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 June 30, 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
(State
or other jurisdiction of
incorporation
or organization)
|
13-3978906
(I.R.S.
Employer
Identification
No.)
|
40
East 52nd
Street, New York, New York
(Address
of principal executive offices)
|
10022
(Zip
Code)
|
(Registrant's
telephone number including area code): (212)
810-3333
NOT
APPLICABLE
(Former
name, former address, and for new fiscal year; if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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
August
1, 2008, 73,918,326 shares of common stock ($0.001 par value per share) were
outstanding.
ANTHRACITE
CAPITAL, INC.
FORM
10-Q
INDEX
PART
I -
FINANCIAL INFORMATION |
|
Page
|
|
|
|
|
|
Item
1.
|
|
Financial
Statements
|
|
4
|
|
|
|
|
|
|
|
Consolidated
Statements of Financial Condition (Unaudited)
|
|
|
|
|
At
June 30, 2008 and December 31, 2007
|
|
4
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations (Unaudited)
|
|
|
|
|
For
the Three and Six Months Ended June 30, 2008 and 2007
|
|
5
|
|
|
|
|
|
|
|
Consolidated
Statement of Changes in Stockholders' Equity (Unaudited)
|
|
|
|
|
For
the Six Months Ended June 30, 2008
|
|
6
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows (Unaudited)
|
|
|
|
|
For
the Six Months Ended June 30, 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
|
|
37
|
|
|
|
|
|
Item
3.
|
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
68
|
|
|
|
|
|
Item
4.
|
|
Controls
and Procedures
|
|
72
|
|
|
|
|
|
Part
II - OTHER INFORMATION
|
|
|
|
|
|
|
|
Item
1.
|
|
Legal
Proceedings
|
|
73
|
|
|
|
|
|
Item
1A.
|
|
Risk
Factors
|
|
73
|
|
|
|
|
|
Item
2.
|
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
73
|
|
|
|
|
|
Item
3.
|
|
Defaults
Upon Senior Securities
|
|
|
|
|
|
|
|
Item
4.
|
|
Submission
of Matters to a Vote of Security Holders
|
|
73
|
|
|
|
|
|
Item
5.
|
|
Other
Information
|
|
|
|
|
|
|
|
Item
6.
|
|
Exhibits
|
|
75
|
|
|
|
|
|
SIGNATURES
|
|
76
|
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)
|
|
June
30, 2008
|
|
December
31, 2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
38,684
|
|
|
|
|
$
|
91,547
|
|
Restricted
cash equivalents
|
|
|
|
|
|
15,807
|
|
|
|
|
|
32,105
|
|
Securities
held-for-trading, at estimated fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
commercial mortgage-backed securities (“CMBS”)
|
|
$
|
797,327
|
|
|
|
|
$
|
1,380
|
|
|
|
|
Investment
grade CMBS
|
|
|
1,104,751
|
|
|
|
|
|
15,923
|
|
|
|
|
Residential
mortgage-backed securities (“RMBS”)
|
|
|
973
|
|
|
|
|
|
901
|
|
|
|
|
Total
securities held-for-trading
|
|
|
|
|
|
1,903,051
|
|
|
|
|
|
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)
|
|
|
|
|
|
993,382
|
|
|
|
|
|
983,387
|
|
Commercial
mortgage loan pools, at amortized cost
|
|
|
|
|
|
1,229,442
|
|
|
|
|
|
1,240,793
|
|
Equity
investments
|
|
|
|
|
|
138,310
|
|
|
|
|
|
108,748
|
|
Derivative
instruments, at estimated fair value
|
|
|
|
|
|
406,202
|
|
|
|
|
|
404,910
|
|
Other
assets (includes $2,210 at estimated fair value in 2008)
|
|
|
|
|
|
71,948
|
|
|
|
|
|
101,886
|
|
Total
Assets
|
|
|
|
|
$
|
4,796,826
|
|
|
|
|
$
|
5,247,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
by pledge of subordinated CMBS
|
|
$
|
233,251
|
|
|
|
|
$
|
293,287
|
|
|
|
|
Secured
by pledge of investment grade CMBS
|
|
|
146,495
|
|
|
|
|
|
207,829
|
|
|
|
|
Secured
by pledge of commercial mortgage loans
|
|
|
225,813
|
|
|
|
|
|
244,476
|
|
|
|
|
Collateralized
debt obligations ("CDOs") (at estimated fair value in
2008)
|
|
|
1,252,224
|
|
|
|
|
|
1,823,328
|
|
|
|
|
Senior
unsecured notes (at estimated fair value in 2008)
|
|
|
85,204
|
|
|
|
|
|
162,500
|
|
|
|
|
Senior
convertible notes (at estimated fair value in 2008)
|
|
|
71,160
|
|
|
|
|
|
80,000
|
|
|
|
|
Junior
unsecured notes (at estimated fair value in 2008)
|
|
|
35,611
|
|
|
|
|
|
73,103
|
|
|
|
|
Junior
subordinated notes to subsidiary trusts issuing preferred securities
(at
estimated fair value in 2008)
|
|
|
72,829
|
|
|
|
|
|
180,477
|
|
|
|
|
Secured
by pledge of commercial mortgage loan pools
|
|
|
1,211,909
|
|
|
|
|
|
1,225,223
|
|
|
|
|
Total
borrowings
|
|
|
|
|
|
3,334,496
|
|
|
|
|
|
4,290,223
|
|
Payable
for investments purchased
|
|
|
|
|
|
-
|
|
|
|
|
|
4,693
|
|
Distributions
payable
|
|
|
|
|
|
26,135
|
|
|
|
|
|
21,064
|
|
Derivative
instruments, at estimated fair value
|
|
|
|
|
|
433,850
|
|
|
|
|
|
442,114
|
|
Other
liabilities
|
|
|
|
|
|
39,936
|
|
|
|
|
|
38,245
|
|
Total
Liabilities
|
|
|
|
|
|
3,834,417
|
|
|
|
|
|
4,796,339
|
|
12%
Series E-1 Cumulative Convertible Redeemable Preferred Stock, liquidation
preference $23,375
|
|
|
|
|
|
23,289
|
|
|
|
|
|
-
|
|
12%
Series E-2 Cumulative Convertible Redeemable Preferred Stock, liquidation
preference $23,375
|
|
|
|
|
|
23,289
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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;
73,309,064
shares issued and outstanding in 2008; 63,263,998
shares issued and outstanding in 2007
|
|
|
|
|
|
73
|
|
|
|
|
|
63
|
|
Additional
paid-in capital
|
|
|
|
|
|
762,843
|
|
|
|
|
|
691,071
|
|
Retained
earnings (distributions in excess of earnings)
|
|
|
|
|
|
11,654
|
|
|
|
|
|
(122,738
|
)
|
Accumulated
other comprehensive income (loss) (“OCI”)
|
|
|
|
|
|
2,567
|
|
|
|
|
|
(255,719
|
)
|
Total
Stockholders’ Equity
|
|
|
|
|
|
915,831
|
|
|
|
|
|
451,371
|
|
Total
Liabilities, Mezzanine and
Stockholders’ Equity
|
|
|
|
|
$
|
4,796,826
|
|
|
|
|
$
|
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
June
30,
|
|
For
the Six Months Ended
June
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Income:
|
|
|
|
|
|
|
|
|
|
Interest
from securities
|
$
|
50,604
|
|
$
|
49,457
|
|
$
|
102,874
|
|
$
|
97,636
|
|
Interest
from commercial mortgage loans
|
|
23,100
|
|
|
18,282
|
|
|
46,831
|
|
|
29,449
|
|
Interest
from commercial mortgage loan pools
|
|
12,801
|
|
|
13,002
|
|
|
25,666
|
|
|
26,133
|
|
Earnings
(loss) from equity investments
|
|
(2,566
|
)
|
|
12,413
|
|
|
(557
|
)
|
|
22,369
|
|
Interest
from cash and cash equivalents
|
|
918
|
|
|
939
|
|
|
1,982
|
|
|
1,863
|
|
Total
income
|
|
84,857
|
|
|
94,093
|
|
|
176,796
|
|
|
177,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
50,683
|
|
|
60,085
|
|
|
107,536
|
|
|
115,924
|
|
Management
and incentive fees
|
|
4,940
|
|
|
7,729
|
|
|
19,159
|
|
|
14,682
|
|
General
and administrative expense
|
|
1,866
|
|
|
1,519
|
|
|
3,682
|
|
|
2,824
|
|
Total
expenses
|
|
57,489
|
|
|
69,333
|
|
|
130,377
|
|
|
133,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
gain (loss) on securities and swaps held-for-trading, net
|
|
(4,860
|
) |
|
388
|
|
|
(9,835
|
)
|
|
371
|
|
Unrealized
