SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended March 31, 2008
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 Number 001-13937
ANTHRACITE
CAPITAL, INC.
(Exact
name of registrant as specified in its charter)
Maryland
|
|
13-3978906
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
|
|
|
40
East 52nd
Street, New York, New York
|
|
10022
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(Registrant's
telephone number including area code): (212)
810-3333
NOT
APPLICABLE
(Former
name, former address, and for new fiscal year; if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
the definitions of “large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer þ
|
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 Exchange Act).
At
May 2,
2008, 68,938,283 shares of common stock ($0.001 par value per share) were
outstanding.
ANTHRACITE
CAPITAL, INC.
FORM
10-Q
INDEX
|
Page
|
PART
I –
FINANCIAL INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements
|
4
|
|
|
|
|
Consolidated
Statements of Financial Condition (Unaudited) At March 31, 2008 and
December 31, 2007
|
4
|
|
|
|
|
Consolidated
Statements of Operations (Unaudited)
|
|
|
For
the Three Months Ended March 31, 2008 and 2007
|
5
|
|
|
|
|
Consolidated
Statement of Changes in Stockholders' Equity (Unaudited)
|
|
|
For
the Three Months Ended March 31, 2008
|
6
|
|
|
|
|
Consolidated
Statements of Cash Flows (Unaudited)
|
|
|
For
the Three Months Ended March 31, 2008 and 2007
|
7
|
|
|
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
9
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results
of Operations
|
35
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
63
|
|
|
|
Item
4.
|
Controls
and Procedures
|
67
|
|
|
Part
II –
OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
68
|
|
|
|
Item
1A.
|
Risk
Factors
|
68
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
68
|
|
|
|
Item
6.
|
Exhibits
|
68
|
|
|
|
SIGNATURES
|
|
Cautionary
Statement Regarding Forward-Looking Statements
Certain
statements contained herein constitute "forward-looking statements" within
the
meaning of the Private Securities Litigation Reform Act of 1995 with respect
to
future financial or business performance, strategies or expectations.
Forward-looking statements are typically identified by words or phrases such
as
“trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,”
“anticipate,” “current,” “intention,” “estimate,” “position,” “assume,”
“potential,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,”
“achieve” and similar expressions, or future or conditional verbs such as
“will,” “would,” “should,” “could,” “may” or similar expressions. Anthracite
Capital, Inc. (the “Company”) cautions that forward-looking statements are
subject to numerous assumptions, risks and uncertainties, which change over
time. Forward-looking statements speak only as of the date they are made, and
the Company assumes no duty to and does not undertake to update forward-looking
statements. Actual results could differ materially from those anticipated in
forward-looking statements and future results could differ materially from
historical performance.
In
addition to factors previously disclosed in the Company’s SEC reports and those
identified elsewhere in this report, the following factors, among others, could
cause actual results to differ materially from forward-looking statements or
historical performance:
(1)
the
introduction, withdrawal, success and timing of business initiatives and
strategies;
(2)
changes in political, economic or industry conditions, the interest rate
environment or financial and capital markets, which could result in changes
in
the value of the Company’s assets;
(3)
the
relative and absolute investment performance and operations of BlackRock
Financial Management, Inc. (“BlackRock”), the Company’s Manager;
(4)
the
impact of increased competition;
(5)
the
impact of future acquisitions or divestitures;
(6)
the
unfavorable resolution of legal proceedings;
(7)
the
impact of legislative and regulatory actions and reforms and regulatory,
supervisory or enforcement actions of government agencies relating to the
Company or BlackRock;
(8)
terrorist activities and international hostilities, which may adversely affect
the general economy, domestic and global financial and capital markets, specific
industries, and the Company;
(9)
the
ability of BlackRock to attract and retain highly talented professionals;
(10)
fluctuations in foreign currency exchange rates; and
(11)
the
impact of changes to tax legislation and, generally, the tax position of the
Company.
The
Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and
the Company’s subsequent reports filed with the SEC, accessible on the SEC's
website at www.sec.gov,
identify additional factors that can affect forward-looking
statements.
Part
I
– FINANCIAL
INFORMATION
Item
1. Financial
Statements
Anthracite
Capital, Inc. and Subsidiaries
Consolidated
Statements of Financial Condition (Unaudited)
(in
thousands, except share data)
|
|
March
31, 2008
|
|
December
31, 2007
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
65,649
|
|
|
|
|
$
|
91,547
|
|
Restricted
cash equivalents
|
|
|
|
|
|
20,742
|
|
|
|
|
|
32,105
|
|
Securities
held-for-trading, at estimated fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
commercial mortgage-backed securities ("CMBS")
|
|
$
|
808,510
|
|
|
|
|
$
|
1,380
|
|
|
|
|
Investment
grade CMBS
|
|
|
1,072,749
|
|
|
|
|
|
15,923
|
|
|
|
|
Residential
mortgage-backed securities (“RMBS”)
|
|
|
1,009
|
|
|
|
|
|
901
|
|
|
|
|
Total
securities held-for-trading
|
|
|
|
|
|
1,882,268
|
|
|
|
|
|
18,204
|
|
Securities
available-for-sale, at estimated fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
CMBS
|
|
|
-
|
|
|
|
|
|
1,026,773
|
|
|
|
|
Investment
grade CMBS
|
|
|
-
|
|
|
|
|
|
1,230,075
|
|
|
|
|
RMBS
|
|
|
-
|
|
|
|
|
|
9,282
|
|
|
|
|
Total
securities available-for-sale
|
|
|
|
|
|
-
|
|
|
|
|
|
2,266,130
|
|
Commercial
mortgage loans (net of loan loss reserve of $25,000 in
2008)
|
|
|
|
|
|
999,163
|
|
|
|
|
|
983,387
|
|
Commercial
mortgage loan pools, at amortized cost
|
|
|
|
|
|
1,235,138
|
|
|
|
|
|
1,240,793
|
|
Equity
investments
|
|
|
|
|
|
108,853
|
|
|
|
|
|
108,748
|
|
Derivative
instruments, at estimated fair value
|
|
|
|
|
|
422,646
|
|
|
|
|
|
404,910
|
|
Other
assets (includes $2,093 at estimated fair value in 2008)
|
|
|
|
|
|
70,274
|
|
|
|
|
|
101,886
|
|
Total
Assets
|
|
|
|
|
$
|
4,804,733
|
|
|
|
|
$
|
5,247,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
by pledge of subordinated CMBS
|
|
$
|
246,955
|
|
|
|
|
$
|
293,287
|
|
|
|
|
Secured
by pledge of investment grade CMBS
|
|
|
227,939
|
|
|
|
|
|
207,829
|
|
|
|
|
Secured
by pledge of commercial mortgage loans
|
|
|
236,990
|
|
|
|
|
|
244,476
|
|
|
|
|
Collateralized
debt obligations ("CDOs") (includes $1,216,289 at estimated fair
value in
2008)
|
|
|
1,216,289
|
|
|
|
|
|
1,823,328
|
|
|
|
|
Senior
unsecured notes (includes $80,864 at estimated fair value in
2008)
|
|
|
80,864
|
|
|
|
|
|
162,500
|
|
|
|
|
Senior
convertible notes (includes $67,696 at estimated fair value in
2008)
|
|
|
67,696
|
|
|
|
|
|
80,000
|
|
|
|
|
Junior
unsecured notes (includes $34,122 at estimated fair value in
2008)
|
|
|
34,122
|
|
|
|
|
|
73,103
|
|
|
|
|
Junior
subordinated notes to subsidiary trusts issuing preferred securities
(includes $68,986 at estimated fair value in 2008)
|
|
|
68,986
|
|
|
|
|
|
180,477
|
|
|
|
|
Secured
by pledge of commercial mortgage loan pools
|
|
|
1,217,901
|
|
|
|
|
|
1,225,223
|
|
|
|
|
Total
borrowings
|
|
|
|
|
|
3,397,742
|
|
|
|
|
|
4,290,223
|
|
Payable
for investments purchased
|
|
|
|
|
|
-
|
|
|
|
|
|
4,693
|
|
Distributions
payable
|
|
|
|
|
|
21,522
|
|
|
|
|
|
21,064
|
|
Derivative
instruments, at estimated fair value
|
|
|
|
|
|
502,349
|
|
|
|
|
|
442,114
|
|
Other
liabilities
|
|
|
|
|
|
34,786
|
|
|
|
|
|
38,245
|
|
Total
Liabilities
|
|
|
|
|
|
3,956,399
|
|
|
|
|
|
4,796,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
83,259
|
|
Common
Stock, par value $0.001 per share; 400,000,000 shares authorized;
64,791,761
shares issued and outstanding in 2008; 63,263,998
shares issued and outstanding in 2007
|
|
|
|
|
|
65
|
|
|
|
|
|
63
|
|
Additional
paid-in capital
|
|
|
|
|
|
700,960
|
|
|
|
|
|
691,071
|
|
Retained
earnings (distributions in excess of earnings)
|
|
|
|
|
|
9,134
|
|
|
|
|
|
(122,738
|
)
|
Accumulated
other comprehensive income (loss) (“OCI”)
|
|
|
|
|
|
(519
|
)
|
|
|
|
|
(255,719
|
)
|
Total
Stockholders’ Equity
|
|
|
|
|
|
848,334
|
|
|
|
|
|
451,371
|
|
Total
Liabilities and Stockholders’ Equity
|
|
|
|
|
$
|
4,804,733
|
|
|
|
|
$
|
5,247,710
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Anthracite
Capital, Inc. and Subsidiaries
Consolidated
Statements of Operations (Unaudited)
(in
thousands, except share and per share data)
|
|
For the Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Income:
|
|
|
|
|
|
|
|
Interest
from securities
|
|
$
|
52,269
|
|
$
|
48,180
|
|
Interest
from commercial mortgage loans
|
|
|
23,732
|
|
|
11,166
|
|
Interest
from commercial mortgage loan pools
|
|
|
12,865
|
|
|
13,132
|
|
Earnings
from equity investments
|
|
|
2,009
|
|
|
9,956
|
|
Interest
from cash and cash equivalents
|
|
|
1,064
|
|
|
924
|
|
Total
income
|
|
|
91,939
|
|
|
83,358
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
Interest
|
|
|
56,854
|
|
|
55,839
|
|
Management
and incentive fees
|
|
|
14,218
|
|
|
6,953
|
|
General
and administrative expense
|
|
|
1,815
|
|
|
1,305
|
|
Total
expenses
|
|
|
72,887
|
|
|
64,097
|
|
|
|
|
|
|
|
|
|
Other
gains (losses):
|
|
|
|
|
|
|
|
Realized
loss on securities and swaps held-for-trading, net
|
|
|
(4,977
|
)
|
|
(17
|
)
|
Unrealized
loss on securities held-for-trading
|
|
|
(369,780
|
)
|
|
-
|
|
Unrealized
loss on swaps classified as held-for-trading
|
|
|
(32,524
|
)
|
|
-
|
|
Unrealized
gain on liabilities
|
|
|
478,318
|
|
|
-
|
|
Gain
on sale of securities available-for-sale, net
|
|
|
-
|
|
|
6,750
|
|
Provision
for loan loss
|
|
|
(25,190
|
)
|
|
-
|
|
Foreign
currency gain (loss)
|
|
|
(8,041
|
)
|
|
1,484
|
|
Loss
on impairment of assets
|
|
|
-
|
|
|
(1,198
|
)
|
Total
other gains
|
|
|
37,806
|
|
|
7,019
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
56,858
|
|
|
26,280
|
|
|
|
|
|
|
|
|
|
Dividends
on preferred stock
|
|
|
(3,127
|
)
|
|
(2,277
|
)
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
53,731
|
|
$
|
24,003
|
|
|
|
|
|
|
|
|
|
Net
income per common share, basic:
|
|
$
|
0.85
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
Net
income per common share, diluted:
|
|
$
|
0.79
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
63,417,576
|
|
|
57,853,694
|
|
Diluted
|
|
|
71,136,517
|
|
|
58,139,455
|
|
Dividend
declared per share of common stock
|
|
$
|
0.30
|
|
$
|
0.29
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Anthracite
Capital, Inc. and Subsidiaries
Consolidated
Statement of Changes in Stockholders' Equity (Unaudited)
For
the Three Months Ended March 31, 2008
(in
thousands)
|
|
|
|
Series
|
|
Series
|
|
|
|
Retained
Earnings
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Common
|
|
C
|
|
D
|
|
Additional
|
|
(Distributions
|
|
Other
|
|
|
|
|
Total
|
|
|
|
Stock,
|
|
Preferred
|
|
Preferred
|
|
Paid-In
|
|
in
Excess
|
|
Comprehensive
|
|
Comprehensive
|
|
|
Stockholders'
|
|
|
|
Par Value
|
|
Stock
|
|
Stock
|
|
Capital
|
|
of Earnings)
|
|
Income (Loss)
|
|
Income
|
|
|
Equity
|
|
Balance
at January 1, 2008
|
|
$
|
63
|
|
$
|
55,435
|
|
$
|
83,259
|
|
$
|
691,071
|
|
$
|
(122,738
|
)
|
$
|
(255,719
|
)
|
|
|
|
$
|
451,371
|
Cumulative
effect of adjustment from adoption of SFAS No. 159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,578
|
|
|
253,045
|
|
|
|
|
|
350,623
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,858
|
|
|
|
|
$
|
56,858
|
|
|
56,858
|
Unrealized
loss on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,371
|
)
|
|
(7,371
|
)
|
|
(7,371)
|
Reclassification
adjustments from cash flow hedges included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
409
|
|
|
409
|
|
|
409
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,117
|
|
|
9,117
|
|
|
9,117
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,155
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
59,013
|
|
|
|
Dividends
declared-common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,437
|
)
|
|
|
|
|
|
|
|
(19,437)
|
Dividends
on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,127
|
)
|
|
|
|
|
|
|
|
(3,127)
|
Issuance
of common stock
|
|
|
2
|
|
|
|
|
|
|
|
|
9,889
|
|
|
|
|
|
|
|
|
|
|
|
9,891
|
Balance
at March 31, 2008
|
|
$
|
65
|
|
$
|
55,435
|
|
$
|
83,259
|
|
$
|
700,960
|
|
$
|
9,134
|
|
$
|
(519
|
)
|
|
|
|
$
|
848,334
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Anthracite
Capital, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows (Unaudited)
(in
thousands)
|
|
For
the Three
Months
Ended
March
31, 2008
|
|
For
the Three
Months
Ended
March
31, 2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
56,858
|
|
$
|
26,280
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Net
decrease in trading securities
|
|
|
4,599
|
|
|
132,076
|
|
Purchase
of securities held-for-trading
|
|
|
(53,515
|
)
|
|
|
|
Unrealized
loss on securities held-for-trading
|
|
|
369,780
|
|
|
-
|
|
Unrealized
loss on swaps classified as held-for-trading
|
|
|
32,524
|
|
|
-
|
|
Net
(gain) on swaps held-for-trading
|
|
|
(610
|
)
|
|
-
|
|
Unrealized
gain on liabilities
|
|
|
(478,318
|
)
|
|
-
|
|
Net
loss (gain) on sale of securities
|
|
|
5,587
|
|
|
(6,733
|
)
|
Earnings
from subsidiary trust
|
|
|
(105
|
)
|
|
(103
|
)
|
Distributions
from subsidiary trust
|
|
|
105
|
|
|
105
|
|
Earnings
from equity investments
|
|
|
(2,009
|
)
|
|
(9,956
|
)
|
Distributions
of earnings from equity investments
|
|
|
1,904
|
|
|
3,637
|
|
Provision
for loan loss
|
|
|
25,190
|
|
|
-
|
|
(Discount)
premium amortization, net
|
|
|
(5,977
|
)
|
|
265
|
|
Loss
on impairment of assets
|
|
|
-
|
|
|
1,198
|
|
Unrealized
net foreign currency loss (gain)
|
|
|
5,141
|
|
|
(1,506
|
)
|
Non-cash
management and incentive fees
|
|
|
3,562
|
|
|
709
|
|
(Disbursements)
proceeds from termination of interest rate swap agreements
|
|
|
(12,755
|
)
|
|
1,693
|
|
(Increase)
decrease in other assets
|
|
|
(6,800
|
)
|
|
1,366
|
|
(Decrease)
increase in other liabilities
|
|
|
(6,784
|
)
|
|
15,738
|
|
Net
cash (used in) provided by operating activities
|
|
|
(61,623
|
)
|
|
164,769
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of securities
|
|
|
-
|
|
|
(125,060
|
)
|
Proceeds
from sale of securities
|
|
|
74,272
|
|
|
48,984
|
|
Principal
payments received on securities
|
|
|
33,892
|
|
|
14,504
|
|
Funding
of commercial mortgage loans
|
|
|
-
|
|
|
(194,509
|
)
|
Repayments
received from commercial mortgage loans
|
|
|
7,768
|
|
|
9,478
|
|
Repayments
received from commercial mortgage loan pools
|
|
|
2,575
|
|
|
10,064
|
|
Decrease
in restricted cash equivalents
|
|
|
11,363
|
|
|
51,174
|
|
Investment
in equity investments
|
|
|
(3,300
|
)
|
|
(23,009
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
126,570
|
|
|
(208,374
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
decrease in borrowings under reverse repurchase agreements and
credit facilities
|
|
|
(50,610
|
)
|
|
(36,630
|
)
|
Repayments
of borrowings secured by commercial mortgage loan pools
|
|
|
(3,945
|
)
|
|
(10,140
|
)
|
Repayments
of collateralized debt obligations
|
|
|
(23,435
|
)
|
|
(851
|
)
|
Issuance
of collateralized debt obligations
|
|
|
-
|
|
|
11,476
|
|
Issuance
costs for collateralized debt obligations
|
|
|
-
|
|
|
(838
|
)
|
Dividends
paid on preferred stock
|
|
|
(3,128
|
)
|
|
(1,348
|
)
|
Proceeds
from issuance of preferred stock, net of offering costs
|
|
|
-
|
|
|
83,306
|
|
Proceeds
from issuance of common stock, net of offering costs
|
|
|
7,773
|
|
|
1,548
|
|
Dividends
paid on common stock
|
|
|
(18,979
|
)
|
|
(16,772
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(92,324
|
)
|
|
29,751
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
1,479
|
|
|
1,282
|
|
Net
decrease in cash and cash equivalents
|
|
|
(25,898
|
)
|
|
(12,572
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
91,547
|
|
|
66,388
|
|
Cash
and cash equivalents, end of period
|
|
$
|
65,649
|
|
$
|
53,816
|
|
|
|
|
For the Three
Months Ended March 31, 2008
|
|
|
For the Three
Months Ended
March 31, 2007
|
|
Supplemental
disclosure of cash flow information: |
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
60,001
|
|
$
|
52,910
|
|
Investments
purchased not settled
|
|
|
-
|
|
$
|
54,562
|
|
Commercial
mortgage loans purchased not settled
|
|
|
-
|
|
$
|
21,358
|
|
Supplemental
disclosure of non-cash activities:
|
|
|
|
|
|
|
|
Non-cash
transfer of securities available-for-sale to trading
|
|
$
|
2,266,130
|
|
|
-
|
|
Incentive
fees paid by the issuance of common stock
|
|
$
|
2,116
|
|
$
|
4,433
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Anthracite
Capital, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(Dollar
amounts in thousands, except share and per share data)
Note
1 ORGANIZATION
AND SIGNIFICANT ACCOUNTING POLICIES
Anthracite
Capital, Inc., a Maryland corporation, and subsidiaries (collectively, the
"Company") was incorporated in Maryland in November of 1997 and 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 ongoing investment activities primarily encompass three core
investment activities:
1) Commercial
Real Estate Securities
2) Commercial
Real Estate Loans
3) Commercial
Real Estate Equity
The
accompanying March 31, 2008 unaudited consolidated financial statements have
been prepared in conformity with the instructions to Form 10-Q and Article
10,
Rule 10-01 of Regulation S-X for interim financial statements. Accordingly,
they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America (“GAAP”) for
complete financial statements. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and changes in cash flows have
been made. These consolidated financial statements should be read in conjunction
with the annual audited financial statements and notes thereto included in
the
Company’s annual report on Form 10-K for the year ended December 31, 2007 filed
with the Securities and Exchange Commission (the “SEC”).
