
|
|
Gross
Unrealized Gain
|
|
Gross
Unrealized
Loss
|
|
Estimated
Fair
Value
|
|
U.S.
Dollar Denominated:
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities:
|
|
|
|
|
|
|
|
|
|
CMBS
IOs
|
|
$
|
69,183
|
|
$
|
1,450
|
|
$
|
(1,280
|
)
|
$
|
69,353
|
|
Investment
grade CMBS
|
|
|
694,173
|
|
|
48,843
|
|
|
(7,637
|
)
|
|
735,379
|
|
Non-investment
grade rated subordinated CMBS
|
|
|
522,011
|
|
|
45,327
|
|
|
(4,591
|
)
|
|
562,747
|
|
Non-rated
subordinated CMBS
|
|
|
71,197
|
|
|
7,483
|
|
|
(61
|
)
|
|
78,619
|
|
Credit
tenant leases
|
|
|
24,439
|
|
|
391
|
|
|
(512
|
)
|
|
24,318
|
|
Investment
grade REIT debt
|
|
|
247,937
|
|
|
4,627
|
|
|
(3,320
|
)
|
|
249,244
|
|
Multifamily
agency securities
|
|
|
452,781
|
|
|
3,048
|
|
|
(6,003
|
)
|
|
449,826
|
|
CDO
investments
|
|
|
117,871
|
|
|
5,806
|
|
|
(3,042
|
)
|
|
120,635
|
|
Total
|
|
|
2,199,592
|
|
|
116,975
|
|
|
(26,446
|
)
|
|
2,290,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
adjustable rate securities
|
|
|
1,768
|
|
|
7
|
|
|
-
|
|
|
1,775
|
|
Residential
CMOs
|
|
|
131,563
|
|
|
265
|
|
|
(978
|
)
|
|
130,850
|
|
Hybrid
ARMs
|
|
|
11,798
|
|
|
-
|
|
|
(283
|
)
|
|
11,515
|
|
Total
RMBS
|
|
|
145,129
|
|
|
272
|
|
|
(1,261
|
)
|
|
144,140
|
|
Total
U.S dollar denominated securities
available-for-sale
|
|
|
2,344,721
|
|
|
117,247
|
|
|
(27,707
|
)
|
$
|
2,434,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
Dollar Denominated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
|
54,383
|
|
|
2,543
|
|
|
(151
|
)
|
|
56,775
|
|
Non-investment
grade rated subordinated CMBS
|
|
|
116,698
|
|
|
6,977
|
|
|
(403
|
)
|
|
123,272
|
|
Non-rated
subordinated CMBS
|
|
|
1,554
|
|
|
-
|
|
|
(6
|
)
|
|
1,548
|
|
Total
non-U.S dollar denominated securities
available-for-sale
|
|
|
172,635
|
|
|
9,520
|
|
|
(560
|
)
|
|
181,595
|
|
Total
securities available-for-sale
|
|
$
|
2,517,356
|
|
$
|
126,767
|
|
$
|
(28,267
|
)
|
$
|
2,615,856
|
|
At
December 31, 2006, an aggregate of $2,415,765 in estimated fair value of the
Company's securities available-for-sale was pledged to secure its collateralized
borrowings.
At
December 31, 2007 and 2006, the aggregate estimated fair values by underlying
credit rating of the Company's securities available-for-sale are as follows:
|
|
December
31, 2007
|
|
December
31, 2006
|
|
Security
Rating
|
|
Estimated
Fair
Value
|
|
Percentage
|
|
Estimated
Fair
Value
|
|
Percentage
|
|
Agency
and agency insured securities
|
|
$
|
45,887
|
|
|
2
|
%
|
$
|
593,170
|
|
|
23
|
%
|
AAA
|
|
|
150,759
|
|
|
7
|
|
|
207,482
|
|
|
8
|
|
AA+
|
|
|
26,548
|
|
|
1
|
|
|
10,719
|
|
|
-
|
|
AA
|
|
|
46,718
|
|
|
2
|
|
|
5,810
|
|
|
-
|
|
AA-
|
|
|
14,312
|
|
|
1
|
|
|
14,859
|
|
|
1
|
|
A+
|
|
|
78,860
|
|
|
3
|
|
|
41,090
|
|
|
2
|
|
A
|
|
|
104,791
|
|
|
4
|
|
|
141,544
|
|
|
5
|
|
A-
|
|
|
118,613
|
|
|
5
|
|
|
112,906
|
|
|
4
|
|
BBB+
|
|
|
247,527
|
|
|
11
|
|
|
226,512
|
|
|
9
|
|
BBB
|
|
|
199,667
|
|
|
9
|
|
|
207,382
|
|
|
8
|
|
BBB-
|
|
|
196,393
|
|
|
9
|
|
|
154,776
|
|
|
6
|
|
Total
investment grade securities available-for-sale
|
|
|
1,230,075
|
|
|
54
|
|
|
1,716,250
|
|
|
66
|
|
BB+
|
|
|
218,093
|
|
|
10
|
|
|
178,378
|
|
|
7
|
|
BB
|
|
|
265,067
|
|
|
12
|
|
|
276,044
|
|
|
10
|
|
BB-
|
|
|
128,016
|
|
|
6
|
|
|
99,892
|
|
|
4
|
|
B+
|
|
|
55,856
|
|
|
3
|
|
|
51,271
|
|
|
2
|
|
B
|
|
|
121,491
|
|
|
5
|
|
|
113,509
|
|
|
4
|
|
B-
|
|
|
53,056
|
|
|
2
|
|
|
41,334
|
|
|
2
|
|
CCC
|
|
|
6,294
|
|
|
-
|
|
|
3,823
|
|
|
-
|
|
CC
|
|
|
5,018
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Not
rated
|
|
|
183,164
|
|
|
8
|
|
|
135,355
|
|
|
5
|
|
Total
below investment grade securities available-for-sale
|
|
|
1,036,055
|
|
|
46
|
|
|
899,606
|
|
|
34
|
|
Total
securities available-for-sale
|
|
$
|
2,266,130
|
|
|
100
|
%
|
$
|
2,615,856
|
|
|
100
|
%
|
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 December 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
|
|
Investment
grade CMBS
|
|
$
|
223,133
|
|
$
|
(24,011
|
)
|
$
|
118,965
|
|
$
|
(5,870
|
)
|
$
|
342,098
|
|
$
|
(29,881
|
)
|
Non-investment
grade rated CMBS
|
|
|
455,892
|
|
|
(114,235
|
)
|
|
141,466
|
|
|
(52,453
|
)
|
|
597,358
|
|
|
(166,688
|
)
|
Non-rated
subordinated CMBS
|
|
|
85,194
|
|
|
(21,865
|
)
|
|
1,611
|
|
|
(980
|
)
|
|
86,805
|
|
|
(22,845
|
)
|
Investment
grade REIT debt
|
|
|
934
|
|
|
(62
|
)
|
|
78,117
|
|
|
(5,109
|
)
|
|
79,051
|
|
|
(5,171
|
)
|
Multifamily
agency securities
|
|
|
20,239
|
|
|
(85
|
)
|
|
363
|
|
|
(154
|
)
|
|
20,602
|
|
|
(239
|
)
|
CDO
investments
|
|
|
14,520
|
|
|
(7,795
|
)
|
|
5,750
|
|
|
(30,756
|
)
|
|
20,270
|
|
|
(38,551
|
)
|
Agency
adjustable rate securities
|
|
|
1,193
|
|
|
(3
|
)
|
|
-
|
|
|
-
|
|
|
1,193
|
|
|
(3
|
)
|
Hybrid
ARMs
|
|
|
-
|
|
|
-
|
|
|
7,934
|
|
|
(57
|
)
|
|
7,934
|
|
|
(57
|
)
|
Total
temporarily impaired securities
|
|
$
|
801,105
|
|
$
|
(168,056
|
)
|
$
|
354,206
|
|
$
|
(95,379
|
)
|
$
|
1,155,311
|
|
$
|
(263,435
|
)
|
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 December 31,
2006.
|
|
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
|
|
$
|
5,524
|
|
$
|
(378
|
)
|
$
|
22,181
|
|
$
|
(902
|
)
|
$
|
27,705
|
|
$
|
(1,280
|
)
|
Investment
grade CMBS
|
|
|
32,051
|
|
|
(151
|
)
|
|
139,776
|
|
|
(7,637
|
)
|
|
171,827
|
|
|
(7,788
|
)
|
Non-investment
grade rated CMBS
|
|
|
125,396
|
|
|
(2,457
|
)
|
|
74,852
|
|
|
(2,537
|
)
|
|
200,248
|
|
|
(4,994
|
)
|
Non-rated
subordinated CMBS
|
|
|
1,548
|
|
|
(6
|
)
|
|
2,468
|
|
|
(61
|
)
|
|
4,016
|
|
|
(67
|
)
|
Credit
tenant leases
|
|
|
-
|
|
|
-
|
|
|
15,803
|
|
|
(512
|
)
|
|
15,803
|
|
|
(512
|
)
|
Investment
grade REIT debt
|
|
|
10,450
|
|
|
(152
|
)
|
|
72,524
|
|
|
(3,168
|
)
|
|
82,974
|
|
|
(3,320
|
)
|
Multifamily
agency securities
|
|
|
153,266
|
|
|
(600
|
)
|
|
181,102
|
|
|
(5,403
|
)
|
|
334,368
|
|
|
(6,003
|
)
|
CDO
investments
|
|
|
35,417
|
|
|
(3,042
|
)
|
|
-
|
|
|
-
|
|
|
35,417
|
|
|
(3,042
|
)
|
Residential
CMOs
|
|
|
111,859
|
|
|
(978
|
)
|
|
-
|
|
|
-
|
|
|
111,859
|
|
|
(978
|
)
|
Hybrid
ARMs
|
|
|
-
|
|
|
-
|
|
|
11,516
|
|
|
(283
|
)
|
|
11,516
|
|
|
(283
|
)
|
Total
temporarily impaired securities
|
|
$
|
475,511
|
|
$
|
(7,764
|
)
|
$
|
520,222
|
|
$
|
(20,503
|
)
|
$
|
995,733
|
|
$
|
(28,267
|
)
|
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.
During
2007, the Company sold securities available-for-sale for total proceeds of
$605,281, resulting in a gross realized gain of $8,025 and a gross realized
loss
of $(13,742). This loss was from the sale of the majority of the Company's
CMBS
IOs and multifamily agency securities. The loss was caused by higher Treasury
rates since the time of purchase. In addition, the Company incurred a charge
of
$1,514 related to the impairment of remaining CMBS IOs and multifamily agency
securities that were not sold during the year which is included in loss on
impairments of assets on the consolidated statement of operations. During 2006,
the Company sold securities available-for-sale for total proceeds of $236,945,
resulting in a gross realized gain of $30,884 and a gross realized loss of
$(1,852). The Company sold the securities with unrealized losses prior to
maturity due to changes in the underlying collateral which were expected to
significantly impact the market value of the securities. During 2005, the
Company sold securities available-for-sale for total proceeds of $172,737,
resulting in a realized gain of $16,543.
The
CMBS
held by the Company include subordinated securities collateralized by fixed
and
adjustable rate commercial and multifamily mortgage loans. The CMBS provide
credit support to the more senior classes of the related commercial
securitization. Cash flow from the mortgages underlying the CMBS generally
is
allocated first to the senior classes, with the most senior class having a
priority entitlement to cash flow. Then, any remaining cash flow is allocated
generally among the other CMBS classes in order of their relative seniority.
To
the extent there are defaults and unrecoverable losses on the underlying
mortgages, resulting in reduced cash flows, the most subordinated CMBS class
will bear this loss first. To the extent there are losses in excess of the
most
subordinated class' stated entitlement to principal and interest, the remaining
CMBS classes will bear such losses in order of their relative
subordination.
At
December 31, 2007 and 2006, the anticipated weighted average unlevered yield
based on the adjusted cost of the Company's entire subordinated CMBS portfolio
was 10.5% and 10.3% per annum, respectively, and of the Company's other
securities available-for-sale was 6.7% and 6.1% per annum, respectively. The
Company's anticipated yields to maturity on its subordinated CMBS and other
securities available-for-sale are based on 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, 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 fixed rate and adjustable rate residential
pass-through or mortgage-backed securities collateralized by fixed and
adjustable 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 December 31, 2007 and 2006, adjustable rate RMBS with
an estimated fair value of $9,282 and $144,140, respectively, are included
in
securities available-for-sale on the consolidated statements of financial
condition.
Note
3 IMPAIRMENTS
- CMBS
The
Company updates its estimated cash flows for securities subject to 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 an estimated fair value less than its adjusted purchase price.
The
Company carries all these securities at their estimated fair value on its
consolidated statements of financial condition.
2007
For
2007,
changes in timing of assumed credit loss and prepayments on fourteen CMBS
required an impairment charge totaling $9,634. The Company also increased its
underlying loss expectations for one below investment grade European CMBS during
2007, resulting in an additional impairment charge of $1,321. In addition,
the
Company incurred a charge of $1,514 related to the impairment of its remaining
high credit quality securities because similar securities were sold at a loss
during the third quarter of 2007 and the Company could not demonstrate its
ability and intent to hold remaining securities to forecasted recovery. During
the quarter ended December 31, 2007, 70 of the Company's Controlling Class
CMBS
with an aggregate adjusted purchase price of $408,201 experienced a weighted
average yield increase of 58 basis points, and 30 Controlling Class CMBS with
an
aggregate adjusted purchase price of $182,941 experienced a weighted average
yield decrease of 12 basis points.