gain (loss) on securities held-for-trading
|
|
44,453
|
|
|
-
|
|
|
(325,327
|
)
|
|
-
|
|
Unrealized
gain on swaps classified as held-for-trading
|
|
37,572
|
|
|
-
|
|
|
5,048
|
|
|
-
|
|
Unrealized
gain (loss) on liabilities
|
|
(72,061
|
)
|
|
|
|
|
406,257
|
|
|
|
|
Gain
on sale of securities available-for-sale, net
|
|
-
|
|
|
158
|
|
|
-
|
|
|
6,908
|
|
Provision
for loan loss
|
|
-
|
|
|
-
|
|
|
(25,190
|
)
|
|
-
|
|
Foreign
currency gain (loss)
|
|
(2,145
|
)
|
|
1,371
|
|
|
(10,186
|
)
|
|
2,855
|
|
Loss
on impairment of assets
|
|
-
|
|
|
(2,900
|
)
|
|
-
|
|
|
(4,098
|
)
|
Total
other gains (losses)
|
|
2,959
|
|
|
(983
|
)
|
|
40,767
|
|
|
6,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
30,327
|
|
|
23,777
|
|
|
87,186
|
|
|
50,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on preferred stock
|
|
5,083
|
|
|
3,127
|
|
|
8,209
|
|
|
5,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
25,244
|
|
$
|
20,650
|
|
|
78,977
|
|
$
|
44,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share, basic:
|
$
|
0.36
|
|
$
|
0.35
|
|
$
|
1.19
|
|
$
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share, diluted:
|
$
|
0.34
|
|
$
|
0.34
|
|
$
|
1.09
|
|
$
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
69,458,370
|
|
|
59,568,356
|
|
|
66,437,973
|
|
|
58,715,762
|
|
Diluted
|
|
85,846,376
|
|
|
59,891,468
|
|
|
78,340,316
|
|
|
58,878,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
declared per share of common stock
|
$
|
0.31
|
|
$
|
0.30
|
|
$
|
0.61
|
|
$
|
0.59
|
|
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 Six Months Ended June 30, 2008
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Series
|
|
|
Series
|
|
|
|
|
|
Earnings
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
Stock,
|
|
|
C
|
|
|
D
|
|
|
Additional
|
|
|
(Distributions
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
|
Par
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Paid-In
|
|
|
in
Excess
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
Stockholders'
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,186
|
|
|
|
|
$
|
87,186
|
|
|
87,186
|
|
Unrealized
loss on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,208
|
)
|
|
(5,208
|
)
|
|
(5,208
|
)
|
Reclassification
adjustments from cash flow hedges included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,124
|
|
|
1,124
|
|
|
1,124
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,325
|
|
|
9,325
|
|
|
9,325
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,241
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,427
|
|
|
|
|
Dividends
declared-common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,163
|
)
|
|
|
|
|
|
|
|
(42,163
|
)
|
Dividends
on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,209
|
)
|
|
|
|
|
|
|
|
(8,209
|
)
|
Issuance
of common stock
|
|
|
10
|
|
|
|
|
|
|
|
|
71,772
|
|
|
|
|
|
|
|
|
|
|
|
71,782
|
|
Balance
at June 30, 2008
|
|
$
|
73
|
|
$
|
55,435
|
|
$
|
83,259
|
|
$
|
762,843
|
|
$
|
11,654
|
|
$
|
2,567
|
|
|
|
|
$
|
915,831
|
|
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 Six Months Ended June 30, 2008
|
|
For
the Six Months Ended June 30, 2007
|
|
Cash
flows from operating activities:
|
|
Net
income
|
|
$
|
87,186
|
|
$
|
50,056
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Net
decrease in trading securities
|
|
|
3,450
|
|
|
132,870
|
|
Purchase
of securities held-for-trading
|
|
|
(53,515
|
)
|
|
|
|
Unrealized
loss on securities held-for-trading
|
|
|
321,885
|
|
|
-
|
|
Unrealized
gain on swaps classified as held-for-trading
|
|
|
(5,048
|
)
|
|
-
|
|
Realized
loss on securities and swaps held-for-trading, net
|
|
|
3,103
|
|
|
(7,279
|
)
|
Unrealized
gain on liabilities
|
|
|
(406,257
|
)
|
|
-
|
|
Earnings
from subsidiary trust
|
|
|
(210
|
)
|
|
(209
|
)
|
Distributions
from subsidiary trust
|
|
|
209
|
|
|
209
|
|
Loss
(earnings) from equity investments
|
|
|
557
|
|
|
(22,369
|
)
|
Distributions
of earnings from equity investments
|
|
|
1,904
|
|
|
8,878
|
|
Provision
for loan loss
|
|
|
25,190
|
|
|
-
|
|
Discount
accretion, net
|
|
|
(7,470
|
)
|
|
(3,545
|
)
|
Loss
on impairment of assets
|
|
|
-
|
|
|
4,098
|
|
Unrealized
net foreign currency gain
|
|
|
(8,850
|
)
|
|
(10,323
|
)
|
Non-cash
management and incentive fees
|
|
|
8,502
|
|
|
2,893
|
|
(Disbursements)
proceeds from termination of interest rate swap agreements
|
|
|
(17,101
|
)
|
|
7,412
|
|
Amortization
of terminated interest rate swaps from OCI
|
|
|
1,124
|
|
|
763
|
|
Increase
in other assets
|
|
|
(7,530
|
)
|
|
(8,911
|
)
|
(Decrease)
increase in other liabilities
|
|
|
(1,473
|
)
|
|
5,065
|
|
Net
cash (used in) provided by operating activities
|
|
|
(54,344
|
)
|
|
159,608
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of securities
|
|
|
-
|
|
|
(215,210
|
)
|
Proceeds
from sale of securities
|
|
|
74,272
|
|
|
50,335
|
|
Principal
payments received on securities
|
|
|
54,425
|
|
|
42,659
|
|
Funding
of commercial mortgage loans
|
|
|
(2,286
|
)
|
|
(574,980
|
)
|
Repayments
received from commercial mortgage loans
|
|
|
14,140
|
|
|
155,173
|
|
Repayments
received from commercial mortgage loan pools
|
|
|
5,088
|
|
|
12,436
|
|
Decrease
in restricted cash equivalents
|
|
|
16,298
|
|
|
40,548
|
|
Investment
in equity investments
|
|
|
(35,323
|
)
|
|
(25,209
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
126,614
|
|
|
(514,248
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
(Decrease)
increase in borrowings under reverse repurchase agreements
and credit facilities:
|
|
|
|
|
|
|
|
Secured
by pledge of subordinated CMBS
|
|
|
(61,907
|
)
|
|
98,677
|
|
Secured
by pledge of investment grade CMBS
|
|
|
(62,175
|
)
|
|
(39,753
|
)
|
Secured
by pledge of commercial mortgage loans
|
|
|
(21,570
|
)
|
|
218,940
|
|
Secured
by pledge of securities held-for-trading
|
|
|
-
|
|
|
(127,249
|
)
|
Repayments
of borrowings secured by commercial mortgage loan pools
|
|
|
(6,458
|
)
|
|
(12,849
|
)
|
Repayments
of collateralized debt obligations
|
|
|
(43,603
|
)
|
|
(29,447
|
)
|
Issuance
of collateralized debt obligations
|
|
|
-
|
|
|
23,875
|
|
Issuance
costs for collateralized debt obligations
|
|
|
-
|
|
|
(1,518
|
)
|
Issuance
of senior unsecured notes
|
|
|
-
|
|
|
87,500
|
|
Issuance
costs of senior unsecured notes
|
|
|
-
|
|
|
(2,456
|
)
|
Issuance
of junior unsecured notes
|
|
|
-
|
|
|
67,528
|
|
Issuance
costs of junior unsecured notes
|
|
|
-
|
|
|
(2,113
|
)
|
Dividends
paid on preferred stock
|
|
|
(6,885
|
)
|
|
(4,217
|
)
|
Proceeds
from issuance of preferred stock, net of offering costs
|
|
|
69,866
|
|
|
83,267
|
|
Proceeds
from issuance of common stock, net of offering costs
|
|
|
43,213
|
|
|
66,297
|
|
Dividends
paid on common stock