In
preparing the consolidated financial statements, management is required to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates
of
the statements of financial condition and revenues and expenses for the periods
covered. Actual results could differ from those estimates and assumptions.
Significant estimates in the financial statements include the valuation and
credit analysis related to certain of the Company's securities, and estimates
pertaining to credit performance related to CMBS and commercial real estate
loans.
Recent
Accounting Developments
Fair
Value Measurements
In
September 2006, the Financial Accounting Standards Board (the “FASB”) issued
Statement of Financial Accounting Standards 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. The Company adopted FAS
157
as of January 1, 2008. FAS 157 did not materially affect how the Company
determines fair value, but resulted 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 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 January
1, 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)
investments in equity of subsidiary trusts;
(3)
all
unsecured long-term liabilities, consisting of all senior unsecured notes,
senior convertible notes, junior unsecured notes and junior subordinated notes;
and
(4)
all
CDO liabilities and related interest rate swaps.
Upon
adoption, with an adjustment to opening retained earnings, total stockholders'
equity increased by $350,623, substantially all of which relates to applying
the
fair value option to the Company's long-term liabilities. The Company recorded
all unamortized debt issuance costs relating to debt for which the Company
elected the fair value option on January 1, 2008 as an adjustment to opening
retained earnings. Subsequent to January 1, 2008, all changes in the estimated
fair value of the Company's available-for-sale securities, CDO liabilities
and
related interest rate swaps, senior unsecured notes, senior convertible notes,
junior unsecured notes and junior subordinated notes are recorded in
earnings.
Disclosures
about Derivative Instruments and Hedging Activities
In
March
2008, the FASB issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities
(“FAS
161”). This statement amends and expands the disclosure requirements of SFAS No.
133, Accounting
for Derivative Instruments and Hedging Activities
(“FAS
133”). This statement requires qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair value
amounts of gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative agreement. FAS
161 will be effective for the Company on January 1, 2009.
Management is currently evaluating the effects that FAS 161 will have on the
disclosures included in the Company’s consolidated financial statements.
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
("FSP
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 No. 140,
Accounting
for Transfers and Securing of Financial Assets and Extinguishment of
Liabilities
(“FAS
140”).
This
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 this 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 its consolidated statement of operations.
However, in a transaction in which 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
this
FSP, but the Company may be precluded from presenting the assets gross on the
Company's consolidated statement of financial condition and may be instead
required to 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 March 31,
2008, the Company has identified securities held-for-trading with a fair value
of approximately $120,228 which had been purchased from and financed with
reverse repurchase agreements totaling approximately $113,735 with the same
counterparty since their purchase. If the Company were required to change
the current accounting treatment for these transactions at March 31, 2008 to
that required by this FSP, total assets and total liabilities would be reduced
by approximately $113,735.
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 by 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 February 14, 2008, 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 variable interest entities (“VIE”) in which the
Company is the primary beneficiary under FASB Interpretation No. 46 (revised),
Consolidation
of Variable Interest Entities
(“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 intercompany
balances and transactions have been eliminated in consolidation.
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 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. Future guidance
from the accounting standard setters may require the Company to consolidate
CMBS
trusts in which the Company has invested.
Note
2 NET
INCOME PER SHARE
Net
income per share is computed in accordance with SFAS No. 128, Earnings
Per Share.
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 convertible senior notes is calculated using
the "if converted" method.
|
|
For the Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
Numerator
for basic earnings per share
|
|
$
|
53,731
|
|
$
|
24,003
|
|
Interest
expense on convertible senior notes
|
|
|
2,313
|
|
|
-
|
|
Numerator
for diluted earnings per share
|
|
$
|
56,044
|
|
$
|
24,003
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share—weighted average common
shares outstanding
|
|
|
63,417,576
|
|
|
57,853,694
|
|
Dilutive
effect of stock options
|
|
|
-
|
|
|
3,032
|
|
Assumed
conversion of convertible senior notes
|
|
|
7,416,680
|
|
|
-
|
|
Dilutive
effect of stock based incentive fee
|
|
|
302,261
|
|
|
282,729
|
|
Denominator
for diluted earnings per share—weighted average common shares outstanding
and common stock equivalents outstanding
|
|
|
71,136,517
|
|
|
58,139,455
|
|
|
|
|
|
|
|
|
|
Basic
net income per weighted average common share:
|
|
$
|
0.85
|
|
$
|
0.41
|
|
Diluted
net income per weighted average common share and common share
equivalents:
|
|
$
|
0.79
|
|
$
|
0.41
|
|
Total
anti-dilutive stock options excluded from the calculation of diluted net income
per share were 21,550 and 1,380,151 for the three months ended March 31, 2008
and 2007, respectively.
Note
3 FAIR VALUE DISCLOSURES
The
Company adopted FAS 157 as of January 1, 2008, which requires, among other
things, enhanced disclosures about financial instruments that are measured
and
reported at fair value. Financial instruments include the Company’s securities
classified as held-for-trading, available-for-sale as well as derivatives
accounted for at fair value.
The
degree of judgment utilized in measuring the fair value of financial instruments
generally correlates to the level of pricing observability. Pricing
observability is impacted by a number of factors, including the type of
financial instrument, whether the financial instrument is new to the market
and
not yet established and the characteristics specific to the transaction.
Financial instruments with readily available active quoted prices or for which
fair value can be measured from actively quoted prices generally will have
a
higher degree of pricing observability and a lesser degree of judgment utilized
in measuring fair value. Conversely, financial instruments rarely traded or
not
quoted will generally have less, or no, pricing observability and a higher
degree of judgment utilized in measuring fair value.
FAS
157
establishes a hierarchal disclosure framework associated with the level of
pricing observability utilized in measuring financial instruments at fair value.
The three broad levels defined by the FAS 157 hierarchy are as follows:
Level
1
– Quoted
prices are available in active markets for identical assets or liabilities
at
the reporting date. Level 1 assets include highly liquid cash instruments with
quoted prices such as agency securities, listed equities and money market
securities, as well as listed derivative instruments.
Level
2 –
Pricing inputs other than quoted prices included within Level 1 that are
observable for substantially the full term of the asset or liability, either
directly or indirectly. Level 2 assets include quoted prices for similar assets
or liabilities in active markets; quoted prices for identical or similar assets
or liabilities that are not active; and inputs other than quoted prices that
are
observable, such as models or other valuation methodologies. Instruments which
are generally included in this category are corporate bonds and loans, mortgage
whole loans, municipal bonds and OTC derivatives. The Company has determined
that the following instruments are Level 2: interest rate swaps, currency swaps
and foreign currency forward commitments.
Level
3 –
Instruments that have little to no pricing observability as of the reported
date. These financial instruments do not have two-way markets and are
measured using management’s best estimate of fair value, where the inputs into
the determination of fair value require significant management judgment or
estimation. Instruments in this category generally include assets and
liabilities for which there is little, if any, current market activity. The
Company’s investments in this category include investment grade CMBS,
subordinated CMBS and all of the Company’s long-term liabilities. The fair
values of certain assets are determined by references to index pricing. However,
for certain assets, index prices for identical or similar assets are not
available. In these cases, management uses broker quotes as being indicative
of
fair values. Management also uses broker quotes for CDO liabilities. 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.
The
Company has classified these assets and liabilities as Level 3 as of March
31,
2008 due to the lack of current market activity. The Company believes that
it
may be appropriate to transfer these assets and liabilities to Level 2 in
subsequent periods if market activity returns to normalized levels and
observable inputs become available.
The
Company’s assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment and considers factors specific
to
the investment.
The
following table summarizes the valuation of our financial instruments by the
above FAS 157 pricing observability levels as of March 31, 2008. Assets and
liabilities measured at fair value on a recurring basis are categorized below
based upon the lowest level of significant input to the valuations.
|
|
Assets
at Fair Value as of March 31, 2008
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
|
Subordinated
CMBS
|
|
$
|
-
|
|
$
|
-
|
|
$
|
808,510
|
|
$
|
808,510
|
|
Investment
grade CMBS
|
|
|
-
|
|
|
-
|
|
|
1,072,749
|
|
|
1,072,749
|
|
RMBS
|
|
|
-
|
|
|
-
|
|
|
1,009
|
|
|
1,009
|
|
Derivative
instruments
|
|
|
-
|
|
|
422,646
|
|
|
-
|
|
|
422,646
|
|
Investments
in Equity of Subsidiary Trusts*
|
|
|
|
|
|
|
|
|
2,093
|
|
|
2,093
|
|
Total
|
|
$
|
-
|
|
$
|
422,646
|
|
$
|
1,884,361
|
|
$
|
2,307,007
|
|
*
Included as a component of other assets on the consolidated statement of
financial condition.
|
|
Liabilities
at Fair Value as of March 31, 2008
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
|
Senior
unsecured notes
|
|
$
|
-
|
|
$
|
-
|
|
$
|
80,864
|
|
$
|
80,864
|
|
Senior
convertible notes
|
|
|
-
|
|
|
-
|
|
|
67,696
|
|
|
67,696
|
|
Junior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
34,122
|
|
|
34,122
|
|
Junior
subordinated notes
|
|
|
-
|
|
|
-
|
|
|
68,986
|
|
|
68,986
|
|
CDOs
|
|
|
-
|
|
|
-
|
|
|
1,216,289
|
|
|
1,216,289
|
|
Derivative
instruments
|
|
|
-
|
|
|
502,349
|
|
|
-
|
|
|
502,349
|
|
Total
|
|
$
|
-
|
|
$
|
502,349
|
|
$
|
1,467,957
|
|
$
|
1,907,306
|
|
The
following table presents the changes in Level 3 assets for the three months
ended March 31, 2008:
|
|
CMBS
|
|
Investment grade
CMBS
|
|
RMBS
|
|
Investments in
Equity of
Subsidiary
Trusts
|
|
Balance
at January 1, 2008
|
|
$
|
1,028,153
|
|
$
|
1,245,998
|
|
$
|
10,183
|
|
$
|
3,135
|
|
Net
purchases (sales)
|
|
|
2,824
|
|
|
(53,841
|
)
|
|
(9,223
|
)
|
|
-
|
|
Net
transfers in (out)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Losses
included in earnings
|
|
|
(230,935
|
)
|
|
(122,138
|
)
|
|
49
|
|
|
(1,042
|
)
|
Gains
included in OCI
(1)
|
|
|
8,468
|
|
|
2,730
|
|
|
|
|
|
|
|
Balance
at March 31, 2008
|
|
$
|
808,510
|
|
$
|
1,072,749
|
|
$
|
1,009
|
|
$
|
2,093
|
|
Amount
of total gains (losses) for the period included in earnings attributable
to the change in unrealized gains or losses relating to assets still
held
at March 31, 2008 (2)
|
|
$
|
(238,005
|
)
|
$
|
(127,068
|
)
|
$
|
49
|
|
$
|
(1,042
|
)
|
Amount
of total gains (losses) for the period included in earnings attributable
to the change in unrealized gains or losses relating to assets still
held
at March 31, 2008 (3)
|
|
$
|
7,070
|
|
$
|
4,930
|
|
$
|
-
|
|
$
|
-
|
|
(1)
The
Company has a foreign subsidiary that has the Euro as its functional currency.
Gains (losses) in OCI represent the currency translation adjustments for this
subsidiary.
(2)
Recorded
in “unrealized loss on securities-held-for trading” in the consolidated
statement of operations.
(3)
Recorded
in “foreign currency gain (loss)” in the consolidated statement of
operations.
The
following table presents the changes in Level 3 liabilities for the three months
ended March 31, 2008:
|
|
CDOs
|
|
Senior
unsecured
notes
|
|
Senior
convertible
notes
|
|
Junior
unsecured
notes
|
|
Trust
preferred
|
|
Balance
at January 1, 2008
|
|
$
|
1,598,502
|
|
$
|
114,473
|
|
$
|
70,186
|
|
$
|
44,833
|
|
$
|
103,312
|
|
Paydowns
|
|
|
(23,435
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
transfers in (out)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Gains
included in earnings
|
|
|
(391,057
|
)
|
|
(33,609
|
)
|
|
(2,490
|
)
|
|
(10,711
|
)
|
|
(34,326
|
)
|
Losses
included in OCI (1)
|
|
|
32,279
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance
at March 31, 2008
|
|
$
|
1,216,289
|
|
$
|
80,864
|
|
$
|
67,696
|
|
$
|
34,122
|
|
$
|
68,986
|
|
Amount
of total gains (losses) for the period included in earnings attributable
to the change in unrealized gains or losses relating to assets still
held
at March 31, 2008 (2)
|
|
$
|
(391,057
|
)
|
$
|
(33,609
|
)
|
$
|
(2,490
|
)
|
$
|
(16,836
|
)
|
$
|
(34,326
|
)
|
Amount
of total gains (losses) for the period included in earnings attributable
to the change in unrealized gains or losses relating to assets still
held
at March 31, 2008 (3)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
6,125
|
|
$
|
-
|
|
(1)
The
Company has a foreign subsidiary that has the Euro as its functional currency.
Gains (losses) in OCI represent the currency translation adjustments for this
subsidiary.
(2)
Recorded
in “unrealized gain on liabilities” in the consolidated statement of
operations.
(3)
Recorded
in “foreign currency gain (loss)” in the consolidated statement of
operations.
Fair
Value Option
On
January 1, 2008, the Company adopted FAS 159 which provides an option to elect
fair value as an alternative measurement for selected financial assets or
liabilities not previously recorded at fair value.
The fair
value option was elected for these assets and liabilities to align the
measurement attributes of both the assets and liabilities while mitigating
volatility in earnings from using different measurement attributes.
The
following table presents information about the eligible instruments for which
the Company elected the fair value option and for which a transition adjustment
was recorded as of January 1, 2008:
|
|
Carrying Value
at
January 1,
2008
|
|
Transition
Adjustment to
Retained Earnings
(Distributions in
Excess of Earnings)
|
|
Carrying Value at
January 1, 2008 (After Adoption of FAS 159)
|
|
Securities
held-for-trading (1)
|
|
$
|
2,284,334
|
|
$
|
(227,635
|
)
|
$
|
2,284,334
|
|
CDO
interest rate swaps (1)
|
|
|
(25,410
|
)
|
|
(25,410
|
)
|
|
(25,410
|
)
|
Liability
issuance costs
|
|
|
35,137
|
|
|
(35,137
|
)
|
|
-
|
|
Senior
unsecured notes
|
|
|
(162,500
|
)
|
|
48,027
|
|
|
(114,473
|
)
|
Senior
convertible notes
|
|
|
(80,000
|
)
|
|
9,814
|
|
|
(70,186
|
)
|
Junior
unsecured notes
|
|
|
(73,103
|
)
|
|
28,269
|
|
|
(44,834
|
)
|
Investments
in equity of subsidiary
trusts
|
|
|
5,477
|
|
|
(2,342
|
)
|
|
3,135
|
|
Junior
subordinated notes
|
|
|
(180,477
|
)
|
|
77,165
|
|
|
(103,312
|
)
|
CDOs
|
|
|
(1,823,328
|
)
|
|
224,827
|
|
|
(1,598,501
|
)
|
Cumulative
effect of the adoption of the fair value option
|
|
|
|
|
$
|
97,578
|
|
|
|
|
(1)
Prior
to January 1, 2008, the Company’s CDO interest rate swaps and the majority of
the Company’s securities were classified as available-for-sale and carried at
fair value. Accordingly, the election of the fair value option for these swaps
and securities did not change their carrying value and resulted in a
reclassification from accumulated OCI to opening distributions in excess of
earnings.
Assets
measured at fair value on a nonrecurring basis
Certain
assets are measured at fair value on a nonrecurring basis, meaning that the
instruments are not measured at fair value on an ongoing basis but are subject
to fair value adjustments only in certain circumstances (for example, when
there
is evidence of impairment). The following table presents the asset carried
on
the consolidated statement of financial condition by caption and by level within
the FAS 157 valuation hierarchy as of March 31, 2008, for which a nonrecurring
change in fair value has been recorded during the quarter ended March 31,
2008:
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Carrying
Value
|
|
Commercial
mortgage loan
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Total
assets at fair value on a nonrecurring basis
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
(1) |
The
Company recorded a provision for loan loss in the amount of $25,190
for
the three months ended March 31, 2008. This provision relates to
one loan
with a principal balance of $25,000 and accrued interest of $190.