2006
During
2006, the Company had sixteen CMBS that required an impairment charge of $7,880,
of which $6,133 was attributed to higher prepayment rates on a pool of Small
Business Administration commercial mortgages. The decline in the updated yields
that caused the remaining impairment charge of $1,747 is not related to
increases in losses but rather accelerated prepayments and changes in the timing
of credit losses.
2005
During
2005, the Company had six CMBS that required impairment charges of $5,088.
For
one below investment grade CMBS, the Company increased its underlying loan
loss
expectations on a 1998 vintage CMBS transaction resulting in a charge of $3,072.
This CMBS transaction has two underlying mortgage loans secured by assisted
living facilities located in Texas that were performing below management's
original expectations. The two underlying mortgage loans were resolved in the
fourth quarter of 2005 with lower than expected loss severities. The effect
of
the improved loss severity will be recognized over the remaining life of the
security in the form of an increased yield. For the remaining five securities,
changes in the timing of credit losses and prepayments caused yields to
decline.
Note
4 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 assets, liabilities 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 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.
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 would result in an impairment charge recorded
on the consolidated statement of operations. An increase in estimated cash
flows
will increase the amount of interest income recorded in future periods.
Note
5 SECURITIES
HELD-FOR-TRADING
The
Company's securities held-for-trading are carried at estimated fair value.
At
December 31, 2007, the Company's securities held-for-trading consisted of FNMA
Mortgage Pools with an estimated fair value of $901 and CMBS with an estimated
fair value of $17,303. At December 31, 2006, the Company's securities
held-for-trading consisted of FNMA Mortgage Pools with an estimated fair value
of $132,204 and CMBS with an estimated fair value of $22,383. The FNMA Mortgage
Pools, and the underlying mortgages, bear interest at fixed rates for specified
periods, generally three to seven years, after which the rates periodically
are
reset to market.
Note
6 COMMERCIAL
MORTGAGE LOANS
The
following table summarizes the Company's commercial real estate loan portfolio
by property type at
December 31, 2007 and 2006:
|
|
Loan
Outstanding
|
|
Weighted
Average
|
|
|
|
December 31,
2007
|
|
December
31, 2006
|
|
Yield
|
|
Property
Type
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
2007
|
|
2006
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
52,209
|
|
|
5.3
|
%
|
$
|
51,553
|
|
|
10.7
|
%
|
|
9.6
|
%
|
|
9.6
|
%
|
Office
|
|
|
45,640
|
|
|
4.6
|
|
|
65,812
|
|
|
13.6
|
|
|
10.3
|
|
|
8.5
|
|
Multifamily
|
|
|
174,873
|
|
|
17.8
|
|
|
51,368
|
|
|
10.7
|
|
|
9.7
|
|
|
11.1
|
|
Storage
|
|
|
32,307
|
|
|
3.3
|
|
|
32,625
|
|
|
6.8
|
|
|
9.1
|
|
|
9.1
|
|
Land
|
|
|
25,000
|
|
|
2.5
|
|
|
-
|
|
|
-
|
|
|
9.6
|
|
|
-
|
|
Hotel
|
|
|
12,208
|
|
|
1.2
|
|
|
33,028
|
|
|
6.9
|
|
|
10.9
|
|
|
10.3
|
|
Other
Mixed Use
|
|
|
3,983
|
|
|
0.5
|
|
|
3,983
|
|
|
0.8
|
|
|
8.5
|
|
|
9.1
|
|
Total
U.S.
|
|
|
346,220
|
|
|
35.2
|
|
|
238,369
|
|
|
49.5
|
|
|
9.7
|
|
|
9.6
|
|
Non
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
278,669
|
|
|
28.3
|
|
|
143,385
|
|
|
29.7
|
|
|
8.9
|
|
|
7.0
|
|
Office
|
|
|
238,691
|
|
|
24.3
|
|
|
64,204
|
|
|
13.3
|
|
|
8.8
|
|
|
8.0
|
|
Multifamily
|
|
|
41,403
|
|
|
4.2
|
|
|
6,550
|
|
|
1.4
|
|
|
8.6
|
|
|
7.3
|
|
Storage
|
|
|
51,272
|
|
|
5.2
|
|
|
1,384
|
|
|
0.3
|
|
|
9.5
|
|
|
6.9
|
|
Industrial
|
|
|
17,274
|
|
|
1.8
|
|
|
19,317
|
|
|
4.0
|
|
|
10.6
|
|
|
9.1
|
|
Hotel
|
|
|
5,016
|
|
|
0.5
|
|
|
5,870
|
|
|
1.2
|
|
|
10.1
|
|
|
8.6
|
|
Other
Mixed Use
|
|
|
4,842
|
|
|
0.5
|
|
|
2,666
|
|
|
0.6
|
|
|
9.0
|
|
|
8.2
|
|
Total
Non U.S.
|
|
|
637,167
|
|
|
64.8
|
|
|
243,376
|
|
|
50.5
|
|
|
8.9
|
|
|
7.5
|
|
Total
|
|
$
|
983,387
|
|
|
100.0
|
%
|
$
|
481,745
|
|
|
100.0
|
%
|
|
9.2
|
%
|
|
8.6
|
%
|
Reconciliation
of commercial mortgage loans:
|
|
Book
Value
|
|
Balance
at December 31, 2005
|
|
$
|
365,806
|
|
Investments
in commercial mortgage loans
|
|
|
294,158
|
|
Proceeds
from repayment of mortgage loans
|
|
|
(197,094
|
)
|
Discount
accretion and foreign currency
|
|
|
18,875
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
$
|
481,745
|
|
Investments
in commercial mortgage loans
|
|
|
781,978
|
|
Proceeds
from repayment of mortgage loans
|
|
|
(296,724
|
)
|
Discount
accretion and foreign currency
|
|
|
16,388
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
$
|
983,387
|
|
There
were no loans subject to delinquent principal or interest at December 31, 2007
or 2006.
Note
7 EQUITY INVESTMENTS
The
following table is a summary of the Company's equity investments for the year
ended December 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
|
|
|
-
|
|
|
28,958
|
|
|
5,500
|
|
|
41,855
|
|
Distributions
from Investments
|
|
|
(132,081
|
)
|
|
(2,208
|
)
|
|
(13,058
|
)
|
|
-
|
|
|
(147,347
|
)
|
Equity
earnings
|
|
|
18,790
|
|
|
700
|
|
|
12,603
|
|
|
-
|
|
|
32,093
|
|
Balance
at December
31, 2007
|
|
$
|
-
|
|
$
|
1,636
|
|
$
|
97,762
|
|
$
|
9,350
|
|
$
|
108,748
|
|
*
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.
At
December 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 Funds") at
December 31, 2007. Collectively, the Carbon Funds are private commercial real
estate income opportunity funds managed by the Manager (see Note 14 of the
consolidated financial statements).
The
Company's investment period in Carbon I expired on July 12, 2004. As repayments
occur, capital will be returned to investors.
The
Company entered into an aggregate commitment of $100,000 to acquire shares
in
Carbon II. The final obligation to fund capital of $13,346 was called on July
13, 2007. The following table summarizes the loan investments held by the Carbon
Funds at December 31, 2007 and 2006:
|
|
Weighted
Average
|
|
|
|
|
|
|
|
December
31, 2007
|
|
December
31, 2006
|
|
Yield
|
|
Property
Type
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
2007
|
|
2006
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
58,162
|
|
|
8.7
|
%
|
|
71,449
|
|
|
10.2
|
%
|
|
8.1
|
%
|
|
9.6
|
%
|
Office
|
|
|
181,495
|
|
|
27.2
|
|
|
162,466
|
|
|
23.2
|
|
|
9.7
|
|
|
10.5
|
|
Multifamily
|
|
|
189,152
|
|
|
28.4
|
|
|
146,108
|
|
|
20.9
|
|
|
12.1
|
|
|
11.0
|
|
Residential
|
|
|
12,000
|
|
|
1.8
|
|
|
12,000
|
|
|
1.7
|
|
|
0.1
|
|
|
12.7
|
|
Land
|
|
|
45,000
|
|
|
6.8
|
|
|
60,000
|
|
|
8.6
|
|
|
11.4
|
|
|
13.5
|
|
Hotel
|
|
|
180,298
|
|
|
27.1
|
|
|
238,921
|
|
|
34.2
|
|
|
12.0
|
|
|
12.1
|
|
Other
Mixed Use
|
|
|
-
|
|
|
-
|
|
|
8,500
|
|
|
1.2
|
|
|
-
|
|
|
11.3
|
|
Total
|
|
$
|
666,107
|
|
|
100.0
|
%
|
$
|
699,444
|
|
|
100.0
|
%
|
|
10.8
|
%
|
|
11.4
|
%
|
One
of
the loans held by Carbon II, of which the Company owns 26%, includes a $24,546
commercial real estate mezzanine loan which defaulted during July 2006 and
was
subsequently cured. The underlying property is a hotel located in the
South Beach area of Miami, Florida. In the second quarter of 2007, Carbon
II purchased for $17,103 the controlling class position of the senior loan.
This
position is senior in the capital structure to Carbon II's existing investment
and provides Carbon II with the ability to direct the workout process of the
senior loan. Both loans matured in March 2007, and the borrower failed to
repay, triggering a maturity default. The borrower has reached a
settlement agreement that allows the borrower a specified period of time to
obtain a purchaser for the hotel. Based on a recent proposal for this
property, the loan to value of this loan is approximately 90% and Carbon II
believes a loan loss reserve is not necessary at December 31, 2007.
Two
other
loans held by Carbon II have defaulted. The aggregate carrying value of
the two assets on Carbon II's consolidated financial statements is
$23,779. The underlying properties, located in Orlando and Boynton Beach,
Florida, are multi-family assets. Carbon II has concluded a workout
arrangement with a 336-unit property borrower in Orlando, 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 continues to hold
title and implement its sales strategy. To date, 240 units have been sold
and closed. An additional 26 units are under contract with deposits and 30
contracts are being prepared. During 2007, Carbon II established a loss
reserve of $3,332 of which the Company's share is $833.
A
216-unit property in Boynton Beach 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 and is
operating it as a rental property. During 2006, Carbon II established a
loss reserve of $5,180, of which the Company's share is $1,361. Carbon II
determined that no change to the carrying value of the property was necessary
at
December 31, 2007.
The
above
three loans are the only defaulted loans held by Carbon II at December 31,
2007. Subsequent to December 31, 2007, two loans had maturity defaults,
one of which has since been cured. Carbon II and the lending group are in
discussions to extend the remaining loan. All other commercial real estate
loans in the Carbon Funds are performing as expected.
BlackRock
Diamond Property Fund, Inc. ("BlackRock Diamond") is a private REIT managed
by
BlackRock Realty Advisors, Inc., a subsidiary of the Company's Manager.
The
Company invested
$100,000 in the BlackRock Diamond.
The
Company redeemed $25,000 of its investment on June 30, 2007 and redeemed the
remaining $75,000 plus accumulated earnings on September 30, 2007. Over the
life
of this investment, the Company recognized a cumulative profit of $34,853,
an
annualized return of 20.8%. For
the
nine months ended September 30, 2007, BlackRock Diamond recorded net income
of
$104,369. The Company's share of BlackRock Diamond's net income for the nine
months ended September 30, 2007 (date of redemption) was
$18,790.
On
December 22, 2005, the Company entered into an $11,000 commitment to acquire
shares of Dynamic India Fund IV. At
December 31, 2007, the Company's capital committed was $11,000, of which $9,350
had been drawn.
Combined
summarized financial information of the unconsolidated equity investments of
the
Company is as follows:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Combined
Statements of Financial Condition:
|
|
|
|
|
|
Commercial
mortgage loans, net
|
|
$
|
666,107
|
|
$
|
699,444
|
|
Securities
available-for-sale, at fair value
|
|
|
23,500
|
|
|
-
|
|
Real
estate property, at fair value
|
|
|
43,002
|
|
|
680,134
|
|
Other
assets
|
|
|
64,233
|
|
|
138,060
|
|
Total
Assets
|
|
$
|
796,842
|
|
$
|
1,517,638
|
|
|
|
|
|
|
|
|
|
Secured
borrowings
|
|
$
|
413,985
|
|
$
|
654,385
|
|
Other
liabilities
|
|
|
6,062
|
|
|
90,581
|
|
Stockholders'
equity
|
|
|
376,795
|
|
|
772,672
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
796,842
|
|
$
|
1,517,638
|
|
|
|
|
|
|
|
|
|
The
Company's share of equity
|
|
$
|
99,398
|
|
$
|
182,147
|
|
|
|
For
the year ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Combined
Statements of Operations:
|
|
|
|
|
|
|
|
Income
|
|
$
|
102,793
|
|
$
|
95,470
|
|
$
|
82,973
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
46,749
|
|
|
42,483
|
|
|
21,834
|
|
Operating
expenses
|
|
|
27,073
|
|
|
22,506
|
|
|
16,250
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
73,822
|
|
|
64,989
|
|
|
38,084
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized/unrealized
gain
|
|
|
122,778
|
|
|
57,677
|
|
|
17,124
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
151,749
|
|
$
|
88,158
|
|
$
|
62,013
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's share of net income
|
|
$
|
32,093
|
|
$
|
27,431
|
|
$
|
12,146
|
|
Note
8 SECURITIZATION
TRANSACTIONS
During
2005, the Company issued its fifth CDO ("CDO HY2") and issued non-recourse
liabilities with a face amount of $365,010. In addition, senior investment
grade
notes with a face amount of $240,134 were issued and sold in a private
placement. The Company retained the floating rate BBB- note, the below
investment grade notes and the preferred shares. The Company recorded CDO HY2
as
a secured financing for accounting purposes and consolidated the assets,
liabilities, income and expenses of CDO HY2 until the sale of the floating
rate
BBB- note in the fourth quarter of 2005, at which point CDO HY2 qualified as
a
sale under FAS 140. In exchange for a portfolio of CMBS and investment grade
REIT debt with an estimated fair value of $323,103, the Company received cash
proceeds of $244,212 as well as all of the retained interests that had an
estimated fair value of $105,025 at December 31, 2005. The total gain from
CDO
HY2 of $16,523 is included in sale of securities available-for-sale on the
consolidated statement of operations.