|
|
|
(38,416
|
)
|
|
(33,685
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(127,935
|
)
|
|
392,797
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
2,802
|
|
|
3,171
|
|
Net
increase, (decrease) in cash and cash equivalents
|
|
|
(52,863
|
)
|
|
41,328
|
|
Cash
and cash equivalents, beginning of period
|
|
|
91,547
|
|
|
66,388
|
|
Cash
and cash equivalents, end of period
|
|
|
38,684
|
|
$
|
107,716
|
|
|
|
|
For
the Six Months Ended June 30, 2008
|
|
|
For
the Six Months Ended June 30, 2007
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
108,769
|
|
$
|
109,355
|
|
Series
E-3 preferred stock conversion
|
|
$
|
23,289
|
|
|
-
|
|
Incentive
fees paid by the issuance of common stock
|
|
$
|
5,280
|
|
$
|
5,250
|
|
Investments
purchased not settled
|
|
|
-
|
|
$
|
66,211
|
|
Commercial
mortgage loans purchased not settled
|
|
|
-
|
|
$
|
25,000
|
|
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 (collectively with its subsidiaries,
the
"Company"), was incorporated in Maryland in November 1997, 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 yield 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 June 30, 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 of
the
Company’s assets and long-term liabilities, 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 agreements. 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 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 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 June 30, 2008, the Company has
identified securities held-for-trading with a fair value of approximately
$126,005 which had been purchased from and financed with reverse repurchase
agreements totaling approximately $116,642 with the same counterparty since
their purchase. If the Company were required to change the current
accounting treatment for these transactions at June 30, 2008 to that required
by
this FSP, total assets and total liabilities would be reduced by approximately
$116,642.
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. As a result, the Company does not
consolidate these entities.
In
April
2008, the FASB voted to eliminate QSPEs from the guidance in SFAS 140 and to
remove the scope exception for QSPEs from FIN 46R. This will require that VIEs
previously accounted for as QSPEs to be analyzed for consolidation according
to
FIN 46R. The FASB also proposed that an entity review VIEs at each reporting
period to reconsider whether an entity is a VIE and to determine the primary
beneficiary. While the revised standards have not been finalized and the Board’s
proposals will be subject to a public comment period, this change may affect
the
Company’s consolidated financial statements as the Company may be required to
consolidate entities that had previously been determined to qualify as QSPEs.
The FASB proposed that the amendments to SFAS 140 and FIN 46R be effective
for
new and existing transactions for fiscal years and interim periods beginning
after November 15, 2009. The Company will continue to evaluate the impact of
these changes on its consolidated financial statements once these changes to
current GAAP become finalized.
Convertible
Debt Instruments
In
May 2008, FSP APB 14-1, Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)
(“FSP
APB 14-1”) was issued. FSP APB 14-1 applies to convertible debt instruments
that, by their stated terms, may be settled in cash (or other assets) upon
conversion, including partial cash settlement of the conversion option. FSP
APB
14-1 requires bifurcation of the instrument into a debt component that is
initially recorded at fair value and an equity component. The difference between
the fair value of the debt component and the initial proceeds from issuance
of
the instrument is recorded as a component of equity. The liability component
of
the debt instrument is accreted to par using the effective yield method;
accretion is reported as a component of interest expense. The equity component
is not subsequently re-valued as long as it continues to qualify for equity
treatment under EITF Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company’s Own Stock.
FSP APB
14-1 is effective for financial statements issued for fiscal years and interim
periods beginning after December 15, 2008. Early adoption is not permitted.
The FSP is to be applied retrospectively to all past periods presented — even if
the instrument has matured, converted, or otherwise been extinguished as of
the
FSP’s effective date. The Company is currently evaluating the impact of adopting
FSP APB 14-1 on the consolidated financial statements.
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 and cumulative
convertible redeemable preferred stock is calculated using the "if converted"
method.
|
|
For
the Three Months Ended
June
30,
|
|
For
the Six Months Ended
June
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Numerator
for basic earnings per share
|
|
$
|
25,244
|
|
$
|
20,650
|
|
$
|
78,977
|
|
$
|
44,653
|
|
Interest
expense on convertible senior notes
|
|
|
2,370
|
|
|
-
|
|
|
4,683
|
|
|
-
|
|
Dividends
on Series E convertible stock
|
|
|
1,929
|
|
|
-
|
|
|
1,929
|
|
|
-
|
|
Numerator
for diluted earnings per share
|
|
$
|
29,543
|
|
$
|
20,650
|
|
$
|
85,589
|
|
$
|
44,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share—
weighted
average common
shares outstanding
|
|
|
69,458,370
|
|
|
59,568,356
|
|
|
66,437,973
|
|
|
58,715,762
|
|
Dilutive
effect of stock options
|
|
|
-
|
|
|
2,480
|
|
|
-
|
|
|
2,760
|
|
Assumed
conversion of convertible senior notes
|
|
|
7,416,680
|
|
|
-
|
|
|
7,416,680
|
|
|
-
|
|
Assumed
conversion of Series E convertible preferred stock
|
|
|
8,604,781
|
|
|
-
|
|
|
4,302,390
|
|
|
-
|
|
Dilutive
effect of stock based incentive fee
|
|
|
366,545
|
|
|
320,632
|
|
|
183,273
|
|
|
160,315
|
|
Denominator
for diluted earnings per share—weighted average common shares outstanding
and common stock equivalents outstanding
|
|
|
85,846,376
|
|
|
59,891,468
|
|
|
78,340,316
|
|
|
58,878,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per weighted average common share:
|
|
$
|
0.36
|
|
$
|
0.35
|
|
$
|
1.19
|
|
$
|
0.76
|
|
Diluted
net income per weighted average common share and common share
equivalents:
|
|
$
|
0.34
|
|
$
|
0.34
|
|
$
|
1.09
|
|
$
|
0.76
|
|
Total
anti-dilutive stock options excluded from the calculation of net income per
share were 10,000 for the three and six months ended June 30, 2008. Total
anti-dilutive stock options excluded from the calculation of net income per
share were 1,380,151 for the three and six months ended June 30, 2007.
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, long-term liabilities 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.