This
charge resulted in one loan that was identified as impaired and for
which
the fair value was zero at March 31,
2008.
|
Valuation
Provided
below is a summary of the valuation techniques employed with respect to
financial instruments measured at fair value utilizing methodologies other
than
quoted prices in active markets:
Investments
in mortgage backed securities and derivative instruments - The fair value of
these assets is determined by reference to index pricing and market prices
provided by certain dealers who make a market in these financial instruments,
although such markets may not be active. 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. The Company performs additional
analysis on prices received based on broker quotes. This process
includes analyzing the securities based on vintage year, rating and asset type
and converting the price received to a spread. The calculated spread
is then compared to market information available for securities of similar
type,
vintage year and rating. We utilize this process to validate the
prices received from brokers.
Collateralized
debt obligations- The fair value of these liabilities are based on market prices
provided by certain dealers who make a market in this sector, although such
markets may be inactive. The dealers use models that considered, among other
things, (i) anticipated cash flows (ii) current market credit spreads,
(iii) known and anticipated credit issues of underlying collateral
(iv) term and reinvestment period and (v) market transactions of
similar bonds. The Company performs additional analysis on prices received
from
the brokers. This process includes analyzing the securities based on
vintage year, rating and asset type and converting the price received to a
spread. The calculated spread is then compared to market information
available for securities of similar type, vintage year and rating and
adjustments are made as deemed necessary by management to capture market
information available.
Senior
convertible notes - The Company used the mid-point of a bid/ask price obtained
from a dealer in this market. The bid/ask price represented the price the
counterparty was willing to transact at on the measurement date of March 31,
2008 understanding that it is an over the counter market that requires direct
communication with the counterparty to execute the transaction. The counterparty
utilizes a model to publish such price and consideration into such model
include, among other things (i) anticipated cash flows (ii) current
market credit spreads, and (iii) market transactions of similar bonds.
Senior
and junior unsecured notes and trust preferred - The estimated fair value of
these liabilities were developed based on the price obtained by the Company
for
the senior convertible notes. The senior convertible notes are senior to the
unsecured and trust preferred securities. The Company priced the senior
convertible bond without the conversion option to obtain a straight bond price,
converted that price to a spread to swaps and then applied an additional spread
to account for the fact that these liabilities were junior to those notes.
The
Company was able to compare the change in the implied spreads for these
bonds to published spreads for CMBS securities which was deemed to be
a reasonable comparison for these liabilities.
Note
4 SECURITIES HELD-FOR TRADING
Upon
adoption of FAS 159 as of January 1, 2008, the Company elected the fair value
option for all of its securities. As of December 31, 2007, most of the
Company’s securities were classified as securities available-for-sale; however,
in accordance with FAS 159, the election of the fair value option for all of
the
Company’s securities resulted in these investments being classified as trading
securities as of January 1, 2008. This reclassification adjustment did not
result in a change to the Company’s intent as it relates to these securities.
For the three months ended March 31, 2008, $(369,780) was recorded as unrealized
loss on the securities and is included in gain (loss) on securities
held-for-trading on the consolidated statement of operations. The estimated
fair
value of securities held-for-trading at March 31, 2008 is summarized as
follows:
Security
Description
|
|
Estimated
Fair
Value
|
|
U.S.
Dollar Denominated:
|
|
|
|
|
CMBS:
|
|
|
|
|
Investment
grade CMBS
|
|
$
|
641,539
|
|
Non-investment
grade rated subordinated CMBS
|
|
|
441,693
|
|
Non-rated
subordinated CMBS
|
|
|
91,684
|
|
CMBS
interest only securities (“IOs”)
|
|
|
3,115
|
|
Credit
tenant leases
|
|
|
24,133
|
|
Investment
grade REIT debt
|
|
|
219,801
|
|
Multifamily
agency securities
|
|
|
359
|
|
CDO
investments - investment grade
|
|
|
2,880
|
|
CDO
investments - non-investment grade
|
|
|
37,927
|
|
Total
CMBS
|
|
|
1,463,131
|
|
|
|
|
|
|
RMBS:
|
|
|
|
|
Residential
CMOs
|
|
|
587
|
|
Hybrid
adjustable rate mortgages (“ARMs”)
|
|
|
422
|
|
Total
RMBS
|
|
|
1,009
|
|
Total
U.S. dollar denominated
|
|
|
1,464,140
|
|
|
|
|
|
|
Non-U.S.
Dollar Denominated:
|
|
|
|
|
Investment
grade CMBS
|
|
|
180,922
|
|
Non-investment
grade rated subordinated CMBS
|
|
|
206,702
|
|
Non-rated
subordinated CMBS
|
|
|
30,504
|
|
Total
non-U.S. dollar denominated
|
|
|
418,128
|
|
Total
securities held-for-trading
|
|
$
|
1,882,268
|
|
At
March
31, 2008, an aggregate of $1,831,170 in estimated fair value of the Company's
securities held-for-trading was pledged to secure its
collateralized
borrowings.
The
CMBS
held by the Company consist of subordinated securities collateralized by
adjustable and fixed rate commercial and multifamily mortgage loans. The CMBS
provide credit support to the more senior classes of the related commercial
securitization. The Company generally does not own the senior classes of its
below investment grade CMBS. Cash flows from the mortgages underlying the CMBS
generally are allocated first to the senior classes, with the most senior class
having a priority entitlement to cash flow. Then, any remaining cash flow is
allocated generally among the other CMBS classes in order of their relative
seniority. To the extent there are defaults and unrecoverable losses on the
underlying mortgages, resulting in reduced cash flows, the most subordinated
CMBS class will bear this loss first. To the extent there are losses in excess
of the most subordinated class' stated entitlement to principal and interest,
the remaining CMBS classes will bear such losses in order of their relative
subordination.
At
March
31, 2008, the anticipated reported yield based upon the adjusted cost of the
Company's entire subordinated CMBS portfolio was 10.6% per annum. The
anticipated reported yield of the Company's investment grade securities was
6.9%. The Company's anticipated yields to maturity on its subordinated CMBS
and
other securities are based upon a number of assumptions that are subject to
certain business and economic uncertainties and contingencies. Examples of
these
uncertainties include, among other things, the rate and timing of principal
payments (including prepayments, repurchases, defaults, liquidations, and
related expenses), the pass-through or coupon rate, and interest rate
fluctuations. Additional factors that may affect the Company's anticipated
yields to maturity on its Controlling Class CMBS include interest payment
shortfalls due to delinquencies on the underlying mortgage loans, and the timing
and magnitude of credit losses on the mortgage loans underlying the Controlling
Class CMBS that are a result of the general condition of the real estate market
(including competition for tenants and their related credit quality), and
changes in market rental rates. As these uncertainties and contingencies are
difficult to predict and are subject to future events that may alter these
assumptions, no assurance can be given that the anticipated yields to maturity,
discussed above and elsewhere in this report, will be achieved.
Note
5 SECURITIES
AVAILABLE-FOR-SALE
Upon
adoption of FAS 159 as of January 1, 2008, the Company elected the fair value
option for all of its securities. The election of the fair value option
for all of the Company’s securities results in these investments being
classified as trading securities as of January 1, 2008 and to record all changes
in fair value are recorded in the statement of operations. The amortized cost
and estimated fair value of U.S. dollar denominated and non-U.S. dollar
denominated 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
CMBS
IOs
|
|
|
14,725
|
|
|
1,190
|
|
|
-
|
|
|
15,915
|
|
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
CMBS
|
|
|
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
|
|
|
2,035,575
|
|
|
85,334
|
|
|
(247,602
|
)
|
|
1,873,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
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.
Note
6 IMPAIRMENTS
- CMBS
The
Company updates its estimated cash flows for securities subject to Emerging
Issues Task Force Issue 99-20, Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial Interests
in Securitized Financial
Assets
(“EITF
99-20”), on a quarterly basis. The Company compares the yields resulting from
the updated cash flows to the current accrual yields. Prior to the adoption
of
FAS 159, an impairment charge was required under EITF 99-20 if the updated
yield
was lower than the current accrual yield and the security had a market value
less than its adjusted purchase price. The Company carries these securities
at
their estimated fair value on its consolidated statements of financial
condition.
For
the
three months ended March 31, 2007, the Company had fifteen CMBS that required
an
aggregate impairment charge of $1,198. The decline in the updated yields that
caused the impairments is not related to increases in losses but rather changes
in the timing of credit losses and prepayments.
As
a
result of the adoption of FAS 159 on January 1, 2008, the Company will no longer
assess securities elected under the fair value option for other-
than-temporary
impairment because the changes in fair value are recorded in the statement
of
operations rather than as an adjustment to accumulated
other
comprehensive income (loss) in stockholders’ equity.
Note
7 COMMERCIAL
MORTGAGE LOAN POOLS
During
the second quarter of 2004, the Company acquired in a subordinated CMBS in
a
trust 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
8 COMMERCIAL
MORTGAGE LOANS
The
following table summarizes the Company’s commercial real estate loan portfolio
by property type at March 31, 2008 and December 31, 2007:
|
|
Loan
Outstanding
|
|
Weighted
Average
|
|
|
|
March
31, 2008
|
|
|
December
31, 2007
|
|
Yield
|
|
Property
Type
|
|
Amount
|
|
%
|
|
|
Amount
|
|
%
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
52,152
|
|
|
5.2
|
%
|
|
$
|
52,209
|
|
|
5.3
|
%
|
|
9.6
|
%
|
|
9.6
|
%
|
Office
|
|
|
45,574
|
|
|
4.6
|
|
|
|
45,640
|
|
|
4.6
|
|
|
10.3
|
|
|
10.3
|
|
Multifamily
|
|
|
175,092
|
|
|
17.5
|
|
|
|
174,873
|
|
|
17.8
|
|
|
9.9
|
|
|
9.7
|
|
Storage
|
|
|
32,220
|
|
|
3.2
|
|
|
|
32,307
|
|
|
3.3
|
|
|
9.1
|
|
|
9.1
|
|
Land
|
|
|
-
|
|
|
-
|
|
|
|
25,000
|
|
|
2.5
|
|
|
-
|
|
|
9.6
|
|
Hotel
|
|
|
12,149
|
|
|
1.2
|
|
|
|
12,208
|
|
|
1.2
|
|
|
10.4
|
|
|
10.9
|
|
Other
Mixed Use
|
|
|
3,983
|
|
|
0.4
|
|
|
|
3,983
|
|
|
0.5
|
|
|
8.5
|
|
|
8.5
|
|
Total
U.S.
|
|
|
321,170
|
|
|
32.1
|
|
|
|
346,220
|
|
|
35.2
|
|
|
9.8
|
|
|
9.7
|
|
Non-U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
298,795
|
|
|
29.9
|
|
|
|
278,669
|
|
|
28.3
|
|
|
8.7
|
|
|
8.9
|
|
Office
|
|
|
257,768
|
|
|
25.8
|
|
|
|
238,691
|
|
|
24.3
|
|
|
8.4
|
|
|
8.8
|
|
Multifamily
|
|
|
44,318
|
|
|
4.4
|
|
|
|
41,403
|
|
|
4.2
|
|
|
8.4
|
|
|
8.6
|
|
Storage
|
|
|
50,789
|
|
|
5.1
|
|
|
|
51,272
|
|
|
5.2
|
|
|
9.2
|
|
|
9.5
|
|
Industrial
|
|
|
17,174
|
|
|
1.7
|
|
|
|
17,274
|
|
|
1.8
|
|
|
10.3
|
|
|
10.6
|
|
Hotel
|
|
|
4,169
|
|
|
0.4
|
|
|
|
5,016
|
|
|
0.5
|
|
|
10.0
|
|
|
10.1
|
|
Other
Mixed Use
|
|
|
4,980
|
|
|
0.6
|
|
|
|
4,842
|
|
|
0.5
|
|
|
9.0
|
|
|
9.0
|
|
Total
Non -.S.
|
|
|
677,993
|
|
|
67.9
|
|
|
|
637,167
|
|
|
64.8
|
|
|
8.7
|
|
|
8.9
|
|
Total
|
|
$
|
999,163
|
|
|
100.0
|
%
|
|
$
|
983,387
|
|
|
100.0
|
%
|
|
9.1
|
%
|
|
9.2
|
%
|
The
Company finances its non-U.S. dollar denominated loans by borrowing in the
applicable local currency and hedging the un-financed portion.
Activity
for the three months ended March 31, 2008 was as follows:
|
|
Book
Value
|
|
Balance
at December 31, 2007
|
|
$
|
983,387
|
|
Investments
in commercial mortgage loans
|
|
|
-
|
|
Proceeds
from repayment of mortgage loans
|
|
|
(7,768
|
)
|
Provision
for loan loss
|
|
|
(25,000
|
)
|
Foreign
currency and discount accretion
|
|
|
48,544
|
|
Balance
at March 31, 2008
|
|
$
|
999,163
|
|
The
Company recorded a provision for loan losses of $25,190 for the three months
ended March 31, 2008. This provision relates to one loan with a principal
balance of $25,000 and accrued interest of $190. The loan is in default and
due
to the reduction in value of the underlying collateral below the principal
balance of the loan, the Company believes the collectibility of the loan is
not
probable.
Changes
in the reserve for possible loan losses were as follows:
Provision
for possible loan losses, December 31, 2007
|
|
$
|
-
|
|
Provision
for loan losses
|
|
|
25,190
|
|
Reserve
for possible loan losses, March 31, 2008
|
|
$
|
25,190
|
|
Note
9 EQUITY INVESTMENTS
The
following table is a summary of the Company’s equity investments for the three
months ended March 31, 2008:
|
|
Carbon
I
|
|
Carbon
II
|
|
Dynamic
India
Fund
IV *
|
|
Total
|
|
Balance
at December
31, 2007
|
|
$
|
1,636
|
|
$
|
97,762
|
|
$
|
9,350
|
|
$
|
108,748
|
|
Equity
earnings
|
|
|
71
|
|
|
1,938
|
|
|
-
|
|
|
2,009
|
|
Distributions
of earnings
|
|
|
-
|
|
|
(1,904
|
)
|
|
-
|
|
|
(1,904
|
)
|
Balance
at March
31, 2008
|
|
$
|
1,707
|
|
$
|
97,796
|
|
$
|
9,350
|
|
$
|
108,853
|
|
*
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
March
31, 2008, the Company owned approximately 20% of Carbon Capital, Inc. (“Carbon
I”). The Company also owned approximately 26% of Carbon Capital II, Inc.
(“Carbon II”, and collectively with Carbon I, the “Carbon Capital Funds”).
Collectively, the Carbon Capital Funds are private commercial real estate income
opportunity funds managed by the Manager (see Note 13 of the consolidated
financial statements).
The
Company entered into a $50,000 commitment on July 20, 2001 to acquire shares
of
Carbon I. On July 12, 2005, the investment period expired and as repayments
occur, capital will be returned to Carbon I’s investors.
The
Company entered into an aggregate commitment of $100,000 to acquire shares
of
Carbon II. The final obligation to fund capital of $13,346 was called on July
13, 2007.
As
of
March 31, 2008 Carbon II has three assets located in Florida that are in various
stages of resolution. The properties consist on one hotel and two multifamily
properties. Carbon II took title to one of the multifamily properties during
2007. During the three months ended March 31, 2008, Carbon II increased its
loan
loss reserves for the two loans by $498. At March 31, 2008 the total loan loss
reserve for these loans is $3,830. For the property owned, Carbon II established
an impairment charge of $5,181 during 2007.
During
the first quarter of 2008, a $17,700 loan secured by four Class-A office
buildings in Manhattan totaling three million square feet of space defaulted.
The borrower defaulted at maturity in February 2008. The loan has been
restructured, modified and extended to allow for an orderly liquidation of
the
collateral. Interest to the Carbon II position will be paid, to the extent
available, from available cash flow. Carbon II believes a loan loss
reserve is not necessary at March 31, 2008.
Subsequent
to March 31, 2008, Carbon II experienced an additional loan default. A
modification and extension of this loan is being negotiated. All other
commercial real estate loans in the Carbon Capital Funds are performing as
expected.
On
December 22, 2005, the Company entered into an $11,000 commitment to indirectly
acquire shares of Dynamic India Fund IV. At March 31, 2008, the Company’s
capital committed was $11,000, of which $9,350 had been drawn.
Note
10 BORROWINGS
The
Company's borrowings consist of reverse repurchase agreements, credit
facilities, CDOs, senior unsecured notes, senior convertible debt, junior
unsecured notes, trust preferred securities, and commercial mortgage loan
pools.
Certain
information with respect to the Company's borrowings at March 31, 2008 is
summarized as follows:
Borrowing
Type
|
|
Market
Value
of
Borrowings
|
|
Amortized
Cost
of
Borrowings
|
|
Weighted
Average
Borrowing
Rate
|
|
Weighted
Average
Remaining
Maturity
|
|
Estimated
Fair
Value
of Assets
Pledged
|
|
Reverse
repurchase agreements
|
|
$
|
4,515
|
|
$
|
4,515
|
|
|
3.76
|
%
|
|
11
days
|
|
$
|
8,161
|
|
Credit
facilities (1)
|
|
|
712,127
|
|
|
712,127
|
|
|
4.86
|
%
|
|
343
days
|
|
|
1,002,638
|
|
Commercial
mortgage loan pools
|
|
|
1,213,143
|
|
|
1,213,143
|
|
|
4.00
|
%
|
|
4.66
years
|
|
|
1,235,138
|
|
CDOs
(2)
|
|
|
1,216,289
|
|
|
1,832,449
|
|
|
5.65
|
%
|
|
5.33
years
|
|
|
1,772,477
|
|
Senior
unsecured notes (2)
|
|
|
80,864
|
|
|
162,500
|
|
|
7.59
|
%
|
|
9.1
years
|
|
|
-
|
|
Junior
unsecured notes (2)
|
|
|
34,122
|
|
|
79,227
|
|
|
6.56
|
%
|
|
14.1
years
|
|
|
-
|
|
Senior
convertible notes (2)
|
|
|
67,696
|
|
|
80,000
|
|
|
11.75
|
%
|
|
19.4
years
|
|
|
-
|
|
Junior
subordinated notes (2)
|
|
|
68,986
|
|
|
180,477
|
|
|
7.64
|
%
|
|
27.9
years
|
|
|
-
|
|
Total
Borrowings
|
|
$
|
3,397,742
|
|
$
|
4,264,438
|
|
|
5.34
|
%
|
|
5.93
years
|
|
$
|
4,018,414
|
|
(1)
Includes
$4,758 of borrowings under facilities related to commercial mortgage loan
pools.