The
table
below summarizes the cash flows received from securitizations during the year
ended December 31, 2007, 2006 and 2005, respectively.
|
|
2007
|
|
2006
|
|
2005
|
|
Proceeds
from securitizations
|
|
$
|
-
|
|
$
|
-
|
|
$
|
235,197
|
|
Sale
of retained interest
|
|
$
|
-
|
|
$
|
-
|
|
$
|
9,015
|
|
Cash
flow on retained interests
|
|
$
|
27,266
|
|
$
|
17,951
|
|
$
|
11,347
|
|
Key
economic assumptions used in measuring the fair value of the retained interests
at the date of the securitization were as follows:
|
|
2005
|
|
2004
|
|
Subordinated
Debt
|
|
|
|
|
|
|
|
Weighted
average life
|
|
|
9.9
years
|
|
|
n/a
|
|
Subordinated
discount rate
|
|
|
12.1
|
%
|
|
n/a
|
|
|
|
2005
|
|
2004
|
|
Expected
life
|
|
|
18.2
years
|
|
|
11.5
years
|
|
Preferred
equity discount rate
|
|
|
4.9
|
%
|
|
67.4
|
%
|
When
measuring the fair value of the retained interests, the Company estimates credit
losses and the timing of losses for each loan underlying the CMBS, collateral,
and accordingly, does not apply a constant default rate to the portfolio. At
December 31, 2007, 2006, and 2005, the amortized costs of the retained interests
were $61,205, $111,076, and $119,003, with an estimated fair value of $35,055,
$114,142, and $121,159, respectively, based on key economic assumptions. The
sensitivity of the retained interest to immediate adverse changes in those
assumptions follows:
|
|
2007
|
|
2006
|
|
2005
|
|
Reduction
of net income per share:
|
|
|
|
|
|
|
|
50%
adverse change in credit losses
|
|
$
|
0.09
|
|
$
|
0.12
|
|
$
|
0.09
|
|
100%
adverse change in credit losses
|
|
$
|
0.18
|
|
$
|
0.24
|
|
$
|
0.18
|
|
EITF
99-20 impairment net income per share:
|
|
|
|
|
|
|
|
|
|
|
50%
adverse change in credit losses
|
|
$
|
0.61
|
|
$
|
0.05
|
|
$
|
0.03
|
|
100%
adverse change in credit losses
|
|
$
|
0.61
|
|
$
|
0.05
|
|
$
|
0.03
|
|
These
sensitivities are hypothetical and changes in fair value based on a variation
in
key assumptions generally cannot be extrapolated because the relationship of
the
change in assumption to the change in fair value may not be linear. This
non-linear relationship exists because the Company applies its key assumptions
on a loan-by-loan basis to the assets underlying the CMBS collateral. The
Company reviews all major assumptions periodically using the most recent
empirical and market data available and makes adjustments where
warranted.
Note
9 REAL
ESTATE, HELD-FOR-SALE
SFAS
No.
144, Accounting
for the Impairment or Disposal of Long-Lived Assets
specifies that long-lived assets to be disposed by sale, which meet certain
criteria, should be classified as real estate held-for-sale and measured at
the
lower of its carrying amount or fair value less costs of sale. In addition,
depreciation is not recorded on real estate held-for-sale.
On
March
6, 2006, the Company purchased a defaulted loan from a Controlling Class CMBS
trust. The loan was secured by a first mortgage on a multi-family property
in
Texas. Subsequent to the loan purchase, the property was acquired by the Company
at foreclosure. The
Company sold the property during the second quarter of 2006 and recorded a
gain
from discontinued operations of $1,366 on the consolidated statement of
operations.
Note
10 BORROWINGS
The
Company's borrowings consist of reverse repurchase agreements, credit
facilities, CDOs, senior unsecured notes, senior convertible notes, junior
unsecured notes, junior subordinated notes, and commercial mortgage loan
pools.
Certain
information with respect to the Company's borrowings at December 31, 2007 is
summarized as follows:
Borrowing
Type
|
|
Outstanding
borrowings
|
|
Weighted
average borrowing rate
|
|
Weighted
average remaining maturity
|
|
Estimated
fair value of assets pledged
|
|
Reverse
repurchase agreements
|
|
$
|
80,119
|
|
|
5.44
|
%
|
|
7
days
|
|
$
|
93,116
|
|
Credit
facilities
|
|
|
671,601
|
|
|
6.06
|
|
|
1.2
years
|
|
|
969,140
|
|
Commercial
mortgage loan pools
|
|
|
1,219,095
|
|
|
3.99
|
|
|
4.9
years
|
|
|
1,240,793
|
|
CDOs
|
|
|
1,823,328
|
|
|
6.11
|
|
|
4.8
years
|
|
|
2,014,047
|
|
Senior
unsecured notes
|
|
|
162,500
|
|
|
7.59
|
|
|
9.3
years
|
|
|
-
|
|
Junior
unsecured notes
|
|
|
73,103
|
|
|
6.56
|
|
|
14.3
years
|
|
|
-
|
|
Senior
convertible notes
|
|
|
80,000
|
|
|
11.75
|
|
|
19.7
years
|
|
|
-
|
|
Junior
subordinated notes
|
|
|
180,477
|
|
|
7.64
|
|
|
28.1
years
|
|
|
-
|
|
Total
Borrowings
|
|
$
|
4,290,223
|
|
|
5.72
|
%
|
|
6.4
years
|
|
$
|
4,317,096
|
|
At
December 31, 2007, the Company's borrowings had the following remaining
maturities:
Borrowing
Type
|
|
Within
30 days
|
|
31
to 59 days
|
|
60
days to less than 1 year
|
|
1
year to 3 years
|
|
3
years to 5 years
|
|
Over
5 years
|
|
Total
|
|
Reverse
repurchase agreements
|
|
$
|
80,119
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
80,119
|
|
Credit
facilities
|
|
|
-
|
|
|
-
|
|
|
261,892
|
|
|
409,709
|
|
|
-
|
|
|
-
|
|
|
671,601
|
|
Commercial
mortgage loan pools
|
|
|
-
|
|
|
17,932
|
|
|
44,270
|
|
|
368,433
|
|
|
130,683
|
|
|
657,777
|
|
|
1,219,095
|
|
CDOs
|
|
|
-
|
|
|
16,736
|
|
|
16,433
|
|
|
149,544
|
|
|
548,800
|
|
|
1,091,815
|
|
|
1,823,328
|
|
Senior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
162,500
|
|
|
162,500
|
|
Senior
convertible notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
80,000
|
|
|
80,000
|
|
Junior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
73,103
|
|
|
73,103
|
|
Junior
subordinated notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
180,477
|
|
|
180,477
|
|
Total
Borrowings
|
|
$
|
80,119
|
|
$
|
34,668
|
|
$
|
322,595
|
|
$
|
927,686
|
|
$
|
679,483
|
|
$
|
2,245,672
|
|
$
|
4,290,223
|
|
Information
with respect to the Company's borrowings at December 31, 2006 is summarized
as
follows:
Borrowing
Type
|
|
Outstanding
borrowings
|
|
Weighted
average borrowing rate
|
|
Weighted
average remaining maturity
|
|
Estimated
fair value of assets pledged
|
|
Reverse
repurchase agreements
|
|
$
|
799,669
|
|
|
5.37
|
%
|
|
78
days
|
|
$
|
854,074
|
|
Credit
facilities
|
|
|
75,447
|
|
|
6.69
|
|
|
193
days
|
|
|
88,876
|
|
Commercial
mortgage loan pools
|
|
|
1,250,503
|
|
|
3.99
|
|
|
5.8
years
|
|
|
1,271,014
|
|
CDOs
|
|
|
1,812,574
|
|
|
6.02
|
|
|
7.0
years
|
|
|
2,096,455
|
|
Senior
unsecured notes
|
|
|
75,000
|
|
|
7.20
|
|
|
10.0
years
|
|
|
-
|
|
Junior
subordinated notes
|
|
|
180,477
|
|
|
7.64
|
|
|
29.1
years
|
|
|
-
|
|
Total
Borrowings
|
|
$
|
4,193,670
|
|
|
5.39
|
%
|
|
6.3
years
|
|
$
|
4,310,419
|
|
At
December 31, 2006, the Company's borrowings had the following remaining
maturities:
Borrowing
Type
|
|
Within
30 days
|
|
31
to 59 days
|
|
60
days to less than 1 year
|
|
1
year to 3 years
|
|
3
years to 5 years
|
|
Over
5 years
|
|
Total
|
|
Reverse
repurchase agreements
|
|
$
|
18,700
|
|
$
|
-
|
|
$
|
780,969
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
799,669
|
|
Credit
facilities
|
|
|
27,569
|
|
|
-
|
|
|
33,893
|
|
|
13,985
|
|
|
-
|
|
|
-
|
|
|
75,447
|
|
Commercial
mortgage loan pools
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,250,503
|
|
|
1,250,503
|
|
CDOs*
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,812,574
|
|
|
1,812,574
|
|
Senior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
75,000
|
|
|
75,000
|
|
Junior
subordinated notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
180,477
|
|
|
180,477
|
|
Total
Borrowings
|
|
$
|
46,269
|
|
$
|
-
|
|
$
|
814,862
|
|
$
|
13,985
|
|
$
|
-
|
|
$
|
3,318,554
|
|
$
|
4,193,670
|
|
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. The Company
received and funded margin calls totaling $82,570 during 2007, $73,793 from
January 1, 2008 through March 10, 2008, and will fund another $11,118 on March
14, 2008.
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 LIBOR-based variable rate. The following table summarizes the
Company's credit facilities at December 31, 2007 and 2006.
|
|
December
31, 2007
|
|
December
31, 2006
|
|
|
|
Maturity
Date
|
|
Facility
Amount
|
|
Total
Borrowings
|
|
Unused
Borrowing Capacity
|
|
Facility
Amount
|
|
Total
Borrowings
|
|
Unused
Borrowing Capacity
|
|
Bank
of America, N.A. (1)
|
|
|
9/18/09
|
|
$
|
275,000
|
|
$
|
211,088
|
|
$
|
63,912
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Deutsche
Bank, AG (2)
|
|
|
12/20/08
|
|
|
200,000
|
|
|
174,186
|
|
|
25,814
|
|
|
200,000
|
|
|
49,398
|
|
|
150,602
|
|
Bank
of America, N.A.(3)
|
|
|
9/17/08
|
|
|
100,000
|
|
|
87,706
|
|
|
12,294
|
|
|
100,000
|
|
|
-
|
|
|
100,000
|
|
Morgan
Stanley Bank (3)
(4)
|
|
|
2/16/08
|
(5)
|
|
300,000
|
|
|
198,621
|
|
|
101,379
|
|
|
200,000
|
|
|
13,985
|
|
|
186,015
|
|
Greenwich
Capital, Inc.
|
|
|
7/7/07
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
75,000
|
|
|
12,064
|
|
|
-
|
|
|
|
|
|
|
$
|
875,000
|
|
$
|
671,601
|
|
$
|
203,399
|
|
$
|
575,000
|
|
$
|
75,447
|
|
$
|
436,617
|
|
(4) |
Can
be increased up to $15,000 based on the change in exchange rates
of the
non-US dollar loans. ….However,
any amounts drawn under this provision must be repaid in ninety days.
|
(5) |
Renewed
on February 15, 2008 until February 7,
2009.
|
During
the second quarter of 2007, the Company entered into a $150,000 committed U.S.
dollar and non-U.S. dollar credit facility with Lehman Commercial Paper, Inc.
The facility matured and was fully repaid on August 23, 2007.
On
July
20, 2007, the Company entered into a $200,000 committed U.S. dollar facility
with Bank of America, N.A. During the third quarter of 2007, the Company
increased the commitment to $275,000.
On
July
20, 2007, the Company amended its $200,000 committed non-U.S. dollar credit
facility with Morgan Stanley Bank. The amendment increases the committed
facility to $300,000. The amendment also allows for borrowings in Japanese
Yen
to fund the Company's Yen-denominated asset acquisitions. (See February 15,
2008
renewal discussion below.)
On
August
27, 2007, the Company borrowed $50,000 from KeyBank National Association. The
loan was secured by a pledge of all of the Company's ownership interest in
the
redemption proceeds of BlackRock Diamond and was repaid in full in October
2007.
On
October 22, 2007, the Company notified Deutsche Bank, AG that it had elected
to
extend the $200,000 credit facility for one year and the new maturity date
will
be December 20, 2008. In connection with this extension, the Company is required
to amortize the loan by 50% in June 2008 and by 25% in September 2008. The
remaining 25% is due in December 2008.
The
Company is subject to financial covenants in its credit facilities.
On
December 28, 2007, the Company received a waiver from its compliance with the
tangible net worth covenant at December 31, 2007 from Bank of America, N.A.,
the
lender, under a $100,000 multicurrency secured credit facility. Without the
waiver, the Company would have been required to maintain tangible net worth
of
at least $520,416 at December 31, 2007 pursuant to the covenant. On January
25,
2008, this lender agreed to amend the covenant so that the Company would be
required to maintain tangible net worth at the end of each fiscal quarter of
not
less than the sum of (i) $400,000 plus (ii) an amount equal to 75% of any equity
proceeds received by the Company on or after July 20, 2007.