Instruments are categorized based on the lowest level input that is significant
to the valuation. 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 June 30,
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 June 30, 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 June 30, 2008
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
|
Subordinated
CMBS
|
|
$
|
-
|
|
$
|
-
|
|
$
|
797,327
|
|
$
|
797,327
|
|
Investment
grade CMBS
|
|
|
-
|
|
|
-
|
|
|
1,104,751
|
|
|
1,104,751
|
|
RMBS
|
|
|
-
|
|
|
-
|
|
|
973
|
|
|
973
|
|
Derivative
instruments
|
|
|
-
|
|
|
406,202
|
|
|
-
|
|
|
406,202
|
|
Investments
in equity of subsidiary
trusts*
|
|
|
-
|
|
|
-
|
|
|
2,210
|
|
|
2,210
|
|
Total
|
|
$
|
-
|
|
$
|
406,202
|
|
$
|
1,905,261
|
|
$
|
2,311,463
|
|
*
Included as a component of other assets on the consolidated statements of
financial condition.
|
|
Liabilities
at Fair Value as of June 30, 2008
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
|
Senior
unsecured notes
|
|
$
|
-
|
|
$
|
-
|
|
$
|
85,204
|
|
$
|
85,204
|
|
Senior
convertible notes
|
|
|
-
|
|
|
-
|
|
|
71,160
|
|
|
71,160
|
|
Junior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
35,611
|
|
|
35,611
|
|
Junior
subordinated notes
|
|
|
-
|
|
|
-
|
|
|
72,829
|
|
|
72,829
|
|
CDOs
|
|
|
-
|
|
|
-
|
|
|
1,252,224
|
|
|
1,252,224
|
|
Derivative
instruments
|
|
|
-
|
|
|
433,850
|
|
|
-
|
|
|
433,850
|
|
Total
|
|
$
|
-
|
|
$
|
433,850
|
|
$
|
1,517,028
|
|
$
|
1,950,878
|
|
The
following table presents the changes in Level 3 assets for the three months
ended June 30, 2008:
|
|
Subordinated
CMBS
|
|
Investment
grade CMBS
|
|
RMBS
|
|
Junior
Subordinated Notes
|
|
Balance
at April 1, 2008
|
|
$
|
808,510
|
|
$
|
1,072,749
|
|
$
|
1,009
|
|
$
|
2,093
|
|
Net
purchases (sales)
|
|
|
(1,870
|
)
|
|
(14,480
|
)
|
|
(59
|
)
|
|
-
|
|
Net
transfers in (out)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Gains
(losses) included in earnings
|
|
|
(8,573
|
)
|
|
45,885
|
|
|
23
|
|
|
117
|
|
Gains
included in OCI
(1)
|
|
|
(740
|
)
|
|
597
|
|
|
-
|
|
|
-
|
|
Balance
at June 30, 2008
|
|
$
|
797,327
|
|
$
|
1,104,751
|
|
$
|
973
|
|
$
|
2,210
|
|
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 June 30, 2008 (2)
|
|
$
|
(7,376
|
)
|
$
|
47,519
|
|
$
|
23
|
|
$
|
117
|
|
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 June 30, 2008 (3)
|
|
$
|
(1,197
|
)
|
$
|
(1,634
|
)
|
$
|
-
|
|
$
|
-
|
|
(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 assets for the six months ended
June 30, 2008:
|
|
Subordinated
CMBS
|
|
Investment
grade CMBS
|
|
RMBS
|
|
Junior
Subordinated Notes
|
|
Balance
at January 1, 2008
|
|
$
|
1,028,153
|
|
$
|
1,245,998
|
|
$
|
10,183
|
|
$
|
3,135
|
|
Net
purchases (sales)
|
|
|
954
|
|
|
(68,321
|
)
|
|
(9,282
|
)
|
|
-
|
|
Net
transfers in (out)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Gains
(losses) included in earnings
|
|
|
(239,508
|
)
|
|
(76,253
|
)
|
|
72
|
|
|
(925
|
)
|
Gains
included in OCI
(1)
|
|
|
7,728
|
|
|
3,327
|
|
|
-
|
|
|
-
|
|
Balance
at June 30, 2008
|
|
$
|
797,327
|
|
$
|
1,104,751
|
|
$
|
973
|
|
$
|
2,210
|
|
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 June 30, 2008 (2)
|
|
$
|
(245,381
|
)
|
$
|
(79,549
|
)
|
$
|
72
|
|
$
|
(925
|
)
|
Amount
of total gains for the period included in earnings attributable to
the
change in unrealized gains or losses relating to assets still held
at June
30, 2008 (3)
|
|
$
|
5,873
|
|
$
|
3,296
|
|
$
|
-
|
|
$
|
-
|
|
(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 June 30, 2008:
|
|
CDOs
|
|
Senior
unsecured notes
|
|
Senior
convertible notes
|
|
Junior
unsecured notes
|
|
Trust
preferred
|
|
Balance
at April 1, 2008
|
|
$
|
1,216,289
|
|
$
|
80,864
|
|
$
|
67,696
|
|
$
|
34,122
|
|
$
|
68,986
|
|
Paydowns
|
|
|
(20,168
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
transfers in (out)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Gains
included in earnings
|
|
|
58,475
|
|
|
4,340
|
|
|
3,464
|
|
|
1,489
|
|
|
3,843
|
|
Losses
included in OCI (1)
|
|
|
(2,372
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance
at June 30, 2008
|
|
|
1,252,224
|
|
|
85,204
|
|
|
71,160
|
|
|
35,611
|
|
|
72,829
|
|
Amount
of total gains for the period included in earnings attributable to
the
change in unrealized gains relating to liabilities still held at
June 30,
2008 (2)
|
|
|
58,475
|
|
|
4,340
|
|
|
3,464
|
|
|
1,939
|
|
|
3,843
|
|
Amount
of total gains (losses) for the period included in earnings attributable
to the change in unrealized gains or losses relating to liabilities
still
held at June 30, 2008 (3)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(450
|
)
|
$
|
-
|
|
(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.
|
The
following table presents the changes in Level 3 liabilities for the six months
ended June 30, 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
|
|
|
(43,603
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
transfers in (out)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Gains
included in earnings
|
|
|
(332,582
|
)
|
|
(29,269
|
)
|
|
974
|
|
|
(9,222
|
)
|
|
(30,483
|
)
|
Losses
included in OCI (1)
|
|
|
29,907
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance
at June 30, 2008
|
|
|
1,252,224
|
|
|
85,204
|
|
|
71,160
|
|
|
35,611
|
|
|
72,829
|
|
Amount
of total gains (losses) for the period included in earnings attributable
to the change in unrealized gains or losses relating to liabilities
still
held at June 30, 2008 (2)
|
|
|
(332,582
|
)
|
|
(29,269
|
)
|
|
974
|
|
|
(14,897
|
)
|
|
(30,483
|
)
|
Amount
of total gains for the period included in earnings attributable to
the
change in unrealized gains or losses relating to liabilities still
held at
June 30, 2008 (3)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
5,675
|
|
$
|
-
|
|
(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.
|
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 June 30, 2008, for which a nonrecurring
change in fair value has been recorded during the six months ended June 30,
2008:
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Carrying
Value
|
|
Commercial
mortgage loan(1)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
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 six months ended June 30, 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 June 30,
2008.
|
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 OCI to opening distributions in excess of earnings.
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. The Company utilizes this process to
validate the prices received from brokers and
adjustments are made as deemed necessary by management to capture current market
information.
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
current market information.
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 June 30,
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 securities - The estimated fair
values 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 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 that were previously classified as
available-for-sale. As a result, all securities are now classified as
held-for-trading. This reclassification adjustment did not result in a change
to
the Company’s intent as it relates to these securities. For the three and six
months ended June 30, 2008, respectively, $44,453 and $(325,327) were recorded
as unrealized gain (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 June 30, 2008 is
summarized as follows:
Security
Description
|
|
Estimated
Fair
Value
|
|
U.S.
Dollar Denominated:
|
|
|
|
CMBS:
|
|
|
|
Investment
grade CMBS
|
|
$
|
694,844
|
|
Non-investment
grade rated subordinated CMBS
|
|
|
456,261
|
|
Non-rated
subordinated CMBS
|
|
|
85,804
|
|
CMBS
interest only securities (“IOs”)
|
|
|
4,427
|
|
Credit
tenant leases
|
|
|
23,030
|
|
Investment
grade REIT debt
|
|
|
205,846
|
|
Multifamily
agency securities
|
|
|
357
|
|
CDO
investments - investment grade
|
|
|
2,840
|
|
CDO
investments - non-investment grade
|
|
|
32,733
|
|
Total
CMBS
|
|
|
1,506,142
|
|
|
|
|
|
|
RMBS:
|
|
|
|
|
Residential
CMOs
|
|
|
555
|
|
Hybrid
adjustable rate mortgages (“ARMs”)
|
|
|
418
|
|
Total
RMBS
|
|
|
973
|
|
Total
U.S. dollar denominated
|
|
|
1,507,115
|
|
|
|
|
|
|
Non-U.S.