(2)
As a
result of the adoption of FAS 159 on January 1, 2008, the Company records the
above liabilities at fair value. Changes in fair value are recorded in
unrealized gain on liabilities on the consolidated statement of operations.
For
the three months ended March 31, 2008, $478,318 was recorded as a result of
a
reduction in the fair value of such liabilities.
At
March
31, 2008, 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
|
|
$
|
4,515
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,515
|
|
Credit
facilities
|
|
|
-
|
|
|
-
|
|
|
537,968
|
|
|
174,159
|
|
|
-
|
|
|
-
|
|
|
712,127
|
|
Commercial
mortgage loan pools
|
|
|
2,135
|
|
|
2,074
|
|
|
379,026
|
|
|
116,649
|
|
|
63,884
|
|
|
649,375
|
|
|
1,213,143
|
|
CDOs
|
|
|
6,727
|
|
|
13,359
|
|
|
40,982
|
|
|
140,719
|
|
|
739,196
|
|
|
891,466
|
|
|
1,832,449
|
|
Senior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
162,500
|
|
|
162,500
|
|
Junior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
79,227
|
|
|
79,227
|
|
Senior
convertible notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
80,000
|
|
|
80,000
|
|
Junior
subordinated notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
180,477
|
|
|
180,477
|
|
Total
Borrowings
|
|
$
|
13,377
|
|
$
|
15,433
|
|
$
|
957,976
|
|
$
|
431,527
|
|
$
|
803,080
|
|
$
|
2,043,045
|
|
$
|
4,264,438
|
|
Reverse
Repurchase Agreements and Credit Facilities
The
Company has entered into reverse repurchase agreements to finance most of its
securities that are not financed under its credit facilities or CDOs. The
reverse repurchase agreements bear interest at a LIBOR-based variable
rate.
Under
the
credit facilities and the reverse repurchase agreements, the respective lender
retains the right to mark the underlying collateral to estimated fair value.
A
reduction in the value of pledged assets would require the Company to provide
additional collateral or fund margin calls. From time to time, the Company
may
be required to provide additional collateral or fund margin calls. See “Item 3 -
Quantitative and Qualitative Disclosures About Market Risk” for a discussion of
the Company’s exposure to potential margin calls.
The
Company’s credit facilities can be used to replace existing reverse repurchase
agreement borrowings and to finance the acquisition of mortgage-backed
securities and commercial real estate loans. Outstanding borrowings bear
interest at a variable rate. The following table summarizes the Company’s credit
facilities at March 31, 2008 and December 31, 2007:
|
|
|
|
March
31, 2008
|
|
December
31, 2007
|
|
|
|
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
|
|
$
|
170,843
|
|
$
|
104,157
|
|
$
|
275,000
|
|
$
|
211,088
|
|
$
|
63,912
|
|
Deutsche
Bank AG, Cayman Islands Branch (2)
|
|
|
12/20/08
|
|
|
200,000
|
|
|
141,478
|
|
|
58,522
|
|
|
200,000
|
|
|
174,186
|
|
|
25,814
|
|
Bank
of America, N.A.(3)
|
|
|
9/17/08
|
|
|
100,000
|
|
|
87,292
|
|
|
12,708
|
|
|
100,000
|
|
|
87,706
|
|
|
12,294
|
|
Morgan
Stanley Bank (3)
(4)
|
|
|
2/07/09
|
|
|
300,000
|
|
|
260,014
|
|
|
39,986
|
|
|
300,000
|
|
|
198,621
|
|
|
101,379
|
|
BlackRock
HoldCo 2, Inc. (1)
(5)
|
|
|
3/06/09
|
|
|
60,000
|
|
|
52,500
|
|
|
7,500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
$
|
935,000
|
|
$
|
712,127
|
|
$
|
222,873
|
|
$
|
875,000
|
|
$
|
671,601
|
|
$
|
203,399
|
|
(1)
USD
only
(2)Multicurrency
(3)
Non-USD
only
(4)
Can be
increased up to $15,000 based on the change in exchange rates of the non-U.S.
dollar loans. However, any amounts drawn under this provision must be prepaid
in
ninety days.
(5)
Repaid
in full on April 8, 2008.
The
Company is subject to financial covenants in its credit facilities.
On
October 22, 2007, the Company notified Deutsche Bank AG, Cayman Islands Branch
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.
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.
On
February 15, 2008, Morgan Stanley Bank extended 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. The aforementioned covenants are the most restrictive financial
covenants the Company is subject to at March 31, 2008.
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")
committed 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 Facility. 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
facility bears interest at 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.
Outstanding
borrowings at March 31, 2008 under the Facility totaled $52,500 and were repaid
in full on April 8, 2008.
For
the
quarter ended March 31, 2008, the Company was in compliance with all covenants.
Note
11 PREFERRED
STOCK
On
April
4, 2008, the Company issued $70,125 of 12%
Series E-1 Cumulative Convertible Redeemable Preferred Stock, 12% Series E-2
Cumulative Convertible Redeemable Preferred Stock and 12% Series E-3 Cumulative
Convertible Redeemable Preferred Stock (collectively, the “Series E Preferred
Stock”).
Net
proceeds to the Company were $70,069. Dividends are payable on the convertible
preferred stock at a 12% coupon and the purchaser has the right to convert
the
preferred stock into Common Stock at $7.49 per share (a 12% premium to the
closing price of the Company's Common Stock on March 28, 2008, the pricing
date).
Note
12 COMMON
STOCK
The
following table summarizes Common Stock issued by the Company for the three
months ended March 31, 2008, net of offering costs:
|
|
Shares
|
|
Net Proceeds
|
|
Dividend
Reinvestment Plan
|
|
|
37,060
|
|
$
|
262
|
|
Sales
agency agreement
|
|
|
1,174,383
|
|
|
7,513
|
|
Incentive
fee –
stock based*
|
|
|
316,320
|
|
|
2,116
|
|
Total
|
|
|
1,527,763
|
|
$
|
9,891
|
|
*
See
Note 13 to the consolidated financial statements, Transactions with Affiliates,
for a further description of the Company’s Management Agreement.
On
March
12, 2008, the Company declared dividends to its common stockholders of $0.30
per
share, payable on April 30, 2008 to stockholders of record on March 30, 2008.
For U.S. federal income tax purposes, the dividends are expected to be ordinary
income to the Company’s stockholders.
In
conjunction with the Company’s issuance of the Series E Preferred Stock on April
4, 2008, the Company also issued 3,494,021 shares of Common Stock, resulting
in
net proceeds of $23,356.
Note
13 TRANSACTIONS
WITH AFFILIATES
The
Company has a Management Agreement, an administrative services agreement and
an
accounting services agreement with the Manager, the employer of certain
directors and all of the officers of the Company, under which the Manager and
the Company’s officers manage the Company’s day-to-day investment operations,
subject to the direction and oversight of the Company’s Board of Directors.
Pursuant to the Management Agreement and these other agreements, the Manager
and
the Company’s officers formulate investment strategies, arrange for the
acquisition of assets, arrange for financing, monitor the performance of the
Company’s assets and provide certain other advisory, administrative and
managerial services in connection with the operations of the Company.
On
March
31, 2008, the Company’s unaffiliated directors approved an amended investment
advisory agreement with the Manager. The amended Management Agreement will
expire on March 31, 2009, unless extended. For the full one-year term of the
renewed contract, the Manager has agreed to receive 100% of the management
fee
and any incentive fee in the Company's Common Stock. The stock issued to the
Manager under this plan will be restricted from sale until six months after
it
is received.
Other
significant changes pursuant to the amended Management Agreement include a
reduction in the quarterly base management fee from 0.50% of stockholders'
equity to 0.375% for the first $400 million in average total stockholders'
equity; 0.3125% for the next $400 million of average total stockholders' equity
and 0.25% for the average total stockholders' equity in excess of $800 million.
Under the terms of the prior Management Agreement, the Company paid the Manager
a base management fee equal to 2.0% of the quarterly average total stockholders’
equity for the applicable quarter. The amended Management Agreement continues
to
provide that the Company will grant the Manager Common Stock equal to one-half
of one percent (0.5%) of the total number of shares of the Company's Common
Stock outstanding as of a specified date in the fourth quarter of each
year.
The
amended Management Agreement also provides for the Manager to receive a
quarterly incentive fee equal to 25% of the amount by which the applicable
quarter's Operating Earnings (as defined in the Management Agreement) of
the Company (before incentive fee) plus realized gains, net foreign currency
gains and decreases in expense associated with reversals of credit impairments
on commercial mortgage loans; less realized losses, net foreign currency losses
and increases in expense associated with credit impairments on commercial
mortgage loans exceeds the weighted average issue price per share of the
Company's Common Stock multiplied by the ten-year Treasury note rate plus 4.0%
per annum (expressed as a quarterly percentage), multiplied by the weighted
average number of shares of the Company's Common Stock outstanding during the
applicable quarterly period. The Management Agreement continues to provide
that
the incentive fee payable to the Manager shall be subject to a rolling
four-quarter high watermark.
Under
the
terms of the prior Management Agreement, the Manager was entitled to receive
an
incentive fee equal to 25% of the amount by which the rolling four-quarter
GAAP
net income before the incentive fee exceeds the greater of 8.5% or 400 basis
points over the ten-year Treasury note multiplied by the adjusted per share
issue price of the Company’s Common Stock ($11.33 per common share at March 31,
2008). Additionally, up to 30% of the incentive fees earned in 2007 or after
was
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
where one-half of one percent of common shares outstanding as of December 31st
is paid to the Manager.
The
following is a summary of management and incentive fees incurred for the three
months ended March 31, 2008 and 2007:
|
|
For the Three Months Ended
|
|
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Management
fee
|
|
$
|
3,275
|
|
$
|
3,520
|
|
Incentive
fee
|
|
|
10,544
|
|
|
2,724
|
|
Incentive
fee- stock based
|
|
|
399
|
|
|
709
|
|
Total
management and incentive fees
|
|
$
|
14,218
|
|
$
|
6,953
|
|
At
March
31, 2008 and 2007, management and incentive fees of $13,366 and $11,248,
respectively, remain payable to the Manager and are included on the accompanying
consolidated statement of financial condition as a component of other
liabilities. In accordance with the provisions of the Management Agreement,
the
Company recorded reimbursements to the Manager of $125 and $117 for certain
expenses incurred on behalf of the Company during the three months ended March
31, 2008 and 2007, respectively.
The
Company also has administration and accounting services agreements with the
Manager. Under the terms of the administration services agreement, the Manager
provides financial reporting, audit coordination and accounting oversight
services to the Company. Under the terms of the accounting services agreement,
the Manager provides investment accounting services to the Company. For the
three months ended March 31, 2008 and 2007, the Company recorded administration
and investment accounting service fees of $255 and $181, respectively, which
are
included in general and administrative expense on the accompanying consolidated
statements of operations.
The
special servicer on 33 of the Company's 39 Controlling Class trusts is Midland
Loan Services, Inc. ("Midland"), a wholly owned indirect subsidiary of the
PNC
Financial Services Group, Inc. (“PNC Bank”), and therefore a related party of
the Manager. The Company's fees for Midland’s services are at market rates.
On
March
7, 2008, the Company entered into a $60,000 credit facility with a subsidiary
of
BlackRock, Inc. BlackRock, Inc. is the parent of the Company’s manager,
BlackRock Financial Management, Inc. The facility has a term of 364 days with
two 364-day extension periods, subject to lender approval. The facility is
collateralized by a pledge of the Company’s investment in Carbon II and gives
the lender the option to purchase the Carbon II investment at fair market value
(as determined by the terms of the agreement) from the Company. Outstanding
borrowings at March 31, 2008 under this facility totaled $52,500 and were repaid
in full on April 8, 2008.
During
2001, the Company entered into a $50,000 commitment to acquire shares of Carbon
I, a private commercial real estate income opportunity fund managed by the
Manager. The Company’s investment in Carbon I at March 31, 2008 was $1,707. The
Company does not incur any additional management or incentive fees to the
Manager related to its investment in Carbon I. At March 31, 2008, the Company
owned approximately 20% of the outstanding shares of Carbon I.
The
Company entered into an aggregate commitment of $100,000 to acquire shares
of
Carbon II, a private commercial real estate income opportunity fund managed
by
the Manager. The Company’s investment in Carbon II at March 31, 2008 was
$97,796. The Company does not incur any additional management or incentive
fees
to the Manager related to its investment in Carbon II. On March 31, 2008, the
Company owned approximately 26% of the outstanding shares of Carbon
II.
During
2000, the Company completed the acquisition of CORE Cap, Inc. At the time of
the
CORE Cap, Inc. acquisition, the Manager agreed to pay GMAC (CORE Cap, Inc.’s
external advisor) $12,500 over a ten-year period (“Installment Payment”) to
purchase the right to manage the Core Cap, Inc. assets under the existing
management contract (“GMAC Contract”). The GMAC Contract had to be terminated in
order to allow the Company to complete the merger, as the Company’s management
agreement with the Manager did not provide for multiple managers. As a result
the Manager offered to buy-out the GMAC Contract as the Manager estimated it
would receive incremental fees above and beyond the Installment Payment, and
thus was willing to pay for, and separately negotiate, the termination of the
GMAC Contract. Accordingly, the value of the Installment Payment was not
considered in the Company’s allocation of its purchase price to the net assets
acquired in the acquisition of CORE Cap, Inc. The Company agreed that should
the
Management Agreement with its Manager be terminated, not renewed or not extended
for any reason other than for cause, the Company would pay to the Manager an
amount equal to the Installment Payment less the sum of all payments made by
the
Manager to GMAC. At March 31, 2008, the Installment Payment would be $3,000
payable over three years. The Company is not required to accrue for this
contingent liability because it is not probable.
Note
14 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The
Company accounts for its derivative investments under FAS 133, 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 in the consolidated statement of financial condition
at
estimated fair value. If the derivative is designated as a cash flow hedge,
the
effective portions of change in the estimated fair value of the derivative
are
recorded in OCI and are recognized in 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, credit
facilities and the floating rate debt of its CDOs. On the date in which the
derivative contract is entered, the Company designates the derivative as either
a cash flow hedge or a trading derivative.
Occasionally,
counterparties will require the Company, or the Company will require
counterparties, to provide collateral for the interest rate swap agreements
in
the form of margin deposits. Such deposits are recorded as a component of either
other assets, other liabilities or restricted cash. Should the counterparty
fail
to return deposits paid, the Company would be at risk for the estimated fair
value of that asset. At March 31, 2008, the balance of such net deposits pledged
to counterparties as collateral under these agreements totaled $4,925 and was
included in restricted cash on the Company’s consolidated balance sheet.
At
March
31, 2008, the Company had interest rate swaps with notional amounts aggregating
$110,500 designated as cash flow hedges of borrowings under reverse repurchase
agreements, credit facilities and the floating rate debt of its CDOs. Cash
flow
hedges with an estimated fair value of $5,980 are included in derivative
liabilities in the consolidated statement of financial condition. For the three
months ended March 31, 2008, the net change in the estimated fair value of
the
interest rate swaps was a decrease of $7,450, of which $79 was deemed
ineffective and is included as an increase of interest expense and $7,371 was
recorded as a reduction of OCI. At March 31, 2008, the $110,500 notional of
swaps designated as cash flow hedges had a weighted average remaining term
of
3.9 years.
During
the three months ended March 31, 2008, the Company terminated four of its
interest rate swaps with a notional amount of $121,000 that were designated
as
cash flow hedges of borrowings under reverse repurchase agreements and credit
facilities. The Company will reclassify the $14,117 loss in value from OCI
to
interest expense over 9.3 years, which was the weighted average remaining term
of the swaps at the time they were closed out. At March 31, 2008, the Company
has, in aggregate, $16,512 of net losses related to terminated swaps recorded
in
OCI. For the quarter ended March 31, 2008, $409 was reclassified as an increase
to interest expense and $2,611 will be reclassified as an increase to interest
expense for the next twelve months.
Upon
the
adoption of FAS 159 on January 1, 2008, the Company redesignated interest rate
swaps with notional amounts aggregating $875,548 as trading swaps. Accordingly,
the election of the fair value option for these swaps resulted in a
reclassification of $(25,410) from accumulated OCI to opening distributions
in
excess of earnings as of January 1, 2008. At March 31, 2008, the Company had
interest rate swaps with notional amounts aggregating $1,205,162 designated
as
trading derivatives. Trading derivatives with an estimated fair value of $770
are included in derivative assets on the consolidated statement of financial
condition and trading derivatives with an estimated fair value of $58,981 are
included in derivative liabilities on the consolidated statement of financial
condition. For the three months ended March 31, 2008, the change in estimated
fair value for these trading derivatives was a decrease of $29,513 and is
included as a component of gain (loss) on securities held-for-trading on the
consolidated statement of operations. At March 31, 2008, the $1,205,162 notional
of swaps designated as trading derivatives had a weighted average remaining
term
of 3.1 years.
At
March
31, 2008, the Company had a forward LIBOR cap with a notional amount of $85,000
and an estimated fair value at March 31, 2008, of $285 which is included in
derivative assets, and the change in estimated fair value related to this
derivative of $90 is included as a component of gain (loss) in securities
held-for-trading on the consolidated statement of operations.
Foreign
Currency
The
U.S.
dollar is considered the functional currency for certain of the Company’s
international subsidiaries. Foreign currency transaction gains or losses are
recognized in the period incurred and are included in foreign currency gain
(loss) in the consolidated statement of operations. Gains and losses on foreign
currency forward commitments are included in foreign currency gain (loss) in
the
consolidated statements of operations. The Company recorded foreign currency
gains (losses) of $(8,041) and $1,484 for
the
three months ended March 31, 2008 and 2007, respectively.
Foreign
currency agreements at March 31, 2008 consisted of the following:
|
|
Estimated
Fair
Value
|
|
Unamortized
Cost
|
|
Average
Remaining Term
|
|
Currency
swaps
|
|
$
|
(21,300
|
)
|
$
|
-
|
|
|
8.3
years
|
|
CDO
currency swaps
|
|
$
|
16,191
|
|
$
|
-
|
|
|
9.6
years
|
|
Forwards
|
|
$
|
(10,689
|
)
|
$
|
-
|
|
|
23
days
|
|
Consistent
with SFAS No. 52, Foreign
Currency Translation
(“FAS
52”), FAS 133 allows hedging of the foreign currency risk of a net investment
in
a foreign operation. The Company primarily uses foreign currency forward
contracts to manage the foreign exchange risk associated with the Company’s
investment in its non-U.S. dollar functional currency foreign subsidiary. In
accordance with FAS 52, the Company records the change in the carrying amount
of
this investment in the cumulative translation adjustment account within
accumulated OCI. For the three months ended March 31, 2008 the foreign currency
gain translation included in accumulated OCI was $9,117. Simultaneously, the
effective portion of the hedge of this exposure is also recorded in the
cumulative translation adjustment account and any ineffective portion of net
investment hedges is recorded in income.