As
a
result of the aforementioned waiver, the most restrictive covenants at December
31, 2007 were as follows: (1) net tangible net worth of $400,000 determined
based on GAAP increased by 75% of any future preferred and common stock
issuances by the Company, (2) a maximum recourse debt-to-equity ratio of 3.0
to
1.0, (3) a minimum unrestricted cash requirement of $10,000, (4) a minimum
debt
service coverage ratio of 1.2 to 1.0 and (5) minimum net income for two
consecutive quarters of more than one dollar. At December 31, 2007, the Company
was in compliance with the aforementioned financial covenants.
On
February 15, 2008, Morgan Stanley Bank agreed to renew its $300,000 non-USD
facility until February 7, 2009. In connection with this extension, certain
financial covenants were added or modified so that: (i) the Company is required
to have a minimum debt service coverage ratio of 1.4 to 1.0 for any calendar
quarter, (ii) on any date, the Company's tangible net worth shall not decline
20% or more from its tangible net worth as of the last business day in the
third
month preceding such date, (iii) on any date, the Company's tangible net worth
shall not decline 40% or more from its tangible net worth as of the last
business day in the twelfth month preceding such date, (iv) on any date, the
Company's tangible net worth shall not be less than the sum of $400,000 plus
75%
of any equity offering proceeds received from and after February 15, 2008,
(v)
at all times, the ratio of the Company's total indebtedness to tangible net
worth shall not be greater than 3:1 and (vi) the Company's liquid assets (as
defined in the related guaranty) shall not at any time be less than 5% of its
mark-to-market indebtedness (as defined in the related guaranty), subject to
certain exceptions before March 31, 2008. Mark-to-market indebtedness is
generally defined under the related guaranty to mean short-term liabilities
that
have a margin call feature. As of December 31, 2007, $751,721 of the Company's
short-term debt had a margin call feature. If the liquid assets covenant had
been in effect as of December 31, 2007, the Company would have been required
to
have an unrestricted cash balance of $37,586.
CDOs
On
May
29, 2002, the Company issued ten tranches of secured debt through its first
CDO
("CDO I"). In this transaction, a wholly owned subsidiary of the Company issued
debt in the par amount of $419,185 secured by the subsidiary's assets. The
adjusted issue price of the CDO I debt at December 31, 2007 was $396,176. Five
tranches were issued at a fixed rate coupon and five tranches were issued at
a
floating rate coupon with a combined weighted average remaining maturity of
1.0
year at December 31, 2007. All floating rate coupons were swapped to fixed
rate
coupons resulting in a total fixed rate cost of funds for CDO I of approximately
7.2%. The Company incurred $9,890 of issuance costs that are being amortized
over the weighted average life of CDO I. CDO I was structured to match fund
the
cash flows from a significant portion of the Company's CMBS and investment
grade
REIT debt. The par amount at December 31, 2007 of the collateral securing CDO
I
consisted of 77.8% CMBS rated B or higher and 22.2% REIT debt rated BBB or
higher. At December 31, 2007, the collateral securing CDO I had a fair value
of
$495,549.
On
December 10, 2002, the Company issued seven tranches of secured debt through
its
second CDO ("CDO II"). In this transaction, a wholly owned subsidiary of the
Company issued debt in the par amount of $280,783 secured by the subsidiary's
assets. In July 2004, the Company sold a CDO II bond with a par of $12,850
that
it had previously retained. Before the sale of this security, the Company
amended the indenture to reduce the coupon from 9.0% to 7.6%. The adjusted
issue
price of the CDO II debt at December 31, 2007 is $291,991. Five tranches were
issued at a fixed rate coupon and three tranches were issued at a floating
rate
coupon with a combined weighted average remaining maturity of 3.8 years at
December 31, 2007. All floating rate coupons were swapped to fixed rate coupons
resulting in a total fixed rate cost of funds for CDO II of approximately 5.9%.
The Company incurred $6,004 of issuance costs that are being amortized over
the
weighted average life of CDO II. CDO II was structured to match fund the cash
flows from a significant portion of the Company's CMBS and investment grade
REIT
debt. The par amount at December 31, 2007 of the collateral securing CDO II
consisted of 83.1% CMBS rated B or higher and 16.9% REIT debt rated BBB or
higher. At December 31, 2007, the collateral securing CDO II had a fair value
of
$339,363.
On
March
30, 2004, the Company issued eleven tranches of secured debt through its third
CDO ("CDO III"). In this transaction, a wholly owned subsidiary of the Company
issued secured debt in the par amount of $372,456 secured by the subsidiary's
assets. The adjusted issue price of the CDO III debt at December 31, 2007 is
$376,582. Five tranches were issued at a fixed rate coupon and six tranches
were
issued at a floating rate coupon with a combined weighted average remaining
maturity of 5.5 years at December 31, 2007. All floating rate coupons were
swapped to fixed rate coupons resulting in a total fixed rate cost of funds
for
CDO III of approximately 5.0%. The Company incurred $2,006 of issuance costs
that will be amortized over the weighted average life of CDO III. CDO III was
structured to match fund the cash flows from a significant portion of the
Company's CMBS and investment grade REIT. The par amount at December 31, 2007
of
the collateral securing CDO III consisted of 87.9% CMBS rated B or higher and
12.1% REIT debt rated BBB or higher. At December 31, 2007, the collateral
securing CDO III had a fair value of $375,611.
On
May
23, 2006, the Company issued nine tranches of secured debt through its sixth
CDO
("CDO HY3"). In this transaction, a wholly owned subsidiary of the Company
issued secured debt in the par amount of $417,000 secured by the subsidiary's
assets. The adjusted issue price of the CDO HY3 debt at December 31, 2007 is
$373,330. Three tranches were issued at a fixed rate coupon and six tranches
were issued at a floating rate coupon with a combined weighted average remaining
maturity of 7.2 years at December 31, 2007. All floating rate coupons were
swapped to fixed rate coupons resulting in a total fixed rate cost of funds
for
CDO HY3 of approximately 6.3%. The Company incurred $7,057 of issuance costs
that will be amortized over the weighted average life of CDO HY3. CDO HY3 was
structured to match fund the cash flows from a significant portion of the
Company's CMBS and commercial real estate loans. The par amount at December
31,
2007 of the collateral securing CDO HY3 consisted of 50.7% CMBS rated B or
higher and 40.8% commercial real estate loans. At December 31, 2007, the
collateral securing CDO HY3 had a fair value of $348,671.
On
December 14, 2006, the Company closed its seventh CDO ("Euro CDO"). The Euro
CDO
sold €263,500 of non-recourse debt at a weighted average spread to Euro Libor of
60 basis points. The €263,500 consists of €251,000 of investment grade debt at a
weighted average spread to Euro Libor of 50 basis points and €12,500 of below
investment grade debt. The Company retained an additional €12,500 of below
investment grade debt and all of Euro CDO's preferred shares. The Company
incurred €3,489 of issuance costs that will be amortized over the weighted
average life of the Euro CDO. At December 31, 2007, the collateral securing
The
Euro CDO had a fair value of $454,855.
Trust
Preferred Securities
On
September 26, 2005, the Company issued $75,000 of trust preferred securities
through its wholly owned subsidiary, Anthracite Capital Trust I, a Delaware
statutory trust ("Trust I"). The trust preferred securities have a thirty-year
term ending October 30, 2035 with interest at a fixed rate of 7.497% for the
first ten years and at a floating rate of three-month LIBOR plus 2.9%
thereafter. The trust preferred securities can be redeemed at par by the Company
beginning in October 2010. Trust I issued $2,380 aggregate liquidation amount
of
common securities, representing 100% of the voting common stock of Trust I,
to
the Company for a purchase price of $2,380. The Company realized net
proceeds from this offering of approximately $72,618.
On
January 31, 2006, the Company issued $50,000 of trust preferred securities
through its wholly owned subsidiary, Anthracite Capital Trust II, a Delaware
statutory trust ("Trust II"). The trust preferred securities have a thirty-year
term ending April 30, 2036 with interest at a fixed rate of 7.73% for the first
ten years and at a floating rate of three-month LIBOR plus 2.7% thereafter.
The
trust preferred securities can be redeemed at par by the Company beginning
in
April 2011. Trust II issued $1,550 aggregate liquidation amount of common
securities, representing 100% of the voting common stock of Trust II to the
Company for a purchase price of $1,550. The Company realized net proceeds
from this offering of approximately $48,491.
On
March
16, 2006, the Company issued $50,000 of trust preferred securities through
its
wholly owned subsidiary, Anthracite Capital Trust III, a Delaware statutory
trust ("Trust III" and collectively with Trust I and Trust II, the "Trusts").
The trust preferred securities have a thirty-year term ending March 15, 2036
with interest at a fixed rate of 7.77% for the first ten years and at a floating
rate of three-month LIBOR plus 2.7% thereafter. The trust preferred securities
can be redeemed at par by the Company beginning in March 2011. Trust III issued
$1,547 aggregate liquidation amount of common securities, representing 100%
of
the voting common stock of Trust III to the Company for a purchase price of
$1,547. The Company realized net proceeds from this offering of
approximately $48,435.
The
Trusts used the proceeds from the sale of the trust preferred securities and
the
common securities to purchase the Company's junior subordinated notes. The
terms of the junior subordinated notes match the terms of the trust preferred
securities. The notes are subordinate and junior in right of payment to
all present and future senior indebtedness and certain other of our financial
obligations.
The
Company's interests in the Trusts are accounted for using the equity method
and
the assets and liabilities of the Trusts are not consolidated into the Company's
financial statements. Interest on the junior subordinated notes is
included in interest expense on the consolidated statements of operation while
the common securities are included as a component of other assets on the
Company's consolidated statements of financial condition.
Senior
Unsecured Notes
During
October 2006, the Company issued $75,000 of unsecured senior notes due in 2016
with a weighted average cost of funds of 7.21%. The unsecured senior notes
can
be redeemed in whole by the Company subject to certain provisions, which could
include the payment of fees.
During
2007, the Company issued $87,500 of senior unsecured notes due in 2017. The
notes bear interest at a weighted average fixed rate of 7.93% until July 2012
and thereafter at a rate equal to 3-month LIBOR plus 2.55%. The senior unsecured
notes contain a covenant whereby total borrowings cannot exceed 95% of the
sum
of total borrowings plus stockholders' equity and the Company must maintain
a
minimum net worth of $400,000. The senior unsecured notes can be redeemed in
whole by the Company subject to certain provisions, which could include the
payment of fees.
Senior
Convertible Notes
On
August
29, 2007 and September 10, 2007, the Company completed an offering for a total
of $80,000 aggregate principal amount of convertible senior notes due in 2027.
The notes bear interest at a rate of 11.75% per annum and are convertible only
under certain conditions, including a 20-day period of trading above $14.02
per
share, as adjusted. The initial conversion rate of 92.7085 shares of Common
Stock per $1,000 principal amount of notes (equal to an initial conversion
price
of approximately $10.79 per share) represented a premium of 17.5% to the last
reported sale price of the Company's Common Stock on August 23, 2007 of
$9.18.
Holders
of convertible senior notes have the right to require the Company to repurchase
their notes on September 1, 2012, September 1, 2017 and September 1, 2022 for
a
cash price equal to 100% of the principal amount of the notes to be purchased,
plus accrued and unpaid interest. The Company may redeem the notes, in whole
or
in part, from time to time, (i) on or after September 1, 2012 or (ii) to
preserve its status as a REIT, at 100% of the principal amount of the notes
to
be redeemed, plus accrued and unpaid interest.
Junior
Unsecured Notes
During
April 2007, the Company issued €50,000 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
11 FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
following table presents the notional amount, carrying value and estimated
fair
value of financial instruments at December 31, 2007 and 2006:
|
|
December
31, 2007
|
|
December
31, 2006
|
|
|
|
Notional
Amount
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Notional
Amount
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Securities
available-for-sale
|
|
$
|
-
|
|
$
|
2,266,130
|
|
$
|
2,266,130
|
|
$
|
-
|
|
$
|
2,615,856
|
|
$
|
2,615,856
|
|
Securities
held-for-trading
|
|
|
-
|
|
|
18,204
|
|
|
18,204
|
|
|
-
|
|
|
154,587
|
|
|
154,587
|
|
Commercial
mortgage loan pools
|
|
|
-
|
|
|
1,240,793
|
|
|
1,240,793
|
|
|
|
|
|
1,271,014
|
|
|
1,271,014
|
|
Commercial
mortgage loans
|
|
|
-
|
|
|
983,387
|
|
|
973,750
|
|
|
-
|
|
|
481,745
|
|
|
476,059
|
|
Secured
borrowings
|
|
|
-
|
|
|
751,721
|
|
|
751,721
|
|
|
-
|
|
|
875,116
|
|
|
875,116
|
|
CDO
borrowings
|
|
|
-
|
|
|
1,823,328
|
|
|
1,598,526
|
|
|
-
|
|
|
1,812,574
|
|
|
1,834,787
|
|
Commercial
mortgage loan pool borrowings
|
|
|
-
|
|
|
1,219,094
|
|
|
1,219,094
|
|
|
-
|
|
|
1,250,503
|
|
|
1,250,503
|
|
Senior
unsecured notes
|
|
|
-
|
|
|
162,500
|
|
|
114,473
|
|
|
-
|
|
|
75,000
|
|
|
68,949
|
|
Senior
convertible notes
|
|
|
-
|
|
|
80,000
|
|
|
70,186
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Junior
unsecured notes
|
|
|
-
|
|
|
73,103
|
|
|
44,833
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Junior
subordinated notes
|
|
|
-
|
|
|
180,477
|
|
|
103,312
|
|
|
-
|
|
|
180,477
|
|
|
160,155
|
|
Currency
forward contracts
|
|
|
-
|
|
|
4,041
|
|
|
4,041
|
|
|
-
|
|
|
(2,659
|
)
|
|
(2,659
|
)
|
Currency
swap agreements
|
|
|
-
|
|
|
(2,093
|
)
|
|
(2,093
|
)
|
|
-
|
|
|
(240
|
)
|
|
(240
|
)
|
Interest
rate swap agreements
|
|
|
2,604,649
|
|
|
(39,347
|
)
|
|
(39,347
|
)
|
|
2,983,144
|
|
|
15,274
|
|
|
15,274
|
|
LIBOR
cap
|
|
|
85,000
|
|
|
195
|
|
|
195
|
|
|
85,000
|
|
|
(38
|
)
|
|
(38
|
)
|
Notional
amounts are a unit of measure specified in a derivative instrument. The
estimated fair values of the Company's securities available-for-sale, securities
held-for-trading, currency forward contracts and interest rate swap agreements
are based on market prices provided by certain dealers who make markets in
these
financial instruments. The estimated fair values reported reflect estimates
and
may not necessarily be indicative of the amounts the Company could realize
in a
current market exchange. Commercial mortgage loans and secured borrowings are
floating rate instruments, and based on these terms, their carrying values
approximate fair value.