Dollar Denominated:
|
|
|
|
|
Investment
grade CMBS
|
|
|
173,407
|
|
Non-investment
grade rated subordinated CMBS
|
|
|
193,271
|
|
Non-rated
subordinated CMBS
|
|
|
29,258
|
|
Total
non-U.S. dollar denominated
|
|
|
395,936
|
|
Total
securities held-for-trading
|
|
$
|
1,903,051
|
|
At
June
30, 2008, an aggregate of $1,847,589 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
June
30, 2008, the anticipated reported yield based upon the adjusted cost of the
Company's entire subordinated CMBS portfolio was 10.00% 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 |
COMMERCIAL
MORTGAGE LOANS
|
The
following table summarizes the Company’s commercial real estate loan portfolio
by property type at June 30, 2008 and December 31, 2007:
|
|
Loan
Outstanding
|
|
Weighted
|
|
|
|
June
30, 2008
|
|
December
31, 2007
|
|
Average
Yield
|
|
Property
Type
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
52,437
|
|
|
5.30
|
%
|
$
|
52,209
|
|
|
5.3
|
%
|
|
9.6
|
%
|
|
9.6
|
%
|
Office
|
|
|
45,549
|
|
|
4.6
|
|
|
45,640
|
|
|
4.6
|
|
|
10.3
|
|
|
10.3
|
|
Multifamily
|
|
|
175,301
|
|
|
17.6
|
|
|
174,873
|
|
|
17.8
|
|
|
9.9
|
|
|
9.7
|
|
Storage
|
|
|
32,159
|
|
|
3.2
|
|
|
32,307
|
|
|
3.3
|
|
|
9.1
|
|
|
9.1
|
|
Land(1)
|
|
|
-
|
|
|
-
|
|
|
25,000
|
|
|
2.5
|
|
|
-
|
|
|
9.6
|
|
Hotel
|
|
|
12,302
|
|
|
1.2
|
|
|
12,208
|
|
|
1.2
|
|
|
10.4
|
|
|
10.9
|
|
Other
Mixed Use
|
|
|
3,994
|
|
|
0.4
|
|
|
3,983
|
|
|
0.5
|
|
|
8.5
|
|
|
8.5
|
|
Total
U.S.
|
|
|
321,742
|
|
|
32.4
|
|
|
346,220
|
|
|
35.2
|
|
|
9.8
|
|
|
9.7
|
|
Non-U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
293,915
|
|
|
29.6
|
|
|
278,669
|
|
|
28.3
|
|
|
8.7
|
|
|
8.9
|
|
Office
|
|
|
255,904
|
|
|
25.8
|
|
|
238,691
|
|
|
24.3
|
|
|
8.4
|
|
|
8.8
|
|
Multifamily
|
|
|
44,139
|
|
|
4.4
|
|
|
41,403
|
|
|
4.2
|
|
|
8.5
|
|
|
8.6
|
|
Storage
|
|
|
51,352
|
|
|
5.2
|
|
|
51,272
|
|
|
5.2
|
|
|
9.2
|
|
|
9.5
|
|
Industrial
|
|
|
17,202
|
|
|
1.7
|
|
|
17,274
|
|
|
1.8
|
|
|
10.3
|
|
|
10.6
|
|
Hotel
|
|
|
4,175
|
|
|
0.4
|
|
|
5,016
|
|
|
0.5
|
|
|
10.0
|
|
|
10.1
|
|
Other
Mixed Use
|
|
|
4,953
|
|
|
0.5
|
|
|
4,842
|
|
|
0.5
|
|
|
9.0
|
|
|
9.0
|
|
Total
Non-U.S.
|
|
|
671,640
|
|
|
67.6
|
|
|
637,167
|
|
|
64.8
|
|
|
8.7
|
|
|
8.9
|
|
Total
|
|
$
|
993,382
|
|
|
100.00
|
%
|
$
|
983,387
|
|
|
100.00
|
%
|
|
9.00
|
%
|
|
9.20
|
%
|
(1) |
Net
of a loan loss reserve of $25,000 at June 30,
2008.
|
As
of
June 30, 2008, the Company’s loans had the following maturity
characteristics:
Year
of maturity
|
|
Number
of loans maturing
|
|
Current
carrying
value
|
|
%
of total
|
|
2008
|
|
|
1
|
|
|
35,921
|
|
|
3.6
|
%
|
2009
|
|
|
-
|
|
|
-
|
|
|
0.0
|
%
|
2010
|
|
|
3
|
|
|
24,783
|
|
|
2.5
|
%
|
2011
|
|
|
15
|
|
|
304,444
|
|
|
30.6
|
%
|
2012
|
|
|
18
|
|
|
264,058
|
|
|
26.6
|
%
|
Thereafter
|
|
|
23
|
|
|
364,176
|
|
|
36.7
|
%
|
Total
|
|
|
60
|
|
|
993,382
|
|
|
100.0
|
%
|
Activity
for the six months ended June 30, 2008 was as follows:
|
|
Book
Value
|
|
Balance
at December 31, 2007
|
|
$
|
983,387
|
|
Investments
in commercial mortgage loans
|
|
|
2,286
|
|
Proceeds
from repayment of mortgage loans
|
|
|
(14,140
|
)
|
Provision
for loan loss
|
|
|
(25,000
|
)
|
Foreign
currency
|
|
|
42,863
|
|
Discount
accretion, net |
|
|
3,986
|
|
Balance
at June 30, 2008
|
|
$
|
993,382
|
|
The
Company recorded a provision for loan losses of $25,190 for the six months
ended
June 30, 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, June 30, 2008
|
|
$
|
25,190
|
|
Subsequent
to June 30, 2008, one of the Company’s mezzanine loans with a carrying value of
$35,921 defaulted. The borrower executed a standstill agreement which is being
extended to allow time to conclude an extension agreement. As of June 30, 2008,
the Company concluded that a loan loss reserve is not necessary.
Note
6 |
COMMERCIAL
MORTGAGE LOAN POOLS
|
During
the second quarter of 2004, the Company acquired subordinated CMBS in a trust
representing 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
7 |
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. 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
six months ended June 30, 2007, changes in timing of assumed credit loss and
prepayments on three CMBS required an impairment charge totaling $2,777. Also,
the Company increased its underlying loss expectations for one below investment
grade European CMBS during the six months ended June 30, 2007, resulting in
an
additional impairment charge of $1,321.
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 OCI in stockholders’
equity.
Note
8 |
EQUITY
INVESTMENTS
|
The
following table is a summary of the Company’s equity investments for the six
months ended June 30, 2008:
|
|
Carbon
I
|
|
Carbon
II
|
|
Dynamic
India
Fund
IV *
|
|
AHR
JV
|
|
AHR
Int’l JV
|
|
Total
|
|
Balance
at December
31, 2007
|
|
$
|
1,636
|
|
$
|
97,762
|
|
$
|
9,350
|
|
$
|
-
|
|
$
|
-
|
|
$
|
108,748
|
|
Contributions
to investments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,137
|
|
|
30,886
|
|
|
32,023
|
|
Equity
earnings
|
|
|
75
|
|
|
(600
|
)
|
|
-
|
|
|
(48
|
)
|
|
16
|
|
|
(557
|
)
|
Distributions
of earnings
|
|
|
-
|
|
|
(1,904
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,904
|
)
|
Balance
at June
30, 2008
|
|
$
|
1,711
|
|
$
|
95,258
|
|
$
|
9,350
|
|
$
|
1,089
|
|
$
|
30,902
|
|
$
|
138,310
|
|
*
The
Company neither controls nor has significant influence over the Dynamic India
Fund IV and accounts for this investment using the cost method of accounting.
The
Company invested $3,300 in the Dynamic India Fund IV in the fourth quarter
of
2007 that did not settle until the first quarter of 2008.
At
June
30, 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”). The
Carbon Capital Funds are private commercial real estate income opportunity
funds
managed by the Manager (see Note 12 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 Carbon I is in
liquidation.