Note
15 NET INTEREST INCOME
The
following is a presentation of the Company’s net interest income for the three
months ended March 31, 2008 and 2007:
|
|
For
the Three Months
Ended
March
31,
|
|
|
|
2008
|
|
2007
|
|
Interest
Income:
|
|
|
|
|
|
|
|
Interest
from securities
|
|
$
|
52,269
|
|
$
|
48,180
|
|
Interest
from commercial mortgage loans
|
|
|
23,732
|
|
|
11,166
|
|
Interest
from commercial mortgage loan pools
|
|
|
12,865
|
|
|
13,132
|
|
Interest
from cash and cash equivalents
|
|
|
1,064
|
|
|
924
|
|
Total
interest income
|
|
|
89,930
|
|
|
73,402
|
|
Interest
Expense:
|
|
|
|
|
|
|
|
Interest
–
securities
|
|
|
56,854
|
|
|
55,839
|
|
Total
interest expense
|
|
|
56,854
|
|
|
55,839
|
|
Net
interest income
|
|
$
|
33,076
|
|
$
|
17,563
|
|
Note
16 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 and an additional $91,698 from January
1, 2008 through May 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 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 such an 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 liabilities 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, during the first quarter of 2008, 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.
During
the first quarter of 2008, the Company raised $7,513 of capital by issuing
common shares under its sales agency agreement. Through May 14, 2008, the
Company raised an additional $4,847 under the sales agency agreement. On April
4, 2008, in a privately negotiated transaction, the Company issued $70,125
of
Series E Preferred Stock and 3,494,021 shares of Common Stock, resulting in
combined net proceeds of $93,425. The Company repaid $52,500 of its loan from
HoldCo 2 on April 8, 2008. As a result, $60,000 of unused borrowing capacity
became available under this facility.
In
the
event of a further reduction in market liquidity, the Company’s short-term (one
year or less) liquidity needs will be met primarily with $65,649 of cash and
cash equivalents held as of March 31, 2008 as well as from cash generated from
the aforementioned capital raises (net of debt repayments) that occurred
subsequent to March 31, 2008.
ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
All
currency figures expressed herein are expressed in thousands, except share
and
per share amounts.
I. General
Anthracite
Capital, Inc., a Maryland corporation, and subsidiaries (collectively, the
"Company") is a specialty finance company that invests in commercial real estate
assets on a global basis. The Company 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 more than $1.364 trillion of assets under management at March
31,
2008. The Manager provides an operating platform that incorporates significant
asset origination, risk management, and operational capabilities.
The
Company’s fixed income investment activity continues to be managed to maintain a
positive, though controlled, exposure to both long- and short-term interest
rates through its active hedging strategies. See “Item 3 - Quantitative and
Qualitative Disclosures About Market Risk” for a discussion of interest rates
and their effect on earnings and book value.
The
following table illustrates the mix of the Company’s asset types at March 31,
2008 and December 31, 2007:
|
|
Carrying
Value at
|
|
|
|
March
31, 2008
|
|
December
31, 2007
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities
|
|
$
|
1,881,259
|
|
|
44.5
|
%
|
$
|
2,274,151
|
|
|
49.3
|
%
|
Commercial
real estate loans(1)
|
|
|
1,098,666
|
|
|
26.0
|
|
|
1,082,785
|
|
|
23.5
|
|
Commercial
mortgage loan pools(2)
|
|
|
1,235,138
|
|
|
29.2
|
|
|
1,240,793
|
|
|
26.9
|
|
Commercial
real estate equity(3)
|
|
|
9,350
|
|
|
0.2
|
|
|
9,350
|
|
|
0.2
|
|
Total
commercial real estate assets
|
|
|
4,224,413
|
|
|
99.9
|
|
|
4,607,079
|
|
|
99.9
|
|
Residential
mortgage-backed securities
|
|
|
1,009
|
|
|
0.1
|
|
|
10,183
|
|
|
0.1
|
|
Total
|
|
$
|
4,225,422
|
|
|
100.0
|
%
|
$
|
4,617,262
|
|
|
100.0
|
%
|
|
(1)
|
Includes
equity investments in the Carbon Capital
funds.
|
|
(2)
|
Represents
a Controlling Class CMBS that is consolidated for accounting purposes.
See
Note 5 of the consolidated financial
statements.
|
|
(3)
|
Represents
equity investment in Dynamic India Fund
IV
|
During
the three months ended March 31, 2008, the Company purchased a total of $53,515
of commercial real estate assets, which were all non-U.S. dollar denominated
commercial mortgage-backed securities (“CMBS”).
Summary
of Commercial Real Estate Assets by Local Currency
A
summary
of the Company’s commercial real estate assets with estimated fair values in
local currencies at March 31, 2008 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
|
|
$
|
1,463,133
|
|
$
|
420,674
|
|
|
-
|
|
$
|
1,235,138
|
|
$
|
3,118,945
|
|
$
|
3,118,945
|
|
GBP
|
|
£ |
29,545
|
|
£ |
44,888
|
|
|
-
|
|
|
-
|
|
£ |
74,433
|
|
|
147,935
|
|
EURO
|
|
€ |
146,615
|
|
€ |
352,439
|
|
|
-
|
|
|
-
|
|
€ |
499,054
|
|
|
790,776
|
|
Canadian
Dollars
|
|
C$ |
87,794
|
|
C$ |
6,254
|
|
|
-
|
|
|
-
|
|
C$ |
94,048
|
|
|
91,660
|
|
Japanese
Yen
|
|
¥ |
4,132,728
|
|
|
-
|
|
|
-
|
|
|
-
|
|
¥ |
4,132,728
|
|
|
41,520
|
|
Swiss
Francs
|
|
|
-
|
|
CHF |
23,962
|
|
|
-
|
|
|
-
|
|
CHF |
23,962
|
|
|
24,227
|
|
Indian
Rupees
|
|
|
-
|
|
|
-
|
|
Rs |
374,187
|
|
|
-
|
|
Rs |
347,187
|
|
|
9,350
|
|
Total
USD Equivalent
|
|
$
|
1,881,259
|
|
$
|
1,098,666
|
|
$
|
9,350
|
|
$
|
1,235,138
|
|
$
|
4,224,413
|
|
$
|
4,224,413
|
|
(1)
Includes
the Company’s investments in the Carbon Capital Funds of $99,503 at March 31,
2008.
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
|
|
|
-
|
|
|
CHF23,939
|
|
|
-
|
|
|
-
|
|
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 Capital Funds at December
31,
2007.
The
Company has foreign currency rate exposure related to its non-U.S. dollar
denominated assets. The Company’s primary foreign currency exposures are the
Euro, British pound and Canadian dollar. Changes in currency rates can adversely
impact the estimated fair value and earnings of the Company’s non-U.S. dollar
investments. The Company mitigates this impact by utilizing local
currency-denominated financing on its foreign investments and foreign currency
forward commitments and swaps to hedge the net exposure.
Commercial
Real Estate Assets Portfolio Activity
The
following table details the par value, carrying value, adjusted purchase price,
and expected yield of the Company’s commercial real estate securities included
in as well as outside of the Company’s CDOs at March 31, 2008. The dollar price
(“Dollar Price”) represents the estimated fair value or adjusted purchase price
of a security, respectively, relative to its par value.
Commercial
real estate securities outside CDOs
|
|
Par
|
|
Carrying
Value
|
|
Dollar
Price
|
|
Adjusted
Purchase
Price
|
|
Dollar
Price
|
|
Expected
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
$
|
239,972
|
|
$
|
175,149
|
|
$
|
72.99
|
|
$
|
205,983
|
|
$
|
85.84
|
|
|
6.89
|
%
|
Investment
grade REIT debt
|
|
|
121
|
|
|
117
|
|
|
96.32
|
|
|
123
|
|
|
101.41
|
|
|
5.27
|
|
CMBS
rated BB+ to B
|
|
|
555,256
|
|
|
229,715
|
|
|
41.37
|
|
|
422,246
|
|
|
76.05
|
|
|
8.88
|
|
CMBS
rated B- or lower
|
|
|
514,052
|
|
|
119,241
|
|
|
23.20
|
|
|
164,376
|
|
|
31.98
|
|
|
10.90
|
|
CDO
Investments
|
|
|
347,807
|
|
|
37,926
|
|
|
10.90
|
|
|
63,390
|
|
|
18.23
|
|
|
22.39
|
|
CMBS
Interest Only securities (“IOs”)
|
|
|
140,207
|
|
|
3,115
|
|
|
2.22
|
|
|
2,477
|
|
|
1.77
|
|
|
22.09
|
|
Multifamily
agency securities
|
|
|
353
|
|
|
360
|
|
|
102.00
|
|
|
515
|
|
|
146.09
|
|
|
6.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
commercial real estate assets outside
CDOs
|
|
|
1,797,768
|
|
|
565,623
|
|
|
31.46
|
|
|
859,110
|
|
|
47.79
|
|
|
9.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate loans and equity outside CDOs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate loans
|
|
|
517,518
|
|
|
605,092
|
|
|
|
|
|
567,121
|
|
|
|
|
|
|
|
Commercial
mortgage loan pools
|
|
|
1,152,654
|
|
|
1,235,138
|
|
|
107.16
|
|
|
1,235,138
|
|
|
107.16
|
|
|
4.15
|
|
Commercial
real estate
|
|
|
9,350
|
|
|
9,350
|
|
|
|
|
|
9,350
|
|
|
|
|
|
|
|
Total
commercial real estate loans and equity outside CDOs
|
|
|
1,679,522
|
|
|
1,849,580
|
|
|
107.16
|
|
|
1,811,609
|
|
|
107.16
|
|
|
4.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate assets included in CDOs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
|
772,550
|
|
|
647,310
|
|
|
83.79
|
|
|
731,366
|
|
|
94.67
|
|
|
7.12
|
|
Investment
grade REIT debt
|
|
|
223,324
|
|
|
219,685
|
|
|
98.37
|
|
|
224,539
|
|
|
100.54
|
|
|
5.85
|
|
CMBS
rated BB+ to B
|
|
|
627,436
|
|
|
374,672
|
|
|
59.71
|
|
|
484,836
|
|
|
77.27
|
|
|
9.97
|
|
CMBS
rated B- or lower
|
|
|
200,003
|
|
|
46,955
|
|
|
23.48
|
|
|
72,547
|
|
|
36.27
|
|
|
14.82
|
|
CDO
Investments
|
|
|
4,000
|
|
|
2,880
|
|
|
72.00
|
|
|
3,509
|
|
|
87.72
|
|
|
7.81
|
|
Credit
tenant lease
|
|
|
23,090
|
|
|
24,133
|
|
|
104.52
|
|
|
23,717
|
|
|
102.72
|
|
|
5.66
|
|
Commercial
real estate loans
|
|
|
504,712
|
|
|
493,574
|
|
|
97.79
|
|
|
439,189
|
|
|
87.02
|
|
|
8.63
|
|
Total
commercial real estate assets included in CDOs
|
|
|
2,355,115
|
|
|
1,809,209
|
|
|
76.82
|
|
|
1,979,703
|
|
|
84.06
|
|
|
8.28
|
%
|
Total
commercial real estate assets
|
|
$
|
5,832,405
|
|
$
|
4,224,413
|
|
|
|
|
$
|
4,675,422
|
|
|
|
|
|
|
|
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 of the Company’s CDOs at December 31, 2007:
Commercial
real estate securities outside CDOs
|
|
Par
|
|
Carrying
Value
|
|
Dollar
Price
|
|
Adjusted
Purchase
Price
|
|
Dollar
Price
|
|
Expected
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
$
|
179,638
|
|
$
|
149,856
|
|
$
|
83.42
|
|
$
|
158,216
|
|
$
|
88.07
|
|
|
6.56
|
%
|
Investment
grade 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
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 assets 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
|
|
|
|
|
|
|
|
The
Company’s CDO offerings allow the Company to match fund its commercial real
estate portfolio by issuing long-term debt to finance long-term assets. The
CDO
debt is non-recourse to the Company; therefore, the Company’s losses are limited
to its equity investment in the CDO. The CDO debt is also hedged to protect
the
Company from an increase in short-term interest rates. At March 31, 2008, 49%
of
the estimated fair value of the Company’s subordinated CMBS was match funded in
the Company's CDOs in this manner. The Company retained 100% of the equity
of
CDOs I, II, III, HY3 and Euro (each as defined below) and recorded the
transactions on its consolidated financial statements as secured
financing.
The
table
below summarizes the Company’s CDO collateral and debt at March 31,
2008.
|
|
Collateral at March 31, 2008
|
|
|
Debt at March 31, 2008
|
|
|
|
|
|
Adjusted
Purchase Price
|
|
Loss Adjusted
Yield
|
|
|
Adjusted Issue
Price
|
|
Weighted
Average Cost
of Funds *
|
|
Net
Spread
|
|
CDO
I
|
|
$ |
465,361 |
|
|
8.16
|
%
|
|
$
|
396,491
|
|
|
6.79
|
%
|
|
1.37
|
%
|
CDO
II
|
|
|
301,961
|
|
|
7.79
|
|
|
|
269,250
|
|
|
5.66
|
|
|
2.13
|
%
|
CDO
III
|
|
|
380,030
|
|
|
7.11
|
|
|
|
376,108
|
|
|
4.73
|
|
|
2.38
|
%
|
CDO
HY3
|
|
|
415,094
|
|
|
9.80
|
|
|
|
373,070
|
|
|
5.62
|
|
|
4.18
|
%
|
Euro
CDO
|
|
|
422,912
|
|
|
8.34
|
|
|
|
417,530
|
|
|
5.73
|
|
|
2.61
|
%
|
Total
**
|
|
$
|
1,985,358
|
|
|
8.28
|
%
|
|
$
|
1,832,449
|
|
|
5.72
|
%
|
|
2.56
|
%
|
*
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.
Real
Estate Credit Profile of Below Investment Grade CMBS
The
Company’s below investment grade CMBS investment activity is part of two
portfolios: Controlling Class CMBS and other below investment grade CMBS. The
Company considers the CMBS securities where it maintains the right to influence
the foreclosure/workout process on the underlying loans its controlling class
CMBS (“Controlling Class”). The distinction between the two is in the rights the
Company obtains with its investment in Controlling Class CMBS. Controlling
Class
rights allow the Company to influence the workout and/or disposition of defaults
that occur in the underlying loans. These securities absorb the first losses
realized in the underlying loan pools. The coupon payment on the non-rated
security also can be reduced for special servicer fees charged to the trust.
The
next highest rated security in the structure then generally will be downgraded
to non-rated and become the first to absorb losses and expenses from that point
on. At March 31, 2008, the Company owned 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 $59,621,932. At March 31, 2008, subordinated Controlling
Class CMBS with a par of $1,582,866 were included on the Company’s consolidated
statement of financial condition and subordinated Controlling Class CMBS with
a
par of $713,850 were held as collateral by CDO HY1 and CDO HY2 (each as defined
below).
The
Company’s other below investment grade CMBS have more limited rights associated
with its ownership to influence the workout and/or disposition of underlying
loan defaults. The total par of the Company’s other below investment grade CMBS
at March 31, 2008 was $313,882; the average credit protection, or subordination
level, of this portfolio was 0.95%.
The
Company’s investment in its subordinated Controlling Class CMBS securities by
credit rating category at March 31, 2008 was as follows:
|
|
Par
|
|
Estimated
Fair
Value
|
|
Dollar
Price
|
|
Adjusted
Purchase
Price
|
|
Dollar
Price
|
|
Weighted
Average
Subordination
Level
|
|
BB+
|
|
$
|
277,334
|
|
$
|
132,667
|
|
|
47.84
|
|
$
|
228,801
|
|
|
82.50
|
|
|
4.17
|
%
|
BB
|
|
|
191,486
|
|
|
77,122
|
|
|
40.28
|
|
|
155,463
|
|
|
81.19
|
|
|
2.80
|
%
|
BB-
|
|
|
185,771
|
|
|
83,999
|
|
|
45.22
|
|
|
134,218
|
|
|
72.25
|
|
|
4.88
|
%
|
B+
|
|
|
106,575
|
|
|
42,831
|
|
|
40.19
|
|
|
69,479
|
|
|
65.19
|
|
|
2.21
|
%
|
B
|
|
|
136,636
|
|
|
52,759
|
|
|
38.61
|
|
|
82,882
|
|
|
60.66
|
|
|
1.87
|
%
|
B-
|
|
|
123,361
|
|
|
34,092
|
|
|
27.64
|
|
|
64,207
|
|
|
52.05
|
|
|
1.34
|
%
|
CCC+
|
|
|
6,868
|
|
|
1,966
|
|
|
28.63
|
|
|
3,340
|
|
|
48.63
|
|
|
1.14
|
%
|
CCC
|
|
|
22,314
|
|
|
4,809
|
|
|
21.55
|
|
|
7,658
|
|
|
34.32
|
|
|
0.88
|
%
|
NR
|
|
|
532,521
|
|
|
98,701
|
|
|
18.53
|
|
|
137,274
|
|
|
25.78
|
|
|
n/a
|
|
Total
|
|
$
|
1,582,866
|
|
$
|
528,946
|
|
|
33.42
|
|
$
|
883,322
|
|
|
55.81
|
|
|
|
|
The
Company’s investment in its subordinated Controlling Class CMBS securities by
credit rating category at December 31, 2007 was 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
|
|
|
|
|
During
the three months ended March 31, 2008, the loan pools were paid down by
$1,126,054. Pay down proceeds are distributed to the highest rated CMBS class
first and reduce the percent of total underlying collateral represented by
each
rating category.
As
the
portfolio matures and expected losses occur, subordination levels of the lower
rated classes of a CMBS investment will be reduced. This may cause the lower
rated classes to be downgraded, which would negatively affect their estimated
fair value and therefore the Company’s net asset value. Reduced estimated fair
value would negatively affect the Company’s ability to finance any such
securities that are not financed through a CDO or similar matched funding
vehicle. In some cases, securities held by the Company may be upgraded to
reflect seasoning of the underlying collateral and thus would increase the
estimated fair value of the securities. During the three months ended March
31,
2008, one security in one of the Company’s Controlling Class CMBS was upgraded
by at least one rating agency and five securities in one Controlling Class
CMBS
were downgraded. Additionally, at least one rating agency upgraded six of the
Company’s non-Controlling Class commercial real estate securities and downgraded
four.