Note
12 PREFERRED
STOCK
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%. Net proceeds
from
the offering were $83,259.
At
December 31, 2007, the Company had 90,944,003 authorized and un-issued shares
of
preferred stock.
Note
13 COMMON
STOCK
The
following table summarizes Common Stock transactions for the years ended
December 31, 2007 and 2006:
|
|
2007
|
|
2006
|
|
|
|
Shares
|
|
Net
Proceeds
|
|
Shares
|
|
Net
Proceeds
|
|
Dividend
Reinvestment and Stock Purchase Plan (the "Dividend Reinvestment
Plan")
|
|
|
327,928
|
|
$
|
3,087
|
|
|
608,747
|
|
$
|
6,517
|
|
Follow-on
offerings
|
|
|
5,750,000
|
|
|
62,412
|
|
|
-
|
|
|
-
|
|
Share
repurchase
|
|
|
(1,307,189
|
)
|
|
(12,100
|
)
|
|
-
|
|
|
-
|
|
Sales
agency agreement
|
|
|
147,700
|
|
|
1,723
|
|
|
664,900
|
|
|
8,529
|
|
Director
compensation
|
|
|
5,000
|
|
|
42
|
|
|
5,000
|
|
|
64
|
|
Incentive
fees*
|
|
|
220,440
|
|
|
2,657
|
|
|
189,077
|
|
|
2,100
|
|
Incentive
fees - stock based*
|
|
|
289,155
|
|
|
3,470
|
|
|
-
|
|
|
-
|
|
Stock
options
|
|
|
-
|
|
|
-
|
|
|
24,700
|
|
|
209
|
|
Total
|
|
|
5,433,034
|
|
$
|
61,291
|
|
|
1,492,424
|
|
$
|
17,419
|
|
*
See
Note 14 of the consolidated financial statements, Transactions with Related
Parties, for a further description of the Company's Management
Agreement.
On
June
12, 2007, the Company completed a follow-on offering of 5,750,000 shares of
its
Common Stock at a price of $11.75, which included a 15% option to purchase
additional shares exercised by the underwriter. Net proceeds (after deducting
underwriting fees and expenses) were approximately $62,412.
Utilizing
a portion of the net proceeds from the convertible senior notes offering, the
Company repurchased 1,307,189 shares of Common Stock on August 29, 2007 with
a
value of $12,100.
The
following table summarizes dividends declared and paid by the Company for the
years ended December 31, 2007, 2006 and 2005:
Year
|
|
Dividend
Declared
|
|
Dividend
Declared per Share
|
|
Paid
in Current Year
|
|
Paid
in Subsequent Year
|
|
2007
|
|
$
|
74,083
|
|
$
|
1.19
|
|
$
|
55,104
|
|
$
|
18,979
|
(1)
|
2006
|
|
$
|
66,017
|
|
$
|
1.15
|
|
$
|
49,246
|
|
$
|
16,771
|
(2)
|
2005
|
|
$
|
61,168
|
|
$
|
1.12
|
|
$
|
45,394
|
|
$
|
15,774
|
(2)
|
Dividends
related to 2007, 2006 and 2005 were 100% ordinary income.
Note
14 TRANSACTIONS
WITH RELATED PARTIES
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.
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 ($11.33 adjusted per share issue price at December
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 2007. The Board of Directors also authorized a stock based
incentive plan pursuant to which one-half of one percent of common shares
outstanding are paid to the Manager at the end of each calendar year. 289,155
shares were paid to the Manager on March 30, 2007.
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 years
ended December 31, 2007, 2006, and 2005:
|
|
For
the Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Management
fee
|
|
$
|
13,468
|
|
$
|
12,617
|
|
$
|
10,974
|
|
Incentive
fee
|
|
|
5,645
|
|
|
5,919
|
|
|
4,290
|
|
Incentive
fee- stock based
|
|
|
2,427
|
|
|
2,761
|
|
|
-
|
|
Total
management and incentive fees
|
|
$
|
21,540
|
|
$
|
21,297
|
|
$
|
15,264
|
|
At
December 31, 2007, 2006, and 2005, respectively, management and incentive fees
of $7,067, $8,989, and $5,734 remain payable to the Manager and are included
on
the consolidated statement of financial condition as a component of other
liabilities.
The
Company has administration and accounting services agreements with the Manager.
Under the terms of the administration 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 years ended December
31,
2007, 2006, and 2005, the Company paid administration and accounting service
fees of $473, $234, and $209, respectively, which are included in general and
administrative expense on the consolidated statement of operations.
The
special servicer on 33 of the Company's 39 Controlling Class trusts is Midland,
a wholly owned indirect subsidiary of PNC Bank, and therefore a related party
to
the Manager. The Company's fees for Midland's services are at market
rates.
The
Company invested
$100,000 in the BlackRock Diamond Fund.
The
Company redeemed $25,000 of its investment in BlackRock Diamond on June 30,
2007
and redeemed the remaining $75,000 plus accumulated earnings on September 30,
2007. Over the life of this investment, the Company recognized a cumulative
profit of $34,853, an annualized return of 20.8%. The Company did not incur
any
additional management or incentive fees to the Manager or its affiliates related
to its investment in BlackRock Diamond.
During
2001, the Company entered into a $50,000 commitment to acquire shares in 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 December 31, 2007 was $1,636. The Company does not
incur any additional management or incentive fees to the Manager related to
its
investment in Carbon I. At December 31, 2007, the Company owned approximately
20% of the outstanding shares in Carbon I.
The
Company entered into an aggregate commitment of $100,000 to acquire shares
in
Carbon II, a private commercial real estate income opportunity fund managed
by
the Manager. The final obligation to fund capital of $13,346 was called on
July
13, 2007. At December 31, 2007, the Company's investment in Carbon II was
$97,762. The Company does not incur any additional management or incentive
fees
to the Manager related to its investment in Carbon II. At December 31, 2007,
the
Company owned approximately 26% of the outstanding shares in Carbon II. The
Company's unaffiliated directors approved this transaction in September 2004.
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 for
services to be performed an amount equal to the remaining Installment Payment
less the sum of all payments made by the Manager to GMAC. At December 31, 2007,
the Installment Payment is $3,000 payable over three years. The Company is
not
required to accrue for this contingent liability.
Note
15 STOCK
PLANS
The
Company has adopted a stock option plan (the "1998 Stock Option Plan") that
provides for the grant of both qualified incentive stock options that meet
the
requirements of Section 422 of the Code and non-qualified stock options, stock
appreciation rights and dividend equivalent rights. Stock options may be granted
to the Manager, directors and officers of the Company and directors, officers
and key employees of the Manager and to any other individual or entity
performing services for the Company.
The
exercise price for any stock option granted under the 1998 Stock Option Plan
may
not be less than 100% of the fair market value of the shares of Common Stock
at
the time the option is granted. Each option must terminate no more than ten
years from the date it is granted and have vested over either a two or
three-year period. Subject to anti-dilution provisions for stock splits, stock
dividends and similar events, the 1998 Stock Option Plan authorizes the grant
of
options to purchase up to an aggregate of 2,470,453 shares of Common
Stock.
The
following table summarizes information about options outstanding under the
1998
Stock Option Plan:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Shares
|
|
Weighted-Average
Exercise Price
|
|
Shares
|
|
Weighted-Average
Exercise Price
|
|
Shares
|
|
Weighted-Average
Exercise Price
|
|
Outstanding
at January 1
|
|
|
1,392,151
|
|
$
|
14.98
|
|
|
1,417,851
|
|
$
|
14.87
|
|
|
1,417,851
|
|
$
|
14.87
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
(24,700
|
)
|
|
8.45
|
|
|
-
|
|
|
-
|
|
Retired
|
|
|
79,750
|
|
|
15.34
|
|
|
(1,000
|
)
|
|
11.81
|
|
|
-
|
|
|
-
|
|
Outstanding
at December 31
|
|
|
1,312,401
|
|
$
|
14.96
|
|
|
1,392,151
|
|
$
|
14.98
|
|
|
1,417,851
|
|
$
|
14.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at December 31
|
|
|
1,312,401
|
|
$
|
14.96
|
|
|
1,392,151
|
|
$
|
14.98
|
|
|
1,417,851
|
|
$
|
14.87
|
|
The
following table summarizes information about options outstanding under the
1998
Stock Option Plan at December 31, 2007:
Exercise
Price
|
|
Options
Outstanding
|
|
Weighted
Average Remaining Life (Years)
|
|
Options
Exercisable
|
|
$8.44
|
|
|
8,000
|
|
|
1.2
|
|
|
8,000
|
|
11.81
|
|
|
2,000
|
|
|
6.4
|
|
|
2,000
|
|
15.00
|
|
|
1,290,851
|
|
|
0.2
|
|
|
1,290,851
|
|
15.83
|
|
|
11,550
|
|
|
0.2
|
|
|
11,550
|
|
|
|
|
|
|
|
|
|
|
|
|
$7.82-$15.83
|
|
|
1,312,401
|
|
|
0.3
|
|
|
1,312,401
|
|
There
were no options granted in 2007, 2006 or 2005. Shares of Common Stock available
for future grant under the 1998 Stock Option Plan at December 31, 2007 were
855,252.
The
Company adopted 2006 Stock Award and Incentive Plan (the "2006 Stock Plan")
which enables a committee of the Board of Directors of the Company to make
discretionary grants of stock options, stock appreciation rights, shares of
restricted stock, performance shares, performance units or other share-based
awards to selected employees and independent contractors of the Company and
its
subsidiaries and of the Manager, and to the Manager.
A
total
of 2,816,927 shares of the Company's Common Stock are reserved for issuance
under the 2006 Stock Plan. Shares issued under the 2006 Stock Plan may be
authorized but unissued shares. If any shares of Common Stock subject to an
award granted under the 2006 Stock Plan are forfeited, cancelled, exchanged
or
surrendered or if an award terminates or expires without a distribution of
shares, or if shares of Common Stock are surrendered or withheld as payment
of
either the exercise price of an award and/or withholding taxes in respect of
an
award, those shares of Common Stock will again be available for awards under
the
2006 Stock Plan. The 2006 Stock Plan will terminate on February 24,
2016.
The
following table summarizes shares that have been issued under the 2006 Stock
Plan during 2007 and 2006:
|
|
2007
|
|
2006
|
|
Incentive
fees
|
|
|
220,440
|
|
|
189,077
|
|
Incentive
fees - stock based
|
|
|
289,155
|
|
|
-
|
|
Director
compensation
|
|
|
5,000
|
|
|
5,000
|
|
Total
shares issued
|
|
|
514,595
|
|
|
194,077
|
|
Shares
of
Common Stock available for future grant under the 2006 Stock Plan at December
31, 2007 were 2,108,255.
Note
16 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The
Company accounts for its derivative investments under FAS 133, 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 statements of financial
condition at estimated fair value. If the derivative is designated as a cash
flow hedge, the effective portions of any change in the estimated fair value
of
the derivative are recorded in other comprehensive income ("OCI") and are
recognized on the consolidated statement of operations 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
on which the derivative contract is entered, the Company designates the
derivative as either a cash flow hedge or a trading derivative.
The
reverse repurchase agreements bear interest at a LIBOR-based variable rate.
Increases in the LIBOR rate could negatively impact earnings. The interest
rate
swap agreements allow the Company to receive a variable rate cash flow based
on
LIBOR and pay a fixed rate cash flow, mitigating the impact of this exposure.
Interest
rate swap agreements contain an element of risk in the event that the
counterparties to the agreements do not perform their obligations under the
agreements. The Company minimizes its risk exposure by entering into agreements
with parties rated at least A or better by nationally recognized credit rating
organizations. Furthermore, the Company has interest rate swap agreements
established with several different counterparties in order to reduce the risk
of
credit exposure to any one counterparty. Management does not expect any
counterparty to default on their obligations.
Where
the
Company elects to apply hedge accounting, it formally documents all
relationships between hedging instruments and hedged items, as well as its
risk-management objectives and strategies for undertaking various hedge
transactions. The Company assesses, both at the inception of the hedge and
on an
on-going basis, whether the derivatives that are used in hedging transactions
are highly effective in offsetting changes in fair values or cash flows of
hedged items. When it is determined that a derivative is not highly effective
as
a hedge, the Company discontinues hedge accounting prospectively.
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. Such deposits are recorded as a component of other
assets, other liabilities or restricted cash. Should the counterparty fail
to
return deposits paid, the Company would be at risk for the value of that asset.
At December 31, 2007, the balance of such net deposits pledged to counterparties
as collateral under these agreements totaled $35,965. At December 31, 2006,
the
balance of such net deposits held by the Company as collateral under these
agreements totaled $520.