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
June 30, 2008 Carbon II has three assets located in Florida that are in various
stages of resolution. The properties consist of one hotel and two multifamily
properties. Carbon II took title to one of the multifamily properties during
2007. During the six months ended June 30, 2008, Carbon II increased its loan
loss reserves for two loans by $911. At June 30, 2008 the total loan loss
reserve for these loans is $4,242. For the property owned, Carbon II recognized
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
at
maturity in February 2008. The loan has been restructured, modified and
extended. However, Carbon II established a loan loss reserve of $17,700
during the second quarter of 2008 based upon management's assessment of the
probability of recovery.
During
the second quarter of 2008, a $30,000 first leasehold mortgage on a 43.9 acre
tract of land in Las Vegas, zoned for commercial use, went into default. Carbon
II is engaged in workout discussions, and other alternatives are being
explored.
Carbon
II
believes a loan loss reserve is not necessary at June 30, 2008. All other
commercial real estate loans in Carbon II 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 June 30, 2008, the Company’s capital
committed was $11,000, of which $9,350 had been drawn.
The
Company will invest up to $5,000, for up to a 10% interest, in Anthracite JV
LLC
(“AHR JV”). AHR JV will invest in U.S. CMBS rated higher than BB. As of June 30,
2008, the Company had invested $1,137 in AHR JV. The
other
member in AHR JV is managed by or otherwise associated with an affiliate of
Credit Suisse.
On
June
26, 2008, the Company invested $30,886 in RECP Anthracite International JV
Limited (“AHR International JV”). AHR International JV will invest in
investments backed by non-U.S. real estate assets. The Company will invest
on a
deal-by-deal basis and has no committed capital obligation. The Company is
utilizing the joint venture structure to increase its capacity to invest in
larger and more diverse transactions given the current market’s elevated level
of risk. The
other
shareholder in AHR International JV is managed by or otherwise associated with
an affiliate of Credit Suisse.
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 June 30, 2008 is
summarized as follows:
Borrowing
Type
|
|
|
Market
Value
|
|
|
Adjusted
Issuance Price
|
|
|
Weighted
Average Borrowing Rate
|
|
|
Weighted
Average Remaining Maturity
|
|
|
Estimated
Fair Value of Assets Pledged
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
facilities (1)
|
|
$
|
610,317
|
|
$
|
610,317
|
|
|
4.92
|
%
|
|
323
days
|
|
$
|
858,382
|
|
Commercial
mortgage loan pools
|
|
|
1,207,151
|
|
|
1,207,151
|
|
|
4.00
|
%
|
|
4.42
years
|
|
|
1,229,442
|
|
CDOs
(2)
|
|
|
1,252,224
|
|
|
1,810,258
|
|
|
5.71
|
%
|
|
5.13
years
|
|
|
1,854,758
|
|
Senior
unsecured notes (2)
|
|
|
85,204
|
|
|
162,500
|
|
|
7.59
|
%
|
|
8.82
years
|
|
|
|
|
Junior
unsecured notes (2)
|
|
|
35,611
|
|
|
78,777
|
|
|
6.56
|
%
|
|
13.84
years
|
|
|
|
|
Senior
convertible notes (2)
|
|
|
71,160
|
|
|
80,000
|
|
|
11.75
|
%
|
|
19.18
years
|
|
|
|
|
Junior
subordinated notes (2)
|
|
|
72,829
|
|
|
180,477
|
|
|
7.64
|
%
|
|
27.61
years
|
|
|
|
|
Total
Borrowings
|
|
$
|
3,334,496
|
|
$
|
4,129,480
|
|
|
5.39
|
%
|
|
5.86
years
|
|
$
|
3,942,582
|
|
(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 (loss) on liabilities on the consolidated
statement of operations. For the six months ended June 30, 2008,
$406,257
was recorded as a result of a reduction in the fair value of such
liabilities.
|
At
June
30, 2008, the Company's borrowings had the following remaining maturities,
at
amortized cost:
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
facilities
|
|
$
|
-
|
|
$
|
-
|
|
$
|
439,474
|
|
$
|
170,843
|
|
$
|
-
|
|
$
|
-
|
|
$
|
610,317
|
|
Commercial
mortgage loan pools(1)
|
|
|
-
|
|
|
2,120
|
|
|
343,333
|
|
|
103,903
|
|
|
40,119
|
|
|
717,676
|
|
|
1,207,151
|
|
CDOs(1)
|
|
|
397
|
|
|
694
|
|
|
45,144
|
|
|
172,900
|
|
|
736,650
|
|
|
854,473
|
|
|
1,810,258
|
|
Senior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
162,500
|
|
|
162,500
|
|
Junior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
78,777
|
|
|
78,777
|
|
Senior
convertible notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
80,000
|
|
|
80,000
|
|
Junior
subordinated notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
180,477
|
|
|
180,477
|
|
Total
Borrowings
|
|
$
|
397
|
|
$
|
2,814
|
|
$
|
827,951
|
|
$
|
447,646
|
|
$
|
776,769
|
|
$
|
2,073,903
|
|
$
|
4,129,480
|
|
(1)
|
Commercial
mortgage loan pools and CDOs are non-recourse borrowings and payments
for
these borrowings are supported solely by the cash flows from the
assets in
these structures.
|
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 June 30, 2008 and December 31, 2007:
|
|
|
|
June
30,
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)(7)
|
|
|
9/18/09
|
|
$
|
275,000
|
|
$
|
170,843
|
|
$
|
104,157
|
|
$
|
275,000
|
|
$
|
211,088
|
|
$
|
63,912
|
|
Deutsche
Bank AG, Cayman Islands Branch (2)(6)
|
|
|
12/20/08
|
|
|
200,000
|
|
|
110,104
|
|
|
89,896
|
|
|
200,000
|
|
|
174,186
|
|
|
25,814
|
|
Bank
of America, N.A.(3)(8)
|
|
|
9/17/08
|
|
|
100,000
|
|
|
80,529
|
|
|
19,471
|
|
|
100,000
|
|
|
87,706
|
|
|
12,294
|
|
Morgan
Stanley Bank (3)(4)
|
|
|
2/07/09
|
|
|
300,000
|
|
|
248,841
|
|
|
51,159
|
|
|
300,000
|
|
|
198,621
|
|
|
101,379
|
|
BlackRock
HoldCo 2, Inc. (1)(5)
|
|
|
3/06/09
|
|
|
60,000
|
|
|
-
|
|
|
60,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
$
|
935,000
|
|
$
|
610,317
|
|
$
|
324,683
|
|
$
|
875,000
|
|
$
|
671,601
|
|
$
|
203,399
|
|
|
(2) |
Multicurrency
(USD and Non- USD)
|
|
(4) |
Can
be increased by an additional $15,000 based on the change in exchange
rates of the non-U.S. dollar loans. However,
any amounts drawn under this provision must be repaid in ninety
days.
|
|
(5) |
Repaid
in full on April 8, 2008; $30,000 borrowed on July 28,
2008
|
|
(6) |
Renewed
on July 8, 2008 until July 8, 2010, see details
below.
|
|
(7) |
Renewed
on August 7, 2008 until September 18, 2010, see details
below.
|
|
(8) |
Renewed
on August 7, 2008 until September 18, 2010, see details
below.
|
The
Company is subject to financial covenants in its credit facilities. For the
quarter ended June 30, 2008, the Company is not aware of any instances of
non-compliance with these covenants.
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 the extension, certain financial
covenants were added or modified so that: (i) the Company is required to have
a
minimum debt service coverage ratio (as defined in the related guaranty) 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, (vi) on any
date 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 (mark-to-market
indebtedness is defined under the related guaranty generally to mean short-term
liabilities that have a margin call feature) and (vii) cumulative income cannot
be less than one dollar for two consecutive quarters.
On
July
8, 2008, Deutsche Bank AG, Cayman Islands Branch, extended its multicurrency
repurchase agreement until July 8, 2010. In connection with the extension,
certain financial covenants were added or modified to conform to the covenants
in the Morgan Stanley Bank facility described above. In addition, the Company
separately agreed with Deutsche Bank AG, Cayman Islands Branch, that to the
extent the Company from time to time agrees to covenants that are more
restrictive than those in the Deutsche Bank agreement, the covenants in the
Deutsche Bank agreement will automatically be deemed to be modified to match
the
restrictions in such more restrictive covenants, subject to limited exceptions.