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.
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
$857,108 related to principal of the underlying loans will not be recoverable,
of which $410,155 is expected to occur over the next five years. The total
loss
estimate of $857,108 represents 1.4% of the total underlying loan pools.
The
Company considers delinquency information from the Lehman Brothers Conduit
Guide
to be the most relevant benchmark to measure credit performance and market
conditions applicable to its Controlling Class CMBS holdings. The year of
issuance, or vintage year, is important, as older loan pools will tend to have
more delinquencies than newly underwritten loans. The Company owns Controlling
Class CMBS issued in 1998, 1999, and 2001 through 2007. Comparable delinquency
statistics referenced by vintage year as a percentage of par outstanding at
March 31, 2008 are shown in the table below:
Vintage
Year
|
|
Underlying
Collateral
|
|
Delinquencies
Outstanding
|
|
Lehman Brothers
Conduit
Guide
|
|
1998
|
|
$
|
2,609,523
|
|
|
2.02
|
%
|
|
0.81
|
%
|
1999
|
|
$
|
507,956
|
|
|
3.10
|
%
|
|
0.83
|
%
|
2001
|
|
$
|
809,251
|
|
|
1.65
|
%
|
|
0.83
|
%
|
2002
|
|
$
|
950,721
|
|
|
0.00
|
%
|
|
0.62
|
%
|
2003
|
|
$
|
1,941,127
|
|
|
1.83
|
%
|
|
0.87
|
%
|
2004
|
|
$
|
6,309,388
|
|
|
0.58
|
%
|
|
0.39
|
%
|
2005
|
|
$
|
11,854,334
|
|
|
0.56
|
%
|
|
0.41
|
%
|
2006
|
|
$
|
13,704,612
|
|
|
0.72
|
%
|
|
0.27
|
%
|
2007
|
|
$
|
20,935,020
|
|
|
0.27
|
%
|
|
0.17
|
%
|
Total
|
|
$
|
59,621,932
|
|
|
0.62
|
%
|
|
0.34
|
%*
|
*
Weighted average based on current principal balance.
Delinquencies
on the Company’s CMBS collateral as a percent of principal are in line with
expectations. While the
Company’s portfolio modestly under-performed the market in the first quarter,
the absolute amount of the delinquencies experienced by the Company remains
low.
These
seasoning criteria generally will adjust for the lower delinquencies that occur
in newly originated collateral. See “Item 7A - Quantitative and Qualitative
Disclosures About Market Risks” for a detailed discussion of how delinquencies
and loan losses affect the Company.
The
following table sets forth certain information relating to the aggregate
principal balance and payment status of delinquent commercial mortgage loans
underlying the Controlling Class CMBS held by the Company at March 31,
2008:
|
|
March
31, 2008
|
|
|
|
Principal
|
|
Number
of
Loans
|
|
%
of
Collateral
|
|
Past
due 30 days to 59 days
|
|
$
|
105,194
|
|
|
16
|
|
|
0.18
|
%
|
Past
due 60 days to 89 days
|
|
$
|
18,915
|
|
|
7
|
|
|
0.03
|
%
|
Past
due 90 days or more
|
|
$
|
186,909
|
|
|
27
|
|
|
0.31
|
%
|
Real
Estate owned
|
|
$
|
40,845
|
|
|
13
|
|
|
0.07
|
%
|
Foreclosure
|
|
$
|
15,120
|
|
|
2
|
|
|
0.03
|
%
|
Total
Delinquent
|
|
$
|
366,983
|
|
|
65
|
|
|
0.62
|
%
|
Total
Collateral Balance
|
|
$
|
59,621,932
|
|
|
4,814
|
|
|
|
|
Of
the 65
delinquent loans at March 31, 2008, 13 loans were real estate owned and being
marketed for sale, 2 loans were in foreclosure and the remaining 50 loans were
in some form of workout negotiations. The Controlling Class CMBS owned by the
Company have a delinquency rate of 0.62%. During 2008, the underlying collateral
experienced early payoffs of $1,126,054, representing 1.89% of the quarter-end
pool balance. These loans were paid off at par with no loss. Aggregate losses
related to the underlying collateral of $498 were realized during three months
ended March 31, 2008. This brings cumulative realized losses to $127,402, which
is 13.0% of total estimated losses. These losses include special servicer and
other workout expenses. This experience to date is in line with the Company's
loss expectations. Realized losses and special servicer expenses are expected
to
increase on the underlying loans as the portfolio matures. Special servicer
expenses are also expected to increase as portfolios mature.
To
the
extent that realized losses differ from the Company’s original loss estimates,
it may be necessary to reduce or increase the projected yield on the applicable
CMBS investment to better reflect such investment’s expected earnings net of
expected losses, from the date of purchase. While realized losses on individual
assets may be higher or lower than original estimates, the Company currently
believes its aggregate loss estimates and yields remain
appropriate.
The
Company manages its credit risk through disciplined underwriting,
diversification, active monitoring of loan performance and exercise of its
right
to influence the workout process for delinquent loans as early as possible.
The
Company maintains diversification of credit exposures through its underwriting
process and can shift its focus in future investments by adjusting the mix
of
loans in subsequent acquisitions. The profile of the loans underlying the
Company’s CMBS by property type at March
31,
2008
was as
follows:
|
|
March 31, 2008
Exposure
|
|
Property
Type
|
|
Collateral
Balance
|
|
% of
Total
|
|
Office
|
|
$
|
20,145,993
|
|
|
33.8
|
%
|
Retail
|
|
|
16,928,041
|
|
|
28.4
|
|
Multifamily
|
|
|
13,068,419
|
|
|
21.9
|
|
Industrial
|
|
|
4,512,265
|
|
|
7.6
|
|
Lodging
|
|
|
4,141,535
|
|
|
6.9
|
|
Healthcare
|
|
|
327,933
|
|
|
0.6
|
|
Other
|
|
|
497,746
|
|
|
0.8
|
|
Total
|
|
$
|
59,621,932
|
|
|
100
|
%
|
At
March
31, 2008, the estimated fair value of the Company’s holdings of subordinated
Controlling Class CMBS is $354,376 lower than the adjusted cost for these
securities, which consists of a gross unrealized gain of $4,041 and a gross
unrealized loss of $358,417. The adjusted purchase price of the Company’s
subordinated Controlling Class CMBS portfolio at March 31, 2008 represents
approximately 55.8% of its par amount. The estimated fair value of the Company’s
subordinated Controlling Class CMBS portfolio at March 31, 2008 represents
approximately 33.4% of its par amount. As the portfolio matures, the Company
expects to recoup the $354,376 of unrealized loss, provided that the credit
losses experienced are not greater than the credit losses assumed in the
projected cash flow analysis. At March 31, 2008, the Company believed there
has
been no material deterioration in the credit quality of its portfolio below
current expectations.
The
Company’s interest income calculated in accordance with Emerging Issues Task
Force Issue 99-20, Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial Interests
in Securitized Financial Assets
(“EITF
99-20”) for its CMBS is computed based upon a yield, which assumes credit losses
will occur. The yield to compute the Company’s taxable income does not assume
there would be credit losses, as a loss can only be deducted for tax purposes
when it has occurred. This is the primary difference between the Company’s
income in accordance with accounting principles generally accepted in the United
States of America (“GAAP”) and taxable income.
Commercial
Real Estate Loan Activity
The
Company's commercial real estate loan portfolio generally emphasizes larger
transactions located in metropolitan markets located in the United States and
Europe, as compared to the typical loan in the CMBS portfolio.
The
following table summarizes the Company’s commercial real estate loan portfolio
by property type at March 31, 2008 and December 31, 2007:
|
|
Loans
Outstanding
|
|
Weighted
Average
|
|
|
|
March
31, 2008
|
|
December
31, 2007
|
|
Yield
|
|
Property
Type
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
52,152
|
|
|
5.2
|
%
|
$
|
52,209
|
|
|
5.3
|
%
|
|
9.6
|
%
|
|
9.6
|
%
|
Office
|
|
|
45,574
|
|
|
4.6
|
|
|
45,640
|
|
|
4.6
|
|
|
10.3
|
|
|
10.3
|
|
Multifamily
|
|
|
175,092
|
|
|
17.5
|
|
|
174,873
|
|
|
17.8
|
|
|
9.9
|
|
|
9.7
|
|
Storage
|
|
|
32,220
|
|
|
3.2
|
|
|
32,307
|
|
|
3.3
|
|
|
9.1
|
|
|
9.1
|
|
Land
|
|
|
-
|
|
|
-
|
|
|
25,000
|
|
|
2.5
|
|
|
-
|
|
|
9.6
|
|
Hotel
|
|
|
12,149
|
|
|
1.2
|
|
|
12,208
|
|
|
1.2
|
|
|
10.4
|
|
|
10.9
|
|
Other
Mixed Use
|
|
|
3,983
|
|
|
0.4
|
|
|
3,983
|
|
|
0.5
|
|
|
8.5
|
|
|
8.5
|
|
Total
U.S.
|
|
|
321,170
|
|
|
32.1
|
|
|
346,220
|
|
|
35.2
|
|
|
9.8
|
|
|
9.7
|
|
Non
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
298,795
|
|
|
29.9
|
|
|
278,669
|
|
|
28.3
|
|
|
8.7
|
|
|
8.9
|
|
Office
|
|
|
257,768
|
|
|
25.8
|
|
|
238,691
|
|
|
24.3
|
|
|
8.4
|
|
|
8.8
|
|
Multifamily
|
|
|
44,318
|
|
|
4.4
|
|
|
41,403
|
|
|
4.2
|
|
|
8.4
|
|
|
8.6
|
|
Storage
|
|
|
50,789
|
|
|
5.1
|
|
|
51,272
|
|
|
5.2
|
|
|
9.2
|
|
|
9.5
|
|
Industrial
|
|
|
17,174
|
|
|
1.7
|
|
|
17,274
|
|
|
1.8
|
|
|
10.3
|
|
|
10.6
|
|
Hotel
|
|
|
4,169
|
|
|
0.4
|
|
|
5,016
|
|
|
0.5
|
|
|
10.0
|
|
|
10.1
|
|
Other
Mixed Use
|
|
|
4,980
|
|
|
0.6
|
|
|
4,842
|
|
|
0.5
|
|
|
9.0
|
|
|
9.0
|
|
Total
Non U.S.
|
|
|
677,993
|
|
|
67.9
|
|
|
637,167
|
|
|
64.8
|
|
|
8.7
|
|
|
8.9
|
|
Total
|
|
$
|
999,163
|
|
|
100.0
|
%
|
$
|
983,387
|
|
|
100.0
|
%
|
|
9.1
|
%
|
|
9.2
|
%
|
The
Company did not purchase any commercial real estate loans during the three
months ended March 31, 2008. During the quarter ended March 31, 2008, the
Company received repayments of commercial real estate loans in the aggregate
amount of $7,368.
The
Company recorded a provision for loan losses of $25,190 for the three months
ended March 31, 2008. This provision relates to one loan with a principal
balance of $25,000 and accrued interest of $190. The loan is in default and
due
to the reduction in value of the underlying collateral below the principal
balance of the loan, the Company believes the collectibility of the loan is
not
probable.
The
Company invests in the Carbon Capital Funds which also invest in commercial
real
estate loans. For the three months ended March 31, 2008, the Company recorded
$2,009 of income for the Carbon Capital Funds. Carbon II increased its
investment in U.S. commercial real estate loans by funding an additional
investment of $636 during the first quarter of 2008. Paydowns in Carbon Capital
Funds during the quarter totaled $41,487. As loans are repaid or sold, Carbon
II
has redeployed capital into acquisitions of additional loans for the portfolio.
The Carbon I investment period has expired.
The
Company's investments in the Carbon Capital Funds are as follows:
|
|
March 31, 2008
|
|
December 31, 2007
|
|
Carbon
I
|
|
$
|
1,707
|
|
$
|
1,636
|
|
Carbon
II
|
|
|
97,796
|
|
|
97,762
|
|
|
|
$
|
99,503
|
|
$
|
99,398
|
|
As
of
March 31, 2008 Carbon II has three assets located in Florida that are in various
stages of resolution. The properties consist on one hotel and two multifamily
properties. Carbon II took title to one of the multifamily properties during
2007. During the three months ended March 31, 2008, Carbon II increased its
loan
loss reserves for the two loans by $498. At March 31, 2008 the total loan loss
reserve for these loans is $3,830. For the property owned, Carbon II established
an impairment charge of $5,181 during 2007.
During
the first quarter of 2008, a $17,700 loan secured by four, Class-A, office
buildings in Manhattan totaling three million square feet of space defaulted.
The borrower defaulted at maturity in February 2008. The loan has been
restructured, modified and extended to allow for an orderly liquidation of
the
collateral. Interest to the Carbon II position will be paid, to the extent
available, from available cash flow. Carbon II believes a loan loss
reserve is not necessary at March 31, 2008.
Subsequent
to March 31, 2008, Carbon II experienced an additional loan default. A
modification and extension of this loan is being negotiated. All other
commercial real estate loans in the Carbon Capital Funds are performing as
expected.
Commercial
Real Estate
The
Company has an indirect investment in a commercial real estate development
fund
located in India. At March 31, 2008, 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.
II. Results
of Operations
Interest
Income: The
following tables set forth information regarding interest income from certain
of
the Company’s interest-earning assets.
|
|
For the Three Months Ended
March 31,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
U.S.
dollar denominated income
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities
|
|
$
|
43,624
|
|
$
|
42,388
|
|
$
|
1,236
|
|
|
2.9
|
%
|
Commercial
real estate loans
|
|
|
8,327
|
|
|
6,049
|
|
|
2,278
|
|
|
37.7
|
%
|
Commercial
mortgage loan pools
|
|
|
12,865
|
|
|
13,132
|
|
|
(267
|
)
|
|
(2.0
|
)%
|
Residential
mortgage-backed securities
|
|
|
60
|
|
|
2,299
|
|
|
(2,239
|
)
|
|
(97.4
|
)%
|
Cash
and cash equivalents
|
|
|
800
|
|
|
388
|
|
|
412
|
|
|
106.2
|
%
|
Total
U.S. interest income
|
|
$
|
65,676
|
|
$
|
64,256
|
|
$
|
1,420
|
|
|
2.2
|
%
|
Non-U.S
dollar denominated income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities
|
|
$
|
8,586
|
|
$
|
3,493
|
|
$
|
5,093
|
|
|
145.9
|
%
|
Commercial
real estate loans
|
|
|
15,404
|
|
|
5,117
|
|
|
10,287
|
|
|
201.0
|
%
|
Cash
and cash equivalents
|
|
|
264
|
|
|
536
|
|
|
(272
|
)
|
|
(50.7
|
)%
|
Total
non-U.S. dollar denominated interest income
|
|
$
|
24,254
|
|
$
|
9,146
|
|
$
|
15,108
|
|
|
165.2
|
%
|
Total
Interest Income
|
|
$
|
89,930
|
|
$
|
73,402
|
|
$
|
16,528
|
|
|
22.5
|
%
|
U.S.
dollar denominated income
For
the
three months ended March 31, 2008 versus 2007, interest income from U.S. assets
increased $1,420, or 2.2%. The Company continued to acquire commercial real
estate securities and loans throughout 2007 which offset the decline in interest
income resulting in the sale of residential mortgage-backed securities during
2007.
Non-U.S.
dollar denominated income
For
the
three months ended March 31, 2008 versus 2007, interest income from non-U.S.
assets increased $15,108, or 165.2%. 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 geographic
diversification.
The
following table reconciles interest income and total income for the three months
ended March 31, 2008 and 2007.
|
|
For the three months ended
March 31,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
Interest
Income
|
|
$
|
89,930
|
|
$
|
73,402
|
|
$
|
16,528
|
|
|
22.5
|
%
|
Earnings
from BlackRock |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diamond
Property Fund, Inc.
|
|
|
-
|
|
|
5,970
|
|
|
(5,970
|
)
|
|
(100.0
|
)
|
Earnings
from Carbon I
|
|
|
71
|
|
|
840
|
|
|
(769
|
)
|
|
(91.6
|
)
|
Earnings
from Carbon II
|
|
|
1,938
|
|
|
3,146
|
|
|
(1,208
|
)
|
|
(38.4
|
)
|
Total
Income
|
|
$
|
91,939
|
|
$
|
83,358
|
|
$
|
8,581
|
|
|
10.3
|
%
|
Interest
Expense:
The
following table sets forth information regarding the total amount of interest
expense from certain of the Company’s borrowings and cash flow
hedges.
|
|
For
the three months
ended
March
31,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
U.S.
dollar denominated interest expense
|
|
|
|
|
|
|
|
|
|
Collateralized
debt obligations
|
|
$
|
18,629
|
|
$
|
22,979
|
|
$ |
(4,350
|
)
|
|
(18.9
|
)%
|
Commercial
real estate securities
|
|
|
3,410
|
|
|
8,363
|
|
|
(4,953
|
)
|
|
(59.2
|
)
|
Commercial
real estate loans
|
|
|
1,361
|
|
|
540
|
|
|
821
|
|
|
151.9
|
|
Commercial
mortgage loan pools
|
|
|
12,207
|
|
|
12,400
|
|
|
(193
|
)
|
|
(1.6
|
)
|
Residential
mortgage-backed securities
|
|
|
45
|
|
|
3,324
|
|
|
(3,279
|
)
|
|
(98.6
|
)
|
Senior
convertible notes
|
|
|
2,313
|
|
|
-
|
|
|
2,313
|
|
|
100.0
|
|
Senior
unsecured notes
|
|
|
3,058
|
|
|
1,347
|
|
|
1,711
|
|
|
127.0
|
|
Junior
unsecured notes
|
|
|
3,267
|
|
|
3,280
|
|
|
(13
|
)
|
|
(0.4
|
)
|
Equity
investments
|
|
|
158
|
|
|
-
|
|
|
158
|
|
|
100.0
|
|
Cash
flow hedges
|
|
|
421
|
|
|
(438
|
)
|
|
859
|
|
|
(196.1
|
)
|
Hedge
ineffectiveness*
|
|
|
79
|
|
|
(109
|
)
|
|
188
|
|
|
(172.5
|
)
|
Total
U.S. Interest Expense
|
|
$
|
44,948
|
|
$
|
51,686
|
|
$
|
(6,738
|
)
|
|
(13.0
|
)%
|
Non-U.S.
dollar denominated interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
CDO
|
|
$
|
5,356
|
|
$
|
3,692
|
|
$
|
1,664
|
|
|
45.1
|
|
Commercial
real estate securities
|
|
|
2,980
|
|
|
-
|
|
|
2,980
|
|
|
100.0
|
|
Commercial
real estate loans
|
|
|
2,242
|
|
|
461
|
|
|
1,781
|
|
|
386.3
|
|
Junior
subordinated notes
|
|
|
1,328
|
|
|
-
|
|
|
1,328
|
|
|
100.0
|
|
Total
Non- U.S. Interest Expense
|
|
$
|
11,906
|
|
$
|
4,153
|
|
|
7,753
|
|
|
186.7
|
%
|
Total
Interest Expense
|
|
$
|
56,854
|
|
$
|
55,839
|
|
$
|
1,015
|
|
|
1.8
|
%
|
*See
Note
14 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
three months ended March 31, 2008 versus 2007, U.S. dollar interest expense
decreased $6,738 or 13.0%. The three month decrease was due to the sale of
residential mortgage-backed securities during 2007 and the write-off of
long-term debt issuance cost as required by FAS 159, offset by the issuance
of
convertible debt and senior notes.