2007
During
2007, the Company sold a majority of its high credit quality, liquid securities.
The sales of these securities and margin calls resulted in a significant
reduction in 90-day repurchase agreements. As a result of the reduction in
the
balance of 90-day repurchase agreements, certain interest rate swaps that were
hedging 90-day repurchase agreements no longer qualified for hedge accounting.
As a result, the Company reclassified $10,899 out of OCI which is included
in
gain (loss) on sale of available-for-sale securities on the consolidated
statements of operations. Of this amount, $5,369 was previously recorded in
OCI
and was being reclassified to interest expense over the weighted average
remaining term of the swaps at the time the swaps were closed. The balance
of
$5,530 relates to gains associated with interest rate swaps that were closed
in
the third quarter of 2007.
At
December 31, 2007, the Company had interest rate swaps with notional amounts
aggregating $1,107,048 designated as cash flow hedges of borrowings under
reverse repurchase agreements and the floating rate debt of its CDOs which
had a
weighted average remaining term of 6.4 years. Cash flow hedges with an estimated
fair value of $2,721 are included in derivative instrument assets on the
consolidated statements of financial condition and cash flow hedges with an
estimated fair value of $40,777 are included in derivative instrument
liabilities on the consolidated statement of financial condition. This liability
was collateralized with $14,860 of restricted cash equivalents recorded on
the
Company's consolidated statements of financial condition. For the year ended
December 31, 2007, the net decrease in the estimated fair value of the interest
rate swaps was $35,145, of which $488 was deemed ineffective and is included
as
an increase of interest expense and $34,657 was recorded as a decrease of OCI.
During
the year ended December 31, 2007, the Company terminated 15 of its interest
rate
swaps with a notional amount of $778,620 that were designated as cash flow
hedges of borrowings under reverse repurchase agreements. The Company will
reclassify the $4,366 gain in value from OCI to interest expense over 7.58
years, which was the weighted average remaining term of the swaps at the time
they were closed out. At December 31, 2007, the Company has, in aggregate,
$2,804 of net losses related to terminated swaps recorded in OCI. For the year
ended December 31, 2007, $1,206 was reclassified as an increase to interest
expense and $1,122 will be reclassified as an increase to interest expense
for
the next twelve months.
At
December 31, 2007, the Company had interest rate swaps with notional amounts
aggregating $1,498,145 designated as trading derivatives which had a weighted
average remaining term of 1.9 years. Trading derivatives with an estimated
fair
value of $615 are included in derivative instrument assets on the consolidated
statement of financial condition and trading derivatives with a fair value
of
$1,906 are included in derivative instrument liabilities on the consolidated
statements of financial condition. For the year ended December 31, 2007, the
net
decrease in the fair value for these trading derivatives was a $1,295 and is
included as an addition to loss on securities held-for-trading on the
consolidated statements of operations.
At
December 31, 2007, the Company had a forward LIBOR cap with a notional amount
of
$85,000 and a fair value of $195 that is included in derivative instrument
assets on the consolidated statement of financial condition. 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.
2006
During
the fourth quarter, the Company changed its financing strategy to emphasize
the
use of 90-day reverse repurchase agreements and concurrently reduced the use
of
30-day reverse repurchase agreements. The Company expected 90-day repurchase
agreements to be its primary source for short-term financings in future periods.
As a result of the reduction in the balance of 30-day reverse repurchase
agreements, certain interest swaps that were hedging the 30-day reverse
repurchase agreements were de-designated as hedges. As a result of the
de-designation, the Company reclassified a loss of $12,661 out of OCI which
is
included in dedesignation of derivative instruments. Of this amount, $9,433
previously was recorded in OCI and was being reclassified to interest expense
over the weighted average remaining term of the swaps at the time the swaps
were
closed. The balance of $3,228 relates to costs associated with interest rate
swaps that were closed or redesignated in the fourth quarter of 2006. At
December 31, 2006, a loss of $8,210 remained in OCI and $1,637 was reclassified
as an increase to interest expense over the next twelve months.
At
December 31, 2006, the Company had interest rate swaps with notional amounts
aggregating $1,539,699 designated as cash flow hedges of borrowings under
reverse repurchase agreements and the floating rate debt of its CDOs which
had a
weighted average remaining term of 7.5 years. Cash flow hedges with an estimated
fair value of $24,290 were included in derivative instrument assets on the
consolidated statement of financial condition and cash flow hedges with an
estimated fair value of $11,012 were included in derivative instrument
liabilities on the consolidated statement of financial condition. This liability
was collateralized with the restricted cash equivalents recorded on the
Company's consolidated statement of financial condition. For the year ended
December 31, 2006, the net change in the estimated fair value of the interest
rate swaps was an increase of $2,699, of which $262 was deemed ineffective
and
was included as an increase of interest expense and $2,961 was recorded as
an
increase of OCI.
At
December 31, 2006, the Company had interest rate swaps with notional amounts
aggregating $446,599 designated as trading derivatives which had a weighted
average remaining term of 7.6 years. Trading derivatives with an estimated
fair
value of $3,294 were included in derivative instrument assets on the
consolidated statements of financial condition and trading derivatives with
a
fair value of $1,537 were included in derivative instrument liabilities on
the
consolidated statements of financial condition. For the year ended December
31,
2006, the change in fair value for these trading derivatives was an increase
of
$717 and was included as an addition to gain on securities held-for-trading
on
the consolidated statements of operations.
At
December 31, 2006, the Company had a forward LIBOR cap with a notional amount
of
$85,000 and a fair value of $211 that was included in derivative instrument
assets on the consolidated statement of financial condition. 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
Foreign
currency agreements at December 31, 2007 and 2006 consisted of the
following:
|
|
At
December 31, 2007
|
|
|
|
Estimated
Fair Value
|
|
Unamortized
Cost
|
|
Average
Remaining Term
|
|
Currency
swaps
|
|
$
|
(12,060
|
)
|
|
-
|
|
7.5
years
|
CDO
currency swaps
|
|
|
9,967
|
|
|
-
|
|
9.9
years
|
Forwards
|
|
|
4,041
|
|
|
-
|
|
23
days
|
|
|
At
December 31, 2006
|
|
|
|
Estimated
Fair Value
|
|
Unamortized
Cost
|
|
Average
Remaining Term
|
|
Currency
swaps
|
|
$
|
1,179
|
|
|
-
|
|
12.53
years
|
CDO
currency swaps
|
|
|
(1,418
|
)
|
|
-
|
|
12.53
years
|
Forwards
|
|
|
(2,659
|
)
|
|
-
|
|
10
days
|
The
U.S.
dollar is considered the functional currency for the Company and certain of
its
international subsidiaries. Foreign currency transaction gains or losses are
recognized in the period incurred and are included in foreign currency gain
(loss) on the consolidated statements of operations. The Company recorded
foreign currency gain (loss) of $6,272, $2,161, and $(134) for the years ended
December 31, 2007, 2006 and 2005, respectively.
Note
17 NET INTEREST INCOME
The
following is a presentation of the Company net interest income for the year
ended December 31, 2007, 2006 and 2005:
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Interest
Income:
|
|
|
|
|
|
|
|
Interest
from securities available-for-sale
|
|
$
|
195,904
|
|
$
|
171,686
|
|
$
|
141,113
|
|
Interest
from commercial mortgage loans
|
|
|
69,981
|
|
|
41,773
|
|
|
23,183
|
|
Interest
from commercial mortgage loan pools
|
|
|
52,037
|
|
|
52,917
|
|
|
54,025
|
|
Interest
from securities held-for-trading
|
|
|
2,657
|
|
|
7,207
|
|
|
11,370
|
|
Interest
from cash and cash equivalents
|
|
|
5,857
|
|
|
2,403
|
|
|
2,077
|
|
Total
interest income
|
|
|
326,436
|
|
|
275,986
|
|
|
231,768
|
|
Interest
Expense
|
|
|
241,000
|
|
|
212,388
|
|
|
163,458
|
|
Net
interest income
|
|
$
|
85,436
|
|
$
|
63,598
|
|
$
|
68,310
|
|
Note
18 NET INCOME PER SHARE
Net
income per share is computed in accordance with SFAS No. 128, Earnings
Per Share
("FAS
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, and the dilutive effect of preferred stock is calculated using the
"if
converted" method.
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
72,320
|
|
$
|
75,079
|
|
$
|
65,205
|
|
Numerator
for basic and diluted earnings per share
|
|
$
|
72,320
|
|
$
|
75,079
|
|
$
|
65,205
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share—weighted average common
shares outstanding
|
|
|
61,136,269
|
|
|
57,182,434
|
|
|
54,144,243
|
|
Dilutive
effect of stock options
|
|
|
1,684
|
|
|
2,364
|
|
|
8,577
|
|
Dilutive
effect of stock based incentive fee
|
|
|
237,240
|
|
|
216,866
|
|
|
-
|
|
Denominator
for diluted earnings per share—weighted average common shares outstanding
and common stock equivalents outstanding
|
|
|
61,375,193
|
|
|
57,401,664
|
|
|
54,152,820
|
|
Basic
net income per weighted average common share:
|
|
$
|
1.18
|
|
$
|
1.31
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per weighted average common stock and common stock
equivalents:
|
|
$
|
1.18
|
|
$
|
1.31
|
|
$
|
1.20
|
|
Total
anti-dilutive stock options and warrants excluded from the calculation of net
income per share were 1,304,401, 1,380,151, and 1,375,151 for the years ended
December 31, 2007, 2006 and 2005, respectively.
The
convertible senior notes offering of $80,000 on August, 29, 2007 were determined
to be anti-dilutive for the year ended December 31, 2007. For the year ended
December 31, 2007, the anti-dilutive weighted average common share equivalents
that were excluded from the above calculation of diluted net income per share
were 2,458,680.
Note
19 SUMMARIZED
QUARTERLY RESULTS (UNAUDITED)
The
following is a presentation of quarterly results of operations:
|
|
March
31
|
|
June
30
|
|
September
30
|
|
December
31
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Total
Income
|
|
$
|
83,358
|
|
$
|
71,743
|
|
$
|
94,093
|
|
$
|
77,441
|
|
$
|
91,434
|
|
$
|
74,553
|
|
$
|
89,644
|
|
$
|
79,680
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
55,839
|
|
|
46,524
|
|
|
60,085
|
|
|
51,358
|
|
|
62,525
|
|
|
56,060
|
|
|
62,551
|
|
|
58,446
|
|
Management
fee and
Other
|
|
|
8,258
|
|
|
5,323
|
|
|
9,248
|
|
|
6,638
|
|
|
5,594
|
|
|
5,320
|
|
|
4,421
|
|
|
8,549
|
|
Total
Expenses
|
|
|
64,097
|
|
|
51,847
|
|
|
69,333
|
|
|
57,996
|
|
|
68,119
|
|
|
61,380
|
|
|
66,972
|
|
|
66,995
|
|
Gain
(loss) on sale of securities available-for-sale
|
|
|
6,750
|
|
|
32
|
|
|
158
|
|
|
(93
|
)
|
|
(1,331
|
)
|
|
446
|
|
|
(261
|
)
|
|
28,647
|
|
Dedesignation
of derivative instruments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(12,661
|
)
|
Gain
(loss) on securities held-for-trading
|
|
|
(17
|
)
|
|
950
|
|
|
388
|
|
|
1,365
|
|
|
(4,435
|
)
|
|
(18
|
)
|
|
(1,087
|
)
|
|
957
|
|
Foreign
currency gain
|
|
|
1,484
|
|
|
43
|
|
|
1,371
|
|
|
271
|
|
|
775
|
|
|
682
|
|
|
2,642
|
|
|
1,165
|
|
Loss
on impairment of assets
|
|
|
(1,198
|
)
|
|
(781
|
)
|
|
(2,900
|
)
|
|
(4,653
|
)
|
|
(2,938
|
)
|
|
(361
|
)
|
|
(5,433
|
)
|
|
(2,085
|
)
|
Income
from continuing operations
|
|
|
26,280
|
|
|
20,140
|
|
|
23,777
|
|
|
16,335
|
|
|
15,386
|
|
|
13,922
|
|
|
18,533
|
|
|
28,708
|
|
Income
from discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,366
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
income
|
|
$
|
26,280
|
|
$
|
20,140
|
|
$
|
23,777
|
|
$
|
17,701
|
|
$
|
15,386
|
|
$
|
13,922
|
|
$
|
18,533
|
|
$
|
28,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on preferred stock
|
|
|
2,277
|
|
|
1,348
|
|
|
3,127
|
|
|
1,348
|
|
|
3,127
|
|
|
1,348
|
|
|
3,125
|
|
|
1,348
|
|
Net
income available to common stockholders
|
|
$
|
24,003
|
|
$
|
18,792
|
|
$
|
20,650
|
|
$
|
16,353
|
|
$
|
12,259
|
|
$
|
12,574
|
|
$
|
15,408
|
|
$
|
27,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
0.41
|
|
$
|
0.33
|
|
$
|
0.35
|
|
$
|
0.29
|
|
$
|
0.19
|
|
$
|
0.22
|
|
$
|
0.24
|
|
$
|
0.47
|
|
Diluted
|
|
$
|
0.41
|
|
$
|
0.33
|
|
$
|
0.34
|
|
$
|
0.29
|
|
$
|
0.19
|
|
$
|
0.22
|
|
$
|
0.24
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from continuing operations per share of Common Stock, after
preferred dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
0.41
|
|
$
|
0.33
|
|
$
|
0.35
|
|
$
|
0.27
|
|
$
|
0.19
|
|
$
|
0.22
|
|
$
|
0.24
|
|
$
|
0.47
|
|
Diluted
|
|
$
|
0.41
|
|
$
|
0.33
|
|
$
|
0.34
|
|
$
|
0.27
|
|
$
|
0.19
|
|
$
|
0.22
|
|
$
|
0.24
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations per share of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
0.02
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Diluted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
0.02
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Note
20 CURRENT AND SUBSEQUENT EVENTS IN THE CREDIT MARKETS
The
ongoing weaknesses in the subprime mortgage sector and in the broader mortgage
market have resulted in reduced liquidity for mortgage-backed securities.