The amended agreement also provides that the Company’s failure (1) to procure an
extension of any of its existing facilities with Bank of America, N.A. and
Morgan Stanley Bank as of the 15th day before the maturity date of such facility
or (2) to demonstrate to the satisfaction of Deutsche Bank that it is
negotiating a bona fide commitment to extend or replace such facility as of
the
30th day before the maturity date, would constitute an event of default under
such agreement; however, any such failure would not be deemed to constitute
an
event of default if the Company demonstrates to the satisfaction of Deutsche
Bank that it has sufficient liquid assets, as defined under such agreement,
to
pay down such the multicurrency repurchase agreement when due. At the time
of
the extension, total borrowings outstanding under the Deutsche Bank agreement
were $110,104. Under the terms of the extension agreements, no additional
borrowings are permitted under the facility. In addition, monthly amortization
payments of approximately $2,000 per month are required under the
facility.
On
August
7, 2008, Bank of America, N.A. extended its USD and non-USD facilities until
September 18, 2010. In connection with the extension, certain financial
covenants were added or modified to conform to more restrictive covenants
contained in other credit facilities. Also in connection with the extension,
the
Company is required to make (i) amortization payments totaling $31,000 on
various dates through September 30, 2008 and (ii) monthly payments of
$2,250 commencing October 15, 2008 until March 15, 2010 under the non-USD
facility and $2,250 per month commencing April 15, 2010 and ending at maturity
under the USD facility.
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 give the Lender the option to purchase from the Company the
shares of Carbon II that serve as collateral for the Facility, up to the
Facility commitment amount, at a price equal to the fair market value (as
determined by the terms of the credit agreement) of those shares, unless the
Company elects to prepay outstanding loans under the Facility in an amount
equal
to the Lender's desired share purchase amount and reduce the Facility's
commitment amount accordingly, which may require termination of the Facility.
If
any loans are outstanding at the time of such purchase, the share purchase
amount shall be reduced by the amount, and applied towards the repayment of
all
outstanding loans (and the reduction of the Facility's commitment amount) in
the
same manner as if the Company had prepaid such loans, and the balance of the
share purchase amount available after such repayment, if any, shall be paid
to
the Company.
On
April
8, 2008, the Company repaid $52,500 to HoldCo 2, representing all
then-outstanding borrowings under the facility. On July 28, 2008, the Company
reborrowed $30,000 under the facility.
Note
10 |
CONVERTIBLE
REDEEMABLE 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 $69,866. Dividends are payable on the Series E Preferred Stock
at a
12% coupon and the holder 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).
Holders
of the Series E-1 and E-2 preferred stock have the right to require the Company
to repurchase their shares for cash equal to the liquidation preference per
share. The Series E-1 preferred stock repurchase date is April 4, 2012 and
the
Series E-2 repurchase date is April 4, 2013.
On
June
20, 2008, the holder of the outstanding 12% Series E-3 Cumulative Convertible
Redeemable Preferred Stock exercised its right to convert its shares into
3,119,661 shares of common stock.
The
holder is a subsidiary of a fund managed by an affiliate of Credit
Suisse.
The
following table summarizes Common Stock issued by the Company for the six months
ended June 30, 2008, net of offering costs:
|
|
Shares
|
|
Net
Proceeds
|
|
Dividend
Reinvestment and Stock Purchase Plan
|
|
|
89,301
|
|
$
|
675
|
|
Sales
agency agreement
|
|
|
2,601,338
|
|
|
19,253
|
|
Incentive
fees*
|
|
|
424,425
|
|
|
3,163
|
|
Incentive
fee - stock based*
|
|
|
316,320
|
|
|
2,116
|
|
Series
E-3 preferred stock conversion
|
|
|
3,119,661
|
|
|
23,289
|
|
Private
transaction (see details below)
|
|
|
3,494,021
|
|
|
23,286
|
|
Total
|
|
|
10,045,066
|
|
$
|
71,782
|
|
*See
Note
12 to the consolidated financial statements, Transactions with the Manager
and
Certain Other Parties, for a further description of the Company’s Management
Agreement.
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, for $6.69
per
share, resulting in net proceeds of $23,286.
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.
On
May
15, 2008, the Company declared dividends to its common stockholders of $0.31
per
share, payable on July 31, 2008 to stockholders of record on June 30, 2008.
For
U.S. federal income tax purposes, the dividends are expected to be ordinary
income to the Company’s stockholders.
Note
12 |
TRANSACTIONS
WITH THE MANAGER AND CERTAIN OTHER
PARTIES
|
The
Company has a Management Agreement, an administrative services agreement and
an
accounting services agreement with the Manager, the employer of certain
directors and all of the officers of the Company, under which the Manager and
the Company’s officers manage the Company’s day-to-day investment operations,
subject to the direction and oversight of the Company’s Board of Directors.
Pursuant to the Management Agreement and these other agreements, the Manager
and
the Company’s officers formulate investment strategies, arrange for the
acquisition of assets, arrange for financing, monitor the performance of the
Company’s assets and provide certain other advisory, administrative and
managerial services in connection with the operations of the Company.
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
fees
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 0.5% 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 ($11.21 per common share at June 30, 2008) 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. Additionally, up to 30% of the
incentive fees earned in 2007 or after were 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
and six months ended June 30, 2008 and 2007:
|
|
For
the Three Months Ended
June
30,
|
|
For
the Six Months Ended
June
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Management
fee
|
|
$
|
2,961
|
|
$
|
3,868
|
|
$
|
6,236
|
|
$
|
7,388
|
|
Incentive
fee
|
|
|
1,334
|
|
|
2,922
|
|
|
11,879
|
|
|
5,646
|
|
Incentive
fee - stock based
|
|
|
645
|
|
|
939
|
|
|
1,044
|
|
|
1,648
|
|
Total
management and incentive fees
|
|
$
|
4,940
|
|
$
|
7,729
|
|
$
|
19,159
|
|
$
|
14,682
|
|
At
June
30, 2008 and 2007, management and incentive fees of $14,182 and $7,308,
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 $250 for certain
expenses incurred on behalf of the Company during the three and six months
ended
June 30, 2008 and $117 and $235 for the three and six months ended June 30,
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 and six months ended June 30, 2008, the Company recorded administration
and investment accounting service fees of $255 and $510, respectively, which
are
included in general and administrative expense on the accompanying consolidated
statements of operations. For the three and six months ended June 30, 2007,
the
Company recorded administration and investment accounting service fees of $363
and $140, 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. On April 8,
2008, the Company repaid $52,500 to HoldCo 2, representing all then-outstanding
borrowings under the facility. On July 28, 2008, the Company reborrowed $30,000
under the facility.
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 June 30, 2008 was $1,711. The
Company does not incur any additional management or incentive fees to the
Manager related to its investment in Carbon I. At June 30, 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 June 30, 2008 was $95,258.
The Company does not incur any additional management or incentive fees to the
Manager related to its investment in Carbon II. On June 30, 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 June 30, 2008, the Installment Payment would be $2,000
payable over two years. The Company is not required to accrue for this
contingent liability because it is not probable.
Note
13 |
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 into, 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 June 30, 2008, the Company did not have any balances
pledged to counterparties as collateral under these agreements.
At
June
30, 2008, the Company had interest rate swaps with notional amounts aggregating
$99,260 designated as cash flow hedges of borrowings under reverse repurchase
agreements and credit facilities. Cash flow hedges with an estimated fair
value of $1,702 are included in derivative assets in the consolidated statement
of financial condition. For the six months ended June 30, 2008, the net change
in the estimated fair value of the interest rate swaps was a decrease of $3,905,
of which $1,303 was deemed ineffective and is included as a decrease of interest
expense and $5,208 was recorded as a reduction of OCI. At June 30, 2008, the
$99,260 of notional swaps designated as cash flow hedges had a weighted average
remaining term of 3.5 years.
During
the six months ended June 30, 2008, the Company terminated five of its interest
rate swaps with a notional amount of $168,500 that were designated as cash
flow
hedges of borrowings under reverse repurchase agreements and credit facilities.