Non-U.S.
dollar denominated interest expense
For
the
three months ended March 31, 2008 versus 2007, non-U.S. dollar interest expense
increased $7,753, or 186.7%. The three month increase was due to increased
purchases of non-dollar securities and loans during the last three quarters
of
2007.
Net
Interest Margin and Net Interest Spread from the Portfolio:
The
Company considers its interest generating portfolio to consist of its securities
available-for-sale, securities held-for-trading, commercial mortgage loans,
and
cash and cash equivalents because these assets relate to its core strategy
of
acquiring and originating high yield loans and securities backed by commercial
real estate, while at the same time maintaining a portfolio of investment grade
securities to enhance the Company's liquidity. The Company's equity investments,
which include the Carbon Capital Funds, 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 three months
ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Interest
income
|
|
$
|
89,930
|
|
$
|
73,402
|
|
Interest
expense related to the consolidation of commercial mortgage loan
pools
|
|
|
(12,207
|
)
|
|
(12,400
|
)
|
Adjusted
interest income
|
|
$
|
77,723
|
|
$
|
61,002
|
|
|
|
For the three months
ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Interest
expense
|
|
$
|
56,854
|
|
$
|
55,839
|
|
Interest
expense related to the consolidation of commercial mortgage loan
pools
|
|
|
(12,207
|
)
|
|
(12,400
|
)
|
Hedge
ineffectiveness
|
|
|
79
|
|
|
109
|
|
Adjusted
interest expense
|
|
$
|
44,726
|
|
$
|
43,548
|
|
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 variable interest entity (“VIE”) that includes commercial
mortgage loan pools. The Company believes interest income and expense excluding
the effects of these items better reflects the Company's net interest margin
and
net interest spread from the portfolio.
|
|
For the three months
ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Adjusted
interest income
|
|
$
|
77,723
|
|
$
|
61,002
|
|
Adjusted
interest expense
|
|
$
|
44,726
|
|
$
|
43,548
|
|
Adjusted
net interest income ratios
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
4.2
|
%
|
|
2.1
|
%
|
Average
yield
|
|
|
9.8
|
%
|
|
7.4
|
%
|
Cost
of funds
|
|
|
5.9
|
%
|
|
5.9
|
%
|
Net
interest spread
|
|
|
3.9
|
%
|
|
1.5
|
%
|
Ratios
including income from equity investments
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
4.3
|
%
|
|
3.1
|
%
|
Average
yield
|
|
|
9.8
|
%
|
|
8.1
|
%
|
Cost
of funds
|
|
|
5.9
|
%
|
|
5.9
|
%
|
Net
interest spread
|
|
|
3.9
|
%
|
|
2.3
|
%
|
Other
Expenses:
Expenses
other than interest expense consist primarily of management fees, incentive
fees
and general and administrative expenses. The table below summarizes those
expenses for the three months ended March 31, 2008 and 2007,
respectively.
|
|
For the three months
ended March 31,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
Management
fee
|
|
$
|
3,275
|
|
$
|
3,520
|
|
$
|
(245
|
)
|
|
(6.9
|
)%
|
Incentive
fee
|
|
|
10,544
|
|
|
2,724
|
|
|
7,820
|
|
|
287.1
|
%
|
Incentive
fee –
stock based
|
|
|
399
|
|
|
709
|
|
|
(310
|
)
|
|
(43.7
|
)%
|
General
and administrative expense
|
|
|
1,815
|
|
|
1,305
|
|
|
510
|
|
|
39.1
|
%
|
Total
other expenses
|
|
$
|
16,033
|
|
$
|
8,258
|
|
$
|
7,775
|
|
|
94.2
|
%
|
Under
the
terms of the management agreement in effect until March 31, 2008, management
fees were based on 2% of average quarterly stockholders’ equity. The decrease of
$245, or (6.9)%, is due to the decrease in the Company’s average stockholders’
equity. The Company’s incentive fee is based on the extent to which net income
(before incentive fees) for a rolling four quarters exceeds a defined hurdle
rate (See Note 13 of the consolidated financial statements). Net income (before
incentive fees) of $115,517 for the twelve months ended March 31, 2008 resulted
in $13,476 of incentive fees, $10,544 of which was recorded in the first quarter
of 2008. Net income (before incentive fees) of $87,764 for the twelve months
ended March 31, 2007 resulted in $7,474 of incentive fees, $2,724 of which
was
recorded in the first quarter of 2007. The decrease in incentive fee - stock
based of $310 is due to the decline in the market price of the Common Stock.
The
fee is based on the number of shares of Common Stock outstanding as of year
end.
The Company accrues the incentive fee - stock based expense each quarter based
on the shares outstanding at the end of the quarter.
General
and administrative expense is comprised of accounting agent fees, custodial
agent fees, directors' fees and expenses, fees for professional services,
insurance premiums, broken deal expenses, and due diligence costs. The increase
in general and administrative expense for the quarter ended March 31, 2008
is
primarily attributable to increased professional fees.
Other
Gains (Losses): Gains
on
securities available-for-sale were $6,750 for the three months ended March
31,
2007. Upon the adoption of FAS 159 on January 1, 2008, all of the Company’s
securities were transferred to securities held-for-trading and gains (losses)
on
securities held-for-trading totaled $71,037 and $(17) for the three months
ended
March 31, 2008 and 2007, respectively. The gain of $71,037 for the three months
ended March 31, 2008 is comprised of realized losses of $(4,977) and unrealized
losses on securities and swaps of $(402,304), offset by unrealized gains on
liabilities of $478,318. Foreign currency gains (loss) were $(8,041) and $1,484
for the three months ended March 31, 2008 and 2007. Included in accumulated
other comprehensive income (loss) was a $9,117 gain on foreign currency
translation. As a result, the Company’s foreign currency economic gain for the
three months ended March 31, 2008 was $1,076. This represents the net impact
of
the Company’s foreign currency exposure for the applicable periods. The losses
on impairment of assets of $(1,198) for the three month period ended March
31,
2007 was related to the Company’s write down of certain CMBS as required by EITF
99-20.
Dividends
Declared: On
March
12, 2008, the Company declared distributions to its holders of Common Stock
$0.30 per share, which were paid on April 30, 2008 to stockholders of record
on
March 31, 2008.
Changes
in Financial Condition
Securities
held-for-trading:
The
Company's securities held-for-trading, which are carried at estimated fair
value, included the following at March 31, 2008 and December 31,
2007:
U.S.
dollar denominated securities
|
|
March
31,
2008
Estimated
Fair
Value
|
|
Percentage
|
|
December
31,
2007
Estimated
Fair
Value
(1)
|
|
Percentage
|
|
Commercial
mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
CMBS
IOs
|
|
$ |
3,115 |
|
|
0.2
|
%
|
$
|
15,915
|
|
|
0.7
|
%
|
Investment
grade CMBS
|
|
|
641,539
|
|
|
34.1
|
|
|
766,996
|
|
|
33.6
|
|
Non-investment
grade rated subordinated securities
|
|
|
441,693
|
|
|
23.5
|
|
|
630,139
|
|
|
27.6
|
|
Non-rated
subordinated securities
|
|
|
91,684
|
|
|
4.9
|
|
|
110,481
|
|
|
4.8
|
|
Credit
tenant lease
|
|
|
24,133
|
|
|
1.3
|
|
|
24,949
|
|
|
1.1
|
|
Investment
grade REIT debt
|
|
|
219,801
|
|
|
11.7
|
|
|
246,095
|
|
|
10.8
|
|
Multifamily
agency securities
|
|
|
359
|
|
|
-
|
|
|
37,123
|
|
|
1.6
|
|
CDO
investments
|
|
|
40,807
|
|
|
2.2
|
|
|
49,630
|
|
|
2.2
|
|
Total
CMBS
|
|
|
1,463,131
|
|
|
77.9
|
|
|
1,881,328
|
|
|
82.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
adjustable rate securities
|
|
|
-
|
|
|
-
|
|
|
1,193
|
|
|
0.1
|
|
Residential
CMOs
|
|
|
587
|
|
|
-
|
|
|
627
|
|
|
0.0
|
|
Hybrid
adjustable rate mortgages (“ARMs”)
|
|
|
422
|
|
|
-
|
|
|
8,363
|
|
|
0.4
|
|
Total
RMBS
|
|
|
1,009
|
|
|
-
|
|
|
10,183
|
|
|
0.5
|
|
Total
U.S. dollar denominated securities
|
|
$
|
1,464,140
|
|
|
77.9
|
|
$
|
1,891,511
|
|
|
82.9
|
%
|
Non-U.S.
dollar denominated securities
|
|
|
|
|
|
|
|
|
|
Commercial
mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
|
180,922
|
|
|
9.6
|
|
|
151,532
|
|
|
6.6
|
|
Non-investment
grade rated subordinated securities
|
|
|
206,702
|
|
|
11.0
|
|
|
212,433
|
|
|
9.3
|
|
Non-rated
subordinated securities
|
|
|
30,504
|
|
|
1.5
|
|
|
28,857
|
|
|
1.2
|
|
Total
Non-U.S. dollar denominated securities
|
|
|
418,128
|
|
|
22.1
|
|
|
392,822
|
|
|
17.1
|
%
|
Total
securities
|
|
$
|
1,882,268
|
|
|
100.0
|
%
|
$
|
2,284,333
|
|
|
100.0
|
%
|
|
(1)
|
Includes
securities available-for-sale at December 31, 2007, reclassified
to
securities held-for-trading in the first quarter of
2008.
|
The
Company continues to purchase non-U.S. dollar denominated securities in order
to
increase geographic diversification. During the first quarter of 2008, the
Company sold the majority of its remaining multifamily agency securities and
CMBS IOs. In addition, the dislocation in the capital markets during the first
quarter of 2008 caused CMBS spreads to widen significantly. This development
resulted in a significant decline in the Company’s U.S. CMBS portfolio during
the first quarter of 2008.
Borrowings: At
March
31, 2008 and December 31, 2007, 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 March 31, 2008 and December 31, 2007, the Company had obtained
financing in amounts and at interest rates consistent with the Company's
short-term financing objectives.
Under
the
credit facilities and reverse repurchase agreements the lender retains the
right
to mark the underlying collateral to its estimated fair value. A reduction
in
the value of its pledged assets would require the Company to provide additional
collateral or fund margin calls. From time to time, the Company expects that
it
will be required to provide such additional collateral or fund margin
calls.
The
following table sets forth information regarding the Company's
borrowings:
|
|
|
|
March 31, 2008
|
|
|
|
|
|
|
|
Market
Value
|
|
Adjusted
Issuance Price
|
|
Maximum
Balance
|
|
Range of
Maturities
|
|
CDO
debt*
|
|
$
|
1,216,289
|
|
$
|
1,832,449
|
|
$
|
1,832,449
|
|
|
3.7 to
7 years
|
|
Commercial
mortgage loan pools
|
|
|
1,213,143
|
|
|
1,213,143
|
|
|
1,213,143
|
|
|
0.8
to 10.7 years
|
|
Reverse
repurchase agreements
|
|
|
4,515
|
|
|
4,515
|
|
|
80,171
|
|
|
11 days
|
|
Credit
facilities
|
|
|
712,127
|
|
|
712,127
|
|
|
712,127
|
|
|
170 to 536 days
|
|
Senior
convertible notes
|
|
|
67,696
|
|
|
80,000
|
|
|
80,000
|
|
|
19.4
years
|
|
Senior
unsecured notes**
|
|
|
80,864
|
|
|
162,500
|
|
|
162,500
|
|
|
9.1
years
|
|
Junior
unsecured notes
|
|
|
34,122
|
|
|
79,228
|
|
|
73,903
|
|
|
14.1
years
|
|
Junior
subordinated notes***
|
|
|
68,986
|
|
|
180,477
|
|
|
180,477
|
|
|
27.9
years
|
|
Total
|
|
$
|
3,397,742
|
|
$
|
4,264,439
|
|
|
|
|
|
|
|
*
Disclosed as adjusted issue price. Total par of the Company’s CDO debt at March
31, 2008 was $1,841,804.
**
The
senior unsecured notes can be redeemed at par by the Company beginning April
2012.
***
The
junior subordinated notes can be redeemed at par by the Company beginning in
October 2010.
The
table
above does not include interest payments on the Company’s borrowings. Such
disclosure of interest payments has been omitted because certain borrowings
require variable rate interest payments. The Company’s total interest payments
for the three months ended March 31, 2008 were $60,001.
At
March
31, 2008, 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
|
|
Convertible
Debt
|
|
Total
Collateralized
Borrowings
|
|
Weighted
average yield
|
|
|
3.76
|
%
|
|
4.86
|
%
|
|
5.65
|
%
|
|
3.99
|
%
|
|
7.64
|
%
|
|
7.59
|
%
|
|
6.56
|
%
|
|
11.75
|
%
|
|
5.34
|
%
|
Interest
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
-
|
%
|
|
-
|
%
|
|
6.80
|
%
|
|
3.99
|
%
|
|
7.64
|
%
|
|
7.59
|
%
|
|
6.56
|
%
|
|
11.75
|
%
|
|
6.17
|
%
|
Floating
|
|
|
3.76
|
%
|
|
4.86
|
%
|
|
3.92
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
4.18
|
%
|
Effective
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
-
|
%
|
|
-
|
%
|
|
7.30
|
%
|
|
3.99
|
%
|
|
7.64
|
%
|
|
7.59
|
%
|
|
6.56
|
%
|
|
11.75
|
%
|
|
6.44
|
%
|
Floating
|
|
|
3.76
|
%
|
|
4.86
|
%
|
|
3.91
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
4.17
|
%
|
Hedging
Instruments:
The
Company may modify its exposure to market interest rates by entering into
various financial instruments that adjust portfolio duration. These financial
instruments are intended to mitigate the effect of changes in interest and
foreign exchange rates on the value of the Company's liabilities and the cost
of
borrowing.
Interest
rate hedging instruments at March 31, 2008 and December 31, 2007 consisted
of
the following:
|
|
At March 31, 2008
|
|
|
|
Notional Value
|
|
Estimated Fair
Value
|
|
Unamortized
Cost
|
|
Average Remaining
Term
(years)
|
|
Cash
flow hedges
|
|
$
|
110,500
|
|
$
|
(5,980
|
)
|
$
|
(1,612
|
)
|
|
3.9
|
|
Trading
swaps
|
|
|
1,205,162
|
|
|
656
|
|
|
-
|
|
|
3.1
|
|
CDO
trading swaps
|
|
|
1,144,853
|
|
|
(58,867
|
)
|
|
-
|
|
|
5.3
|
|
CDO
LIBOR cap
|
|
|
85,000
|
|
|
285
|
|
|
1,407
|
|
|
5.2
|
|
|
|
At December 31, 2007
|
|
|
|
Notional Value
|
|
Estimated Fair
Value
|
|
Unamortized
Cost
|
|
Average Remaining
Term (years)
|
|
Cash
flow hedges
|
|
$
|
231,500
|
|
$
|
(12,646
|
)
|
$
|
(1,612
|
)
|
|
6.7
|
|
CDO
cash flow hedges
|
|
|
875,548
|
|
|
(25,410
|
)
|
|
-
|
|
|
6.2
|
|
Trading
swaps
|
|
|
1,218,619
|
|
|
(1,296
|
)
|
|
-
|
|
|
4.2
|
|
CDO
trading swaps
|
|
|
279,527
|
|
|
5
|
|
|
-
|
|
|
4.7
|
|
CDO
LIBOR cap
|
|
|
85,000
|
|
|
195
|
|
|
1,407
|
|
|
5.4
|
|
Foreign
currency agreements at March 31, 2008 and December 31, 2007 consisted of the
following:
|
|
At March 31, 2008
|
|
|
|
Estimated Fair
Value
|
|
Unamortized
Cost
|
|
Average Remaining
Term
|
|
Currency
swaps
|
|
$
|
(21,300
|
)
|
|
-
|
|
|
8.3
years
|
|
CDO
currency swaps
|
|
|
16,191
|
|
|
-
|
|
|
9.6
years
|
|
Forwards
|
|
|
(10,688
|
)
|
|
-
|
|
|
23
days
|
|
|
|
At December 31, 2007
|
|
|
|
Estimated Fair
Value
|
|
Unamortized
Cost
|
|
Average Remaining
Term
|
|
Currency
swaps
|
|
$
|
(12,060
|
)
|
|
-
|
|
|
8.6
years
|
|
CDO
currency swaps
|
|
|
9,967
|
|
|
-
|
|
|
9.9
years
|
|
Forwards
|
|
|
4,041
|
|
|
-
|
|
|
23
days
|
|
Capital
Resources and Liquidity
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, and $91,698 from January 1, 2008
through May 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 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 such an 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.