Although this reduction in liquidity has been directly linked to subprime
residential assets, to which the Company continues to have no direct exposure,
there has been an overall reduction in liquidity across the credit spectrum
of
commercial and residential mortgage products. The Company received and funded
margin calls totaling $82,570 during 2007, $73,793 from January 1, 2008 through
March 14, 2008, and will fund another $11,118 on March 14, 2008. The Company's
ability to maintain adequate liquidity is dependent on several factors, many
of
which are outside of the Company's control, including the Company's continued
access to credit facilities on acceptable terms, the Company's compliance with
REIT distribution requirements, the timing and amount of margin calls by lenders
that are dependent on the Company's investments, the valuation of the Company's
investments and credit risk of the underlying collateral.
The
aforementioned market factors could adversely affect one or more of the
Company's repurchase counterparties providing funding for the Company's
portfolio and could cause one or more of the Company's counterparties to be
unwilling or unable to provide the Company with additional financing. This
could
potentially increase the Company's financing costs and reduce the Company's
liquidity. If one or more major market participants fails or decides to withdraw
from the market, it could negatively affect the marketability of all fixed
income securities, and this event could negatively affect the value of the
securities in the Company's portfolio, thus reducing the Company's net book
value. Furthermore, if many of the Company's counterparties are unwilling or
unable to provide the Company with additional financing, the Company could
be
forced to sell its investments at a time when prices are depressed. If this
were
to occur, it potentially could have a negative impact on the Company's
compliance with the REIT asset and income tests necessary to fulfill the
Company's REIT qualification requirements. In addition, 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.
In
addition, the Company's liquidity also may be adversely affected by margin
calls
under the Company's repurchase agreements and credit facilities that are
dependent in part on the valuation of the collateral to secure the financing.
The Company's repurchase agreements and credit facilities allow the lender,
to
varying degrees, to revalue the collateral to values that the lender considers
to reflect market. If a counterparty determines that the value of the collateral
has decreased, it may initiate a margin call requiring the Company to post
additional collateral to cover the decrease. When subject to such a margin
call,
the Company repays a portion of the outstanding borrowing with minimal notice.
The Company has hedged a significant amount of its portfolio to offset market
value declines due to changes in interest rates but is exposed to market value
fluctuations due to spread widening. A significant increase in margin calls
as a
result of spread widening could harm the Company's liquidity, results of
operations, financial condition and business prospects. Additionally, in order
to obtain cash to satisfy a margin call, the Company may be required to
liquidate assets at a disadvantageous time, which could cause the Company to
incur further losses and consequently adversely affect its results of operations
and financial condition.
To
date,
the credit performance of the Company's investments remains consistent both
with
the Company's expectations and with the broader commercial real estate finance
industry experience; nevertheless, subsequent to December 31, 2007, the capital
markets have been marking down the value of all credit sensitive securities
regardless of performance. The
Company believes it has sufficient sources of
liquidity to fund operations for
the
next twelve months.
The
Company's ability to meet its long-term (greater than twelve months) 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.
Note
21 LOAN FROM AFFILIATE
On
February 29, 2008, the Company entered into a binding loan commitment letter
(the "Commitment Letter") with BlackRock HoldCo 2, Inc. ("HoldCo 2"), pursuant
to the terms of which HoldCo 2 or its affiliates (together, the "Lender")
commits to provide a revolving credit loan facility (the "Facility") to the
Company for general working capital purposes. HoldCo 2 is a wholly-owned
subsidiary of BlackRock, Inc., the parent of BlackRock Financial Management,
Inc., the manager of the Company.
On
March
7, 2008, the Company and HoldCo 2 entered into the credit agreement. The
Facility has a term of 364 days with two 364-day extension periods, subject
to
the Lender's approval. The Facility is collateralized by a pledge of equity
shares that the Company holds in Carbon II. The principal amount of the Facility
is the lesser of $60,000 or a number determined in accordance with a borrowing
base calculation equal to 60% of the value of the shares of Carbon II that
are
pledged to secure the Facility.
The
interest rate payable on the Facility generally shall be a variable rate equal
to LIBOR plus 2.5%. The fee letter, dated February 29, 2008, between the Company
and HoldCo 2, sets forth certain terms with respect to fees.
Amounts
borrowed under the Facility may be repaid and reborrowed from time to time.
The
Company, however, has agreed to use commercially reasonable efforts to obtain
other financing to replace the Facility and reduce the outstanding
balance.
The
terms
of the Facility gives the Lender the option to purchase from the Company the
shares of Carbon II that serve as collateral for the Facility, up to the
Facility commitment amount, at a price equal to the fair market value (as
determined by the terms of the credit agreement) of those shares, unless the
Company elects to prepay outstanding loans under the Facility in an amount
equal
to the Lender's desired share purchase amount and reduce the Facility's
commitment amount accordingly, which may require termination of the Facility.
If
any loans are outstanding at the time of such purchase, the share purchase
amount shall be reduced by the amount, and applied towards the repayment, of
all
outstanding loans (and the reduction of the Facility's commitment amount) in
the
same manner as if the Company had prepaid such loans, and the balance of the
share purchase amount available after such repayment, if any, shall be paid
to
the Company.
On
March
7, 2008, the Company borrowed $37,500 under the Facility.
Schedule
IV - Mortgage Loans on Real Estate
December 31,
2007
|
|
Description
|
|
|
|
Location
|
|
Interest
rate
|
|
Final
Maturity Date
|
|
Periodic
Payment Terms
|
|
Face
Amount of Loans
|
|
Carrying
Amount of Loans
|
|
US
Dollar:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Storage
|
|
|
Various
US Cities
|
|
|
9.08
|
%
|
|
August
2015
|
|
|
|
|
$
|
32,307
|
|
$
|
32,307
|
|
|
|
|
Retail
|
|
|
Las
Vegas, NV
|
|
|
7.95
|
%
|
|
November
2015
|
|
|
Interest
only
|
|
|
40,000
|
|
|
36,538
|
|
|
|
|
Multifamily
|
|
|
Phoenix,
Arizona
|
|
|
8.76
|
%
|
|
June
2012
|
|
|
Interest
Only
|
|
|
50,000
|
|
|
50,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,307
|
|
|
119,318
|
|
USD
<3%
|
|
|
Various
|
|
|
Various
US Cities
|
|
|
6.29%
- 17.00
1M
LIBOR +4
3M
LIBOR +4.50
|
%
%
-
%
|
|
March
2009 -December
2018
|
|
|
|
|
|
232,894
|
|
|
226,902
|
|
Total
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
355,201
|
|
|
346,220
|
|
Non
US Dollar:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GBP:
|
|
|
Storage
|
|
|
UK
|
|
|
3M
GBP LIBOR+3.20
|
%
|
|
October
2013
|
|
|
Interest
Only
|
|
|
49,765
|
|
|
49,533
|
|
GBP
<3%
|
|
|
Various
|
|
|
UK
|
|
|
3M
GBP LIBOR+3.50
3M
GBP LIBOR + 4.35
|
%
%
|
|
January
2010 - July
2015
|
|
|
|
|
|
43,269
|
|
|
41,922
|
|
EUR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Various
|
|
|
Germany
|
|
|
3M
Euribor + 5.00
|
%
|
|
July
2008
|
|
|
Interest
only
|
|
|
32,768
|
|
|
32,772
|
|
|
|
|
Retail
|
|
|
Germany
|
|
|
7.50
|
%
|
|
November
2011
|
|
|
|
|
|
35,552
|
|
|
34,730
|
|
|
|
|
Retail
|
|
|
Germany
|
|
|
6.16
|
%
|
|
July
2011
|
|
|
Interest
only
|
|
|
39,475
|
|
|
39,055
|
|
|
|
|
Retail
|
|
|
Germany
|
|
|
11.05
|
%
|
|
January
2012
|
|
|
|
|
|
51,172
|
|
|
44,812
|
|
|
|
|
Office
|
|
|
Netherlands
|
|
|
3M
Euribor +3.90
|
%
|
|
April
2009
|
|
|
Interest
only
|
|
|
46,973
|
|
|
46,832
|
|
|
|
|
Various
|
|
|
Europe
|
|
|
3M
Euribor +4.85
|
%
|
|
May
2014
|
|
|
|
|
|
49,827
|
|
|
46,985
|
|
|
|
|
Office
|
|
|
Germany
|
|
|
3M
Euribor
+ 3.75
|
%
|
|
January
2012
|
|
|
|
|
|
58,482
|
|
|
56,275
|
|
|
|
|
Retail
|
|
|
Germany
|
|
|
3M
Euribor
+ 3.75
|
%
|
|
July
2011
|
|
|
|
|
|
71,558
|
|
|
71,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
385,806
|
|
|
464,292
|
|
EUR
<3%
|
|
|
Various
|
|
|
Various
European Cities
|
|
|
3M
Euribor
+2.25 -
3M
Euribor
+ 4.35
7.63
|
%
%
%
|
|
December
2010 - October
2013
|
|
|
|
|
|
146,322
|
|
|
145,398
|
|
CHF
|
|
|
Retail
|
|
|
Switzerland
|
|
|
3M
CHF
LIBOR + 3.00
|
%
|
|
October
2013
|
|
|
Interest
Only
|
|
|
21,131
|
|
|
21,145
|
|
CAD
<3%
|
|
|
Various
|
|
|
Canada
|
|
|
12.25%
- 13.15
|
%
|
|
March
2011 - April
2017
|
|
|
Interest
Only
|
|
|
6,658
|
|
|
6,332
|
|
Total
Non U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
652,951
|
|
|
637,167
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,008,152
|
|
$
|
983,387
|
|
ITEM
9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A.
CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
The
Company's management, under the supervision and with the participation of the
Company's 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 December 31, 2007.
Changes
in Internal Control over Financial Reporting
No
change
in internal control over financial reporting (as defined in Rule 13a-15(f)
under
the Exchange Act) occurred during the quarter ended December 31, 2007 that
has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Management's
Report on Internal Control over Financial Reporting
The
Company's management is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company's internal control over
financial reporting is a process designed under the supervision of the Company's
Chief Executive Officer and Chief Financial Officer and effected by the
Company's Board of Directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
|
·
|
pertain
to the maintenance of records that in reasonable detail accurately
and
fairly reflect the transactions and dispositions of the assets of
the
Company;
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the
Company
are being made only in accordance with authorizations of management
and
directors of the Company; and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets
that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Projections of any evaluation of effectiveness
to
future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
The
Company's management assessed the effectiveness of the Company's internal
control over financial reporting at December 31, 2007. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in "Internal
Control-Integrated Framework".
Based
on
its assessment, the Company's management concluded that, at December 31, 2007,
the Company's internal control over financial reporting was
effective.
The
effectiveness of the Company's internal control over financial reporting as
of
December 31, 2007 has been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report set forth in Part
II, Item 8 of this Annual Report on Form 10-K.
ITEM
9B.
OTHER
INFORMATION
None.
PART
III
ITEM
10.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information
regarding the Company's directors, including the audit committee and audit
committee financial experts, and executive officers and compliance with Section
16(a) of the Exchange Act will be included in the Company's definitive proxy
statement for the 2008 Annual Meeting of Stockholders (the "Proxy Statement")
and is incorporated herein by reference.
The
Company has adopted Codes of Business Conduct and Ethics that govern both the
Company's senior officers, including the Company's chief executive officer
and
chief financial officer, and employees. Copies of the Company's Codes of
Business Conduct and Ethics are available on the Company's website at
www.anthracitecapital.com and may also be obtained upon request without charge
by writing to the Secretary of the Company, Anthracite Capital, Inc., 40 East
52nd Street, New York, NY 10022. The Company will post to its website any
amendments to the Codes of Business Conduct and Ethics, and any waivers that
are
required to be disclosed by the rules of either the SEC or the NYSE.
Copies
of
the Company's Corporate Governance Guidelines and the charters of the Company's
Audit Committee, Compensation Committee and Nominating and Corporate Governance
Committee are available on the Company's website and may also be obtained upon
request without charge as described in the preceding paragraph.
ITEM
11.
EXECUTIVE
COMPENSATION
The
information required by this item will be included in the Proxy Statement and
is
incorporated herein by reference.
ITEM
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
information required by this item, including information relating to security
ownership of certain beneficial owners of the Company's Common Stock and of
the
Company's management, will be included in the Proxy Statement and is
incorporated herein by reference.
ITEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The
information required by this item, including information under the caption
"Certain Relationships and Related Transactions" in the Proxy Statement and
information regarding director independence, will be included in the Proxy
Statement and is incorporated herein by reference.
ITEM
14.
PRINCIPAL
ACCOUNTING FEES AND SERVICES
The
information required by this item, including information under the caption
"Independent Registered Public Accounting Firm Fees and Services" in the Proxy
Statement, will be included in the Proxy Statement and is incorporated herein
by
reference.
PART
IV
ITEM
15.
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
(a) List
of
documents filed as part of this report:
|
(1)
|
Consolidated
Financial Statements and Report of Independent Registered Public
Accounting Firm
|
See
the
Index to Financial Statements and Schedule set forth in Part II, Item 8 of
this
report.
|
(2) |
Financial
Statement Schedules
|
See
the
Index to Financial Statements and Schedule set forth in Part II, Item 8 of
this
report.