During
the first quarter, the Company raised $7,513 of capital by issuing common shares
under its sales agency agreement. Through May 14, 2008, the Company raised
an
additional $4,847 under the sales agency agreement. On April 4, 2008, in a
privately negotiated transaction, the Company issued $70,125 of Series E
Cumulative Redeemable Convertible Preferred Stock and 3,494,021 shares of Common
Stock, resulting in combined net proceeds of $93,425. The Company repaid $52,500
of its loan from HoldCo 2 on April 8, 2008. As a result, $60,000 of unused
borrowing capacity became available under this facility.
In
the
event of a further reduction in market liquidity, the Company’s short-term (one
year or less) liquidity needs will be met primarily with $65,649 of cash and
cash equivalents held as of March 31, 2008 as well as from the aforementioned
capital raises (net of debt repayments) that occurred subsequent to March 31,
2008.
Certain
information with respect to the Company's borrowings at March 31, 2008 is
summarized as follows:
Borrowing
Type
|
|
Market Value
of Borrowings
|
|
Amortized
Cost of
Borrowings
|
|
Weighted
Average
Borrowing
Rate
|
|
Weighted Average
Remaining
Maturity
|
|
Estimated Fair
Value of Assets
Pledged
|
|
Reverse
repurchase agreements
|
|
$
|
4,515
|
|
$
|
4,515
|
|
|
3.76
|
%
|
|
11 days
|
|
$
|
8,161
|
|
Credit
facilities (1)
|
|
|
712,127
|
|
|
712,127
|
|
|
4.86
|
%
|
|
343 days
|
|
|
1,002,638
|
|
Commercial
mortgage loan pools
|
|
|
1,213,143
|
|
|
1,213,143
|
|
|
4.00
|
%
|
|
4.66 years
|
|
|
1,235,138
|
|
CDOs
(2)
|
|
|
1,216,289
|
|
|
1,832,449
|
|
|
5.65
|
%
|
|
5.33 years
|
|
|
1,772,477
|
|
Senior
unsecured notes (2)
|
|
|
80,864
|
|
|
162,500
|
|
|
7.59
|
%
|
|
9.1 years
|
|
|
-
|
|
Junior
unsecured notes (2)
|
|
|
34,122
|
|
|
79,227
|
|
|
6.56
|
%
|
|
14.1 years
|
|
|
-
|
|
Senior
convertible notes (2)
|
|
|
67,696
|
|
|
80,000
|
|
|
11.75
|
%
|
|
19.4 years
|
|
|
-
|
|
Junior
subordinated notes (2)
|
|
|
68,986
|
|
|
180,477
|
|
|
7.64
|
%
|
|
27.9 years
|
|
|
-
|
|
Total
Borrowings
|
|
$
|
3,397,742
|
|
$
|
4,264,438
|
|
|
5.34
|
%
|
|
5.93 years
|
|
$
|
4,018,414
|
|
(1)
Includes
$4,758 of borrowings under facilities related to commercial mortgage loan
pools.
(2)
As a
result of the adoption of FAS 159 on January 1, 2008, the Company records the
above liabilities at fair value. Changes in fair value are recorded in
unrealized gain on liabilities on the consolidated statement of operations.
For
the three months ended March 31, 2008, $478,318 was recorded as a result of
a
reduction in the fair value of such liabilities.
At
March
31, 2008, 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
|
|
$
|
4,515
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,515
|
|
Credit
facilities
|
|
|
-
|
|
|
-
|
|
|
537,968
|
|
|
174,159
|
|
|
-
|
|
|
-
|
|
|
712,127
|
|
Commercial
mortgage loan pools
|
|
|
2,135
|
|
|
2,074
|
|
|
379,026
|
|
|
116,649
|
|
|
63,884
|
|
|
649,375
|
|
|
1,213,143
|
|
CDOs*
|
|
|
6,727
|
|
|
13,359
|
|
|
40,982
|
|
|
140,719
|
|
|
739,196
|
|
|
891,466
|
|
|
1,832,449
|
|
Junior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
79,227
|
|
|
79,227
|
|
Senior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
162,500
|
|
|
162,500
|
|
Senior
convertible notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
80,000
|
|
|
80,000
|
|
Junior
subordinated notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
180,477
|
|
|
180,477
|
|
Total
Borrowings
|
|
$
|
13,377
|
|
$
|
15,433
|
|
$
|
957,976
|
|
$
|
431,527
|
|
$
|
803,080
|
|
$
|
2,043,045
|
|
$
|
4,264,438
|
|
Reverse
Repurchase Agreements and Credit Facilities
The
Company is subject to financial covenants in its credit facilities.
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.
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.
On
February 15, 2008, Morgan Stanley Bank extended 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. The aforementioned covenants are the most restrictive covenants at
March 31, 2008.
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")
committed 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
facility bears interest at 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.
Outstanding
borrowings at March 31, 2008 under the Facility totaled $52,500 and were repaid
in full on April 8, 2008.
For
the
quarter ended March 31, 2008, the Company was in compliance with all covenants.
Preferred
Equity Issuance
On
April
4, 2008, the Company issued $70,125 of Series E Cumulative Redeemable
Convertible Preferred Stock. Net proceeds were $70,069. Dividends are payable
on
the three new series of convertible preferred stock at a 12% coupon and the
purchaser has the right to convert the preferred stock into common stock at
$7.49 per share (a 12% premium to the closing price of the Company's common
stock on March 28, 2008, the pricing date).
Common
Equity Issuances
In
conjunction with the Company’s issuance of the Series E Preferred Stock on April
4, 2008, the Company also issued 3,494,021 shares of Common Stock, resulting
in
net proceeds of $23,356.
For
the
three months ended March 31, 2008, the Company issued 37,060 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 $260.
For
the
three months ended March 31, 2008, the Company issued 1,174,383 shares of Common
Stock under a sales agency agreement with Brinson Patrick Securities
Corporation. Net proceeds to the Company were approximately $7,513.
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
March
31, 2008 the Company owned securities of 39 Controlling Class CMBS trusts with
a
par of $1,857,019. The total par amount of CMBS issued by the 39 trusts was
$67,597,670. One of the Company's 39 Controlling Class trusts does not qualify
as a QSPE and has been consolidated by the Company (see Note 7 of the
consolidated financial statements).
The
Company's maximum exposure to loss as a result of its investment in these QSPEs
totaled $1,129,177 and $1,126,442 at March 31, 2008 and December 31, 2007,
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 March 31, 2008 and December 31, 2007, respectively, was
$60,787 and $61,206.
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 March 31, 2008 and
December 31, 2007, the Company's total maximum exposure to loss as a result
of
its investment in Leaf was $6,111 and $6,264, 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 used cash flows of $61,623 and provided
cash flow of $164,739 for the three months ended March 31, 2008 and 2007,
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.
Net cash from trading securities provided an outflow of $48,916 and received
$132,076 for the three months ended March 31, 2008 and 2007, respectively.
Net
cash
provided by investing activities consists primarily of the purchase, sale,
and
repayments on securities, commercial loan pools, commercial mortgage loans
and
equity investments. The Company's investing activities provided cash flows
of
$126,570 and used cash flows of $208,374 during the three months ended March
31,
2008 and 2007, respectively. The variance in investing cash flows is primarily
attributable to FAS 159 reclassifications of securities available-for-sale
to
operating activities and purchases of securities and funding of commercial
mortgage loans.
Net
cash
provided by financing activities was an outflow for $92,324 for the three months
ended March 31, 2008 versus a cash inflow of $29,751 for the three months ended
March 31, 2007, respectively, primarily due to margin calls on reverse
repurchase agreements and credit facilities during the first quarter of 2008.
Transactions
with Affiliates
The
Company has a Management Agreement, an administrative services agreement and
an
accounting services agreement with the Manager, the employer of certain
directors and all of the officers of the Company, under which the Manager and
the Company’s officers manage the Company’s day-to-day investment operations,
subject to the direction and oversight of the Company’s Board of Directors.
Pursuant to the Management Agreement and these other agreements, the Manager
and
the Company’s officers formulate investment strategies, arrange for the
acquisition of assets, arrange for financing, monitor the performance of the
Company’s assets and provide certain other advisory, administrative and
managerial services in connection with the operations of the Company.
On
March
31, 2008, the Company’s unaffiliated directors approved an amended investment
advisory agreement with the Manager. The amended Management Agreement will
expire on March 31, 2009, unless extended. For the full one-year term of the
renewed contract, the Manager has agreed to receive 100% of the management
fee
and any incentive fee in the Company's Common Stock. The stock issued to the
Manager under this plan will be restricted from sale until six months after
it
is received.
Other
significant changes pursuant to the amended Management Agreement include a
reduction in the quarterly base management fee from 0.5000% of stockholders'
equity to 0.3750% for the first $400 million in average total stockholders'
equity; 0.3125% for the next $400 million of average total stockholders' equity
and 0.2500% for the average total stockholders' equity in excess of $800
million. Under the terms of the prior Management Agreement, the Company paid
the
Manager a base management fee equal to 2.0% of the quarterly average total
stockholders’ equity for the applicable quarter. The amended Management
Agreement continues to provide that the Company will grant the Manager Common
Stock equal to one-half of one percent (0.5%) of the total number of shares
of
the Company's Common Stock outstanding as of a specified date in the fourth
quarter of each year.
The
amended Management Agreement also provides for the Manager to receive a
quarterly incentive fee equal to 25% of the amount by which the applicable
quarter's Operating Earnings (as defined in the Management Agreement) of
the Company (before incentive fee) plus realized gains, net foreign currency
gains and decreases in expense associated with reversals of credit impairments
on commercial mortgage loans; less realized losses, net foreign currency losses
and increases in expense associated with credit impairments on commercial
mortgage loans exceeds the weighted average issue price per share of the
Company's Common Stock multiplied by the ten-year Treasury note rate plus 4.0%
per annum (expressed as a quarterly percentage), multiplied by the weighted
average number of shares of the Company's Common Stock outstanding during the
applicable quarterly period. The Management Agreement continues to provide
that
the incentive fee payable to the Manager shall be subject to a rolling
four-quarter high watermark.
Under
the
terms of the prior Management Agreement, the Manager was 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 per
common share at March 31, 2008). Additionally, up to 30% of the incentive fees
earned in 2007 or after was 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 where one-half of one percent of common shares
outstanding as of December 31st is paid to the Manager.
The
following is a summary of management and incentive fees incurred for the three
months ended March 31, 2008 and 2007:
|
|
For the Three Months
Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Management
fee
|
|
$
|
3,275
|
|
$
|
3,520
|
|
Incentive
fee
|
|
|
10,544
|
|
|
2,724
|
|
Incentive
fee – stock based
|
|
|
399
|
|
|
709
|
|
Total
management and incentive fees
|
|
$
|
14,218
|
|
$
|
6,953
|
|
At
March
31, 2008 and 2007, respectively, management and incentive fees of $13,366 and
$11,248 remain payable to the Manager and are included on the accompanying
consolidated statements 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 $125 and $117 for certain expenses incurred
on
behalf of the Company during the three months ended March 31, 2008 and 2007,
respectively.
The
Company has administration and accounting services agreements with the Manager.
Under the terms of the administration services agreement, the Manager provides
financial reporting, audit coordination and accounting oversight services to
the
Company. Under the terms of the accounting services agreement, the Manager
provides investment accounting services to the Company. For the three months
ended March 31, 2008 and 2007, the Company recorded administration and
investment accounting fees of $255 and $181, respectively, which are included
in
general and administrative expense on the accompanying consolidated statements
of operations.
The
special servicer on 33 of the Company's 39 Controlling Class trusts is Midland
Loan Services, Inc. ("Midland"), a wholly owned indirect subsidiary of PNC
Bank.
Midland therefore may be presumed to be an affiliate of the Manager. The
Company's fees for Midland’s services are at market rates.
On
March
7, 2008, the Company entered into a $60,000 credit facility with a subsidiary
of
BlackRock, Inc. BlackRock, Inc. is the parent of the Company’s manager,
BlackRock Financial Management, Inc. The facility has a term of 364 days with
two 364-day extension periods, subject to lender approval. The facility is
collateralized by a pledge of the Company’s investment in Carbon II and gives
the lender the option to purchase the Carbon II investment at fair market value
(as determined by the terms of the agreement) from the Company. Outstanding
borrowings at March 31, 2008 under this facility totaled $52,500 and were repaid
in full on April 8, 2008.
During
2001, the Company entered into a $50,000 commitment to acquire shares of Carbon
I, a private commercial real estate income opportunity fund managed by the
Manager. The Company’s investment in Carbon I at March 31, 2008 was $1,707. The
Company does not incur any additional management or incentive fees to the
Manager related to its investment in Carbon I. On March 31, 2008, the Company
owned approximately 20% of the outstanding shares of Carbon I.
The
Company entered into an aggregate commitment of $100,000 to acquire shares
of
Carbon II, a private commercial real estate income opportunity fund managed
by
the Manager. The Company’s investment in Carbon II at March 31, 2008 was
$97,796. The Company does not incur any additional management or incentive
fees
to the Manager related to its investment in Carbon II. On March 31, 2008, the
Company owned approximately 26% of the outstanding shares of Carbon
II.
REIT
Status:
The
Company has elected to be taxed as a REIT and therefore must comply with the
provisions of the Code with respect thereto. Accordingly, the Company generally
will not be subject to U.S. federal income tax to the extent of its
distributions to stockholders and as long as certain asset, income and stock
ownership tests are met. The Company may, however, be subject to tax at
corporate rates or at excise tax rates on net income or capital gains not
distributed.
The
Company and certain subsidiaries have elected to be treated as taxable REIT
subsidiaries. This election permits the subsidiaries to enter into
activities related to foreign investments that may not have constituted
qualifying assets generating qualifying income for the REIT
tests.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market
Risk:
Market
risk includes the exposure to loss resulting from changes in interest rates,
credit curve spreads, foreign currency exchange rates, commodity prices and
equity prices. The primary market risks to which the Company is exposed are
interest rate risk, credit curve risk and foreign currency risk. Interest rate
risk is highly sensitive to many factors, including governmental, monetary
and
tax policies, domestic and international economic and political considerations
and other factors beyond the control of the Company. Credit curve risk is highly
sensitive to the dynamics of the markets for commercial real estate securities
and other loans and securities held by the Company. Excessive supply of these
assets combined with reduced demand will cause the market to require a higher
yield. This demand for higher yield will cause the market to use a higher spread
over the U.S. Treasury securities yield curve, or other benchmark interest
rates, to value these assets. Changes in the general level of the U.S. Treasury
yield curve can have significant effects on the estimated fair value of the
Company's portfolio.
The
majority of the Company's assets are fixed rate securities valued based on
a
market credit spread to U.S. Treasury securities. 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 March 31, 2008. This means that
a
100 basis point increase in interest rates would cause a margin call of
approximately $16,000.
The
Company also focuses on economic risk in managing its sensitivity to interest
rates and maintains an economic duration within a band of 2.0 to 5.0 years.
At
March 31, 2008, 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%.
The
GAAP
book value of the Company’s common stock is $10.28 per share. As indicated in
the table above a 100 basis point change in interest rates will change reported
book value by approximately 2.4%, or $19,000. 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 $16,000.
Net
interest income sensitivity to changes in interest rates is analyzed using
the
assumptions that interest rates, as defined by the LIBOR curve, increase or
decrease and that the yield curves of the LIBOR rate shocks will be parallel
to
each other.
Regarding
the table below, all changes in net interest income are measured as percentage
changes from the respective values calculated in the scenario labeled as “Base
Case.” The base interest rate scenario assumes interest rates at March 31, 2008.
Actual results could differ significantly from these estimates.
Projected Percentage Change In Net
Interest Income Per Share Given LIBOR
Movements
|
|
Change in LIBOR,
+/- Basis Points
|
|
Projected Change
in Earnings per
Share
|
|
-200
|
|
$
|
0.02
|
|
-100
|
|
$
|
0.01
|
|
-50
|
|
$
|
0.00
|
|
Base
Case
|
|
|
|
|
+50
|
|
$
|
(0.00
|
)
|
+100
|
|
$
|
(0.01
|
)
|
+200
|
|
$
|
(0.02
|
)
|
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 on the 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. For purposes of illustration, a doubling of the
losses in the Company's Controlling Class CMBS, without a significant
acceleration of those losses, would reduce GAAP income by approximately $0.63
per share of Common Stock per year. A significant acceleration of the timing
of
these losses would cause the Company's net income to decrease.
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
4. CONTROLS
AND PROCEDURES
The
Company, under the direction and with the participation of its management,
including the Chief Executive Officer and the Chief Financial Officer, evaluated
the effectiveness of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) as of the end of the period covered by this report. Based
on that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
at March 31, 2008.
No
change
in internal control over financial reporting (as defined in Rule 13a-15(f)
under
the Exchange Act) occurred during the quarter ended March 31, 2008 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
Part
II – OTHER
INFORMATION
ITEM
1. Legal
Proceedings
At
March
31, 2008, there were no pending legal proceedings in which the Company was
a
defendant or of which any of its property was subject.
ITEM
1A.
Risk Factors
None.
ITEM
2.
Unregistered Sales of Equity Securities and Use of Proceeds
During
the three months ended March 31, 2008, the Company issued 316,320 shares
of unregistered common stock with an aggregate value of $2,116 to
BlackRock Financial Management, Inc., the manager of the Company (the
"Manager"), under the Company's 2006 Stock Award and Incentive Plan (the "Plan")
and pursuant to the provision of the amended and restated investment advisory
agreement, dated as of March 15, 2007, between the Company and the Manager
(the
"Management Agreement") requiring the Company to grant to the Manager a number
of shares of Company common stock equal to one-half of one percent (0.5%) of
the
total number of shares of Common Stock outstanding as of December 31 of each
year in which the Management Agreement is in effect.The
issuance of common stock was made in reliance upon the exemption from
registration under Section 4(2) of the Securities Act.
ITEM
6.
Exhibits
Exhibit
No.
|
|
Description
|
|
|
|
31.1
|
|
Exchange
Act Rule (3a-14b)/15d-14(a) Certification of Chief Executive
Officer
|
31.2
|
|
Exchange
Act Rule (3a-14b)/15d-14(a) Certification of Chief Financial
Officer
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
ANTHRACITE
CAPITAL, INC.
|
|
|
|
Dated:
May 15, 2008
|
By:
|
/s/
Christopher A. Milner
|
|
Name:
Christopher A. Milner
|
|
Title:
Chief Executive Officer
|
|
|
|
Dated:
May 15, 2008
|
By:
|
/s/
James J. Lillis
|
|
Name:
James J. Lillis
|
|
Title:
Chief Financial Officer
|