Exhibit
No.
|
|
Description
|
3.1
|
|
Articles
of Amendment and Restatement of the Company (incorporated by reference
to
Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year
ended
December 31, 1999, filed on March 29, 2000)
|
|
|
|
3.2
|
|
Articles
Supplementary of the Company establishing 9.375% Series C Cumulative
Redeemable Preferred Stock (incorporated by reference to Exhibit
3.1 to
the Company's Current Report on Form 8-K, filed on May 30,
2003)
|
|
|
|
3.3
|
|
Articles
Supplementary of the Company establishing 8.25% Series D Cumulative
Redeemable Preferred Stock (incorporated by reference to Exhibit
3.2 to
the Company's Registration Statement on Form 8-A, filed on February
12,
2007)
|
|
|
|
3.4
|
|
Amended
and Restated Bylaws of the Company (incorporated by reference to
Exhibit
3.1 to the Company's Current Report on Form 8-K, filed on December
12,
2007)
|
|
|
|
4.1
|
|
Junior
Subordinated Indenture, dated as of September 26, 2005, between the
Company and Wells Fargo Bank, National Association, as trustee
(incorporated by reference to Exhibit 4.1 to the Company's Annual
Report
on Form 10-K for the year ended December 31, 2005, filed on March
16,
2006)
|
|
|
|
4.2
|
|
Junior
Subordinated Indenture, dated as of January 31, 2006, between the
Company
and JPMorgan Chase Bank, National Association, as trustee (incorporated
by
reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K
for
the year ended December 31, 2005, filed on March 16,
2006)
|
|
|
|
4.3
|
|
Junior
Subordinated Indenture, dated as of March 16, 2006, between the Company
and Wilmington Trust Company, as trustee (incorporated by reference
to
Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the
quarter
ended March 31, 2006, filed on May 10, 2006)
|
|
|
|
4.4
|
|
Amended
and Restated Trust Agreement, dated as of September 26, 2005, among
the
Company, as depositor, Wells Fargo Bank, National Association, as
property
trustee, Wells Fargo Delaware Trust Company, as Delaware trustee,
and
three administrative trustees, each of whom is an officer of the
Company
(incorporated by reference to Exhibit 4.4 to the Company's Annual
Report
on Form 10-K for the year ended December 31, 2005, filed on March
16,
2006)
|
|
|
|
4.5
|
|
Amended
and Restated Trust Agreement, dated as of January 31, 2006, among
the
Company, as depositor, JPMorgan Chase Bank, National Association,
as
property trustee, Chase Bank USA, National Association, as Delaware
trustee, and three administrative trustees, each of whom is an officer
of
the Company (incorporated by reference to Exhibit 4.5 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2005,
filed on
March 16, 2006)
|
4.6
|
|
Amended
and Restated Trust Agreement, dated as of March 16, 2006, among the
Company, as depositor, Wilmington Trust Company, as property trustee,
Wilmington Trust Company, as Delaware trustee, and the three
administrative trustees, each of whom is an officer of the Company
(incorporated by reference to Exhibit 4.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2006, filed on
May 10,
2006)
|
|
|
|
4.7
|
|
Indenture,
dated as of October 4, 2006, between the Company and Wells Fargo
Bank,
N.A. (incorporated by reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2007, filed on
May 10,
2007)
|
|
|
|
4.8
|
|
Indenture,
dated as of October 17, 2006, between the Company and Wells Fargo
Bank,
N.A. (incorporated by reference to Exhibit 4.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2007, filed on
May 10,
2007)
|
|
|
|
4.9
|
|
Junior
Subordinated Indenture, dated as of April 17, 2007, between the Company
and Wells Fargo Bank, N.A., as trustee (incorporated by reference
to
Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the
quarter
ended June 30, 2007, filed on August 9, 2007)
|
|
|
|
4.10
|
|
Junior
Subordinated Indenture, dated as of April 18, 2007, between the Company
and Wells Fargo Bank, N.A., as trustee (incorporated by reference
to
Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the
quarter
ended June 30, 2007, filed on August 9, 2007)
|
|
|
|
4.11
|
|
Indenture,
dated as of May 29, 2007, between the Company and Wilmington Trust
Company, as trustee (incorporated by reference to Exhibit 4.1 to
the
Company's Current Report on Form 8-K, filed on May 29,
2007)
|
|
|
|
4.12*
|
|
Indenture,
dated as of June 15, 2007, between the Company and Wells Fargo Bank,
N.A.,
as trustee
|
|
|
|
4.13
|
|
Indenture,
dated as of August 29, 2007, between the Company and Wells Fargo
Bank,
N.A., as trustee (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K, filed on August 29,
2007)
|
|
|
|
10.1
|
|
Amended
and Restated Investment Advisory Agreement, dated as of March 15,
2007,
between the Company and BlackRock Financial Management, Inc. (incorporated
by reference to Exhibit 10.1 to the Company's Annual Report on Form
10-K
for the year ended December 31, 2006, filed on March 16,
2007)
|
|
|
|
10.2
|
|
Amended
and Restated Accounting Services Agreement, dated as of March 15,
2007,
between the Company and BlackRock Financial Management, Inc. (incorporated
by reference to Exhibit 10.2 of the Company's Annual Report on Form
10-K
for the year ended December 31, 2006, filed on March 16,
2007)
|
|
|
|
10.3
|
|
Amended
and Restated Administration Agreement, dated as of March 15, 2007,
between
the Company and BlackRock Financial Management, Inc. (incorporated
by
reference to Exhibit 10.3 of the Company's Annual Report on Form
10-K for
the year ended December 31, 2006, filed on March 16,
2007)
|
|
|
|
10.4
|
|
Form
of 1998 Stock Option Incentive Plan (incorporated by reference to
Exhibit
10.6 to the Company's Registration Statement on Form S-11 (File No.
333-40813), filed on March 18, 1998)
|
|
|
|
10.5
|
|
Form
of 2006 Stock Award and Incentive Plan (incorporated by reference
to
Exhibit 10.5 of the Company's Annual Report on Form 10-K for the
year
ended December 31, 2006, filed on March 16, 2007)
|
|
|
|
10.6
|
|
Multicurrency
Revolving Facility Agreement, dated as of March 17, 2006, among AHR
Capital BofA Limited, as borrower, the Company, as borrower agent,
and
Bank of America, N.A., as lender (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended
March 31, 2006, filed on May 10, 2006)
|
|
|
|
10.7a
|
|
Parent
Guaranty, dated as of March 17, 2006, executed by the Company, as
guarantor, in favor of Bank of America, N.A., as lender (incorporated
by
reference to Exhibit 10.1a to the Company's Current Report on Form
8-K,
filed on March 1, 2007)
|
|
|
|
10.7b
|
|
Amendment
No. 1, dated as of February 23, 2007, to Parent Guaranty, dated as
of
March 17, 2006 (incorporated by reference to Exhibit 10.1b to the
Company's Current Report on Form 8-K, filed on March 1,
2007)
|
|
|
|
10.7c
|
|
Waiver
and Agreement, dated December 28, 2007, relating to Parent Guaranty,
dated
as of March 17, 2006 (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K, filed on December 28,
2007)
|
10.7d
|
|
Amendment
No. 2, dated as of January 25, 2008, to Parent Guaranty, dated as
of March
17, 2006 (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K, filed on January 31, 2008)
|
|
|
|
10.8a
|
|
Master
Repurchase Agreement, dated as of July 20, 2007, among Anthracite
Capital
BOFA Funding LLC, as seller, Bank of America, N.A. and Banc of America
Mortgage Capital Corporation, as buyers, and Bank of America, N.A.,
as
buyer agent (incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K, filed on July 25, 2007)
|
|
|
|
10.8b
|
|
Annex
I, dated as of July 20, 2007, to Master Repurchase Agreement, dated
as of
July 20, 2007 (incorporated by reference to Exhibit 10.3 to the Company's
Current Report on Form 8-K, filed on July 25, 2007)
|
|
|
|
10.8c
|
|
First
Amendment, dated as of October 31, 2007, to Master Repurchase Agreement,
dated as of July 20, 2007 (incorporated by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K, filed on November 2,
2007)
|
|
|
|
10.9
|
|
Guaranty,
dated as of July 20, 2007, executed by the Company, as guarantor,
for the
benefit of Bank of America, N.A. and Banc of America Mortgage Capital
Corporation, as buyers, and Bank of America, N.A., as buyer agent
(incorporated by reference to Exhibit 10.4 to the Company's Current
Report
on Form 8-K, filed on July 25, 2007)
|
|
|
|
10.10a*
|
|
Master
Repurchase Agreement, dated as of December 23, 2004, between Anthracite
Funding, LLC, as seller, and Deutsche Bank AG, Cayman Islands Branch,
as
buyer
|
|
|
|
10.10b
|
|
Annex
I, dated as of December 23, 2004, to Master Repurchase Agreement,
dated as
of December 23, 2004 (incorporated by reference to Exhibit 10.7 to
the
Company's Annual Report on Form 10-K for the year ended December
31, 2004,
filed on March 16, 2005)
|
|
|
|
10.11a*
|
|
Guaranty,
dated as of December 23, 2004, executed by the Company, as guarantor,
for
the benefit of Deutsche Bank AG, Cayman Islands Branch
|
|
|
|
10.11b
|
|
Amendment,
dated as of February 27, 2007, to Guaranty, dated as of December
23, 2004
(incorporated by reference to Exhibit 10.2 to the Company's Current
Report
on Form 8-K, filed on March 1, 2007)
|
|
|
|
10.12
|
|
Second
Amended and Restated Multicurrency Revolving Facility Agreement,
dated as
of February 15, 2008, among AHR Capital MS Limited, as borrower,
Morgan Stanley Mortgage Servicing Ltd, as the security trustee, Morgan
Stanley Bank, as the initial lender and agent, and Morgan Stanley
Principal Funding Inc., as the first new lender and agent (incorporated
by
reference to Exhibit 10.1 to the Company's Current Report on Form
8-K,
filed on February 21, 2008)
|
|
|
|
10.13
|
|
Amended
and Restated Parent Guaranty and Indemnity, dated as of February
15, 2008,
executed by the Company, as guarantor, in favor of Morgan Stanley
Mortgage
Servicing Ltd, as the security trustee, and Morgan Stanley Principal
Funding Inc., as the agent (incorporated by reference to Exhibit
10.2 to
the Company's Current Report on Form 8-K, filed on February 21,
2008)
|
|
|
|
10.14
|
|
Resale
Registration Rights Agreement, dated as of August 29, 2007, between
the
Company and Banc of America Securities LLC and Deutsche Bank Securities
Inc., as the initial purchasers (incorporated by reference to Exhibit
10.1
to the Company's Current Report on Form 8-K, filed on August 29,
2007)
|
|
|
|
10.15
|
|
Fee
letter, dated February 29, 2008, between BlackRock HoldCo 2, Inc.
and the
Company (incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K, filed on March 4, 2008)
|
|
|
|
10.16*
|
|
Credit
Agreement, dated as of March 7, 2008, between
the Company and BlackRock Holdco 2, Inc.
|
|
|
|
10.17*
|
|
Ownership
Interests Pledge and Security Agreement, dated as of March 7, 2008,
between the Company and BlackRock Holdco 2, Inc.
|
|
|
|
10.18
|
|
Sales
Agency Agreement, dated May 15, 2002, between the Company and Brinson
Patrick Securities Corporation (incorporated by reference to Exhibit
1.2
to the Company's Current Report on Form 8-K, filed on May 16,
2002)
|
|
|
|
12*
|
|
Computation
of Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends
|
|
|
|
21*
|
|
List
of subsidiaries of the Company as of December 31, 2007
|
|
|
|
23.1*
|
|
Consent
of Deloitte & Touche LLP, Independent Registered Public Accounting
Firm
|
|
|
|
23.2*
|
|
Consent of
PricewaterhouseCoopers LLP |
|
|
|
31.1*
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
|
|
|
31.2*
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
|
|
|
32*
|
|
Certification
of Chief Executive Officer and Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002
|
|
|
|
99* |
|
BlackRock
Diamond Property Fund, Inc. consolidated financial statements for
the
years ended December 31, 2007 and 2006, and for the period March
21, 2005
(inception) to December 31, 2005
|
* Filed
herewith.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
|
|
|
ANTHRACITE
CAPITAL, INC.
|
|
|
|
Date:
March 12, 2008
|
By: |
/s/
Christopher A. Milner |
|
Christopher
A. Milner
|
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
|
|
Date:
March 12, 2008
|
By: |
/s/
Christopher A. Milner |
|
Christopher
A. Milner
Chief
Executive Officer and Director
(Principal
Executive Officer)
|
|
|
|
Date:
March 12, 2008
|
By: |
/s/
James J. Lillis |
|
James
J. Lillis
Chief
Financial Officer and Treasurer
(Principal
Financial Officer and Principal Accounting
Officer)
|
|
|
|
|
|
Date:
March 12, 2008
|
By: |
/s/
Carl
F. Geuther |
|
Carl
F. Geuther
Chairman
of the Board of Directors
|
|
|
|
|
|
|
Date:
March 12, 2008
|
By: |
/s/
Scott M. Amero |
|
Scott
M. Amero
Director
|
|
|
|
|
|
|
Date:
March 12, 2008
|
By: |
/s/
Hugh
R. Frater |
|
Hugh
R. Frater
Director
|
|
|
|
Date:
March 12, 2008
|
By: |
/s/
Jeffrey C. Keil |
|
Jeffrey
C. Keil
Director
|
|
|
|
|
|
|
Date:
March 12, 2008
|
By: |
/s/
John
B. Levy |
|
John
B. Levy
Director
|
|
|
|
|
|
|
Date:
March 12, 2008
|
By: |
/s/
Deborah J. Lucas |
|
Deborah
J. Lucas
Director
|