The Company will reclassify the $18,253 loss in value from OCI to interest
expense over 7.6 years, which was the weighted average remaining term of the
swaps at the time they were closed out. At June 30, 2008, the Company has,
in
aggregate, $19,933 of net losses related to terminated swaps recorded in OCI.
For the quarter ended June 30, 2008, $715 was reclassified as an increase to
interest expense and $3,561 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 OCI to opening distributions in excess of
earnings as of January 1, 2008. At June 30, 2008, the Company had interest
rate
swaps with notional amounts aggregating $1,238,755 designated as trading
derivatives. Trading derivatives with an estimated fair value of $3,569 are
included in derivative assets on the consolidated statement of financial
condition and trading derivatives with an estimated fair value of $28,236 are
included in derivative liabilities on the consolidated statement of financial
condition. For the six months ended June 30, 2008, the change in estimated
fair
value for these trading derivatives was a increase of $3,704 and is included
as
a component of gain (loss) on securities held-for-trading on the consolidated
statement of operations. At June 30, 2008, the $1,238,755 notional of swaps
designated as trading derivatives had a weighted average remaining term of
5.2
years.
At
June
30, 2008, the Company had a forward LIBOR cap with a notional amount of $85,000
and an estimated fair value at June 30, 2008, of $260 which is included in
derivative assets, and the change in estimated fair value related to this
derivative of $65 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 $(2,145) and $(10,186) for the three and six months ended
June
30, 2008 and $1,371 and $2,855 for the three and six months ended 2007,
respectively.
Foreign
currency agreements at June 30, 2008 consisted of the following:
|
|
Estimated
Fair Value
|
|
Unamortized
Cost
|
|
Average
Remaining Term
|
|
Currency
swaps
|
|
$
|
(22,181
|
)
|
$
|
-
|
|
|
8.1
years
|
|
CDO
currency swaps
|
|
$
|
18,554
|
|
$
|
-
|
|
|
9.4
years
|
|
Forwards
|
|
$
|
(1,316
|
)
|
$
|
-
|
|
|
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 may use 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 OCI. For the six months
ended June 30, 2008 the foreign currency gain translation included in
accumulated OCI was $9,325. 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
14 |
NET
INTEREST INCOME
|
The
following is a presentation of the Company’s net interest income for the three
and six months ended June 30, 2008 and 2007:
|
|
For
the Three Months
Ended
June
30,
|
|
For
the Six Months
Ended
June
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Interest
Income:
|
|
|
|
|
|
|
|
|
|
Interest
from securities
|
|
$
|
50,604
|
|
$
|
49,457
|
|
$
|
102,874
|
|
$
|
97,636
|
|
Interest
from commercial mortgage loans
|
|
|
23,100
|
|
|
18,282
|
|
|
46,831
|
|
|
29,449
|
|
Interest
from commercial mortgage loan pools
|
|
|
12,801
|
|
|
13,002
|
|
|
25,666
|
|
|
26,133
|
|
Interest
from cash and cash equivalents
|
|
|
918
|
|
|
939
|
|
|
1,982
|
|
|
1,863
|
|
Total
interest income
|
|
|
87,423
|
|
|
81,680
|
|
|
177,353
|
|
|
155,081
|
|
Interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
- securities
|
|
|
50,683
|
|
|
60,085
|
|
|
107,536
|
|
|
115,924
|
|
Total
interest expense
|
|
|
50,683
|
|
|
60,085
|
|
|
107,536
|
|
|
115,924
|
|
Net
interest income
|
|
$
|
36,740
|
|
$
|
21,595
|
|
$
|
69,817
|
|
$
|
39,157
|
|
Note
15 |
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 was originally 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 $120,619 from
January 1, 2008 through August 8, 2008, $35,708 of which occurred since April
1,
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 (including repurchase
agreements) 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 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
credit facilities (including repurchase agreement) counterparties which provide
funding for the Company's portfolio or could cause one or more of the Company's
counterparties to be unwilling or unable to provide the Company with additional
financing or to extend current credit facilities on the maturity date. If one
or
more of the Company's counterparties were unwilling or unable to provide the
Company with additional financing and the Company were unable to replace such
facilities, the Company’s liquidity would be reduced, which could have a
material adverse effect on the Company's financial condition and business.
The
Company could be forced to sell its investments at a time when prices are
depressed, which could adversely affect the Company's ability to comply with
REIT asset and income tests and maintain its qualification as a
REIT.
If
one or
more major market participants that provides financing for mortgage-backed
or
other fixed income securities fails or decides to withdraw from the market,
it
could negatively affect the marketability of all fixed income securities,
including the value of the securities in the Company's portfolio, thus reducing
the Company's net book value. In addition, distribution requirements under
the
REIT provisions of the Code limit the Company's ability to retain earnings
and
thereby replenish or increase capital for its operations.
In
addition, the Company's liquidity also may be adversely affected by margin
calls
under the Company's credit facilities (including repurchase agreements) that
are
dependent in part on the valuation of the collateral to secure the financing.
The Company's credit facilities allow the lender, to varying degrees, to revalue
the collateral to values that the lender considers to reflect market value.
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 certain 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 the
widening of credit spreads 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 six months 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.
During
the first six months of 2008, the Company raised $19,253 of capital by issuing
common shares under its sales agency agreement. From January 1, 2008 through
August 8, 2008, the Company raised an additional $4,103 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. On July 28, 2008, the Company subsequently
reborrowed $30,000 from HoldCo 2.
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 $38,684 of unrestricted
cash and cash equivalents held as of June 30, 2008 as well as future common
stock issuances under the Company’s sales agency agreement, and $30,000 of
unused borrowing capacity from HoldCo 2.
The
Company's ability to meet its long-term (greater than twelve months) liquidity
requirements is subject to obtaining additional long-term 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.
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.
Anthracite
Capital, Inc., a Maryland corporation (collectively with its subsidiaries,
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
four
investment sectors:
|
1) |
Commercial
Real Estate Securities
|
|
2) |
Commercial
Real Estate Loans
|
|
3) |
Commercial
Real Estate Equity
|
|
4) |
Residential
Mortgage-Backed Securities (“RMBS”)
|
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). 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. Given the
dramatically improved relative value in the RMBS sector, the Company may
replenish the RMBS portfolio as its source of liquidity.
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 $1.428 trillion of assets under management at June 30,
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 June 30,
2008 and December 31, 2007:
|
|
Carrying
Value at
|
|
|
|
June
30, 2008
|
|
December
31, 2007
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities(4)
|
|
$
|
1,903,167
|
|
|
44.6
|
%
|
$
|
2,274,151
|
|
|
49.3
|
%
|
Commercial
real estate loans(1)
|
|
|
1,121,253
|
|
|
26.3
|
|
|
1,082,785
|
|
|
23.5
|
|
Commercial
mortgage loan pools(2)
|
|
|
1,229,442
|
|
|
28.8
|
|
|
1,240,793
|
|
|
26.9
|
|
Commercial
real estate equity(3)
|
|
|
9,350
|
|
|
0.2
|
|
|
9,350
|
|
|
0.2
|
|
Total
commercial real estate assets
|
|
|
4,263,212
|
|
|
100
|
%
|
|
4,607,079
|
|
|
99.9
|
|
Residential
mortgage-backed securities
|
|
|
973
|
|
|
0.0
|
|
|
10,183
|
|
|
0.1
|
|
Total
|
|
$
|
4,264,185
|
|
|
100
|
%
|
$
|
4,617,262
|
|
|
100.0
|
%
|
(1) |
Includes
equity investments in the Carbon Capital funds and AHR International
JV.
|
(2) |
Represents
a Controlling Class CMBS that is consolidated for accounting purposes.
See
Note 6 of the consolidated financial
statements.
|
(3) |
Represents
equity investment in Dynamic India Fund
IV
|
(4) |
Includes
equity investment in AHR JV
|
During
the first six months of 2008 the Company purchased $53,515 of non-U.S. dollar
denominated securities in order to continue to increase geographic
diversification. Also during the first six months of 2008, the Company sold
the
majority of its remaining multifamily agency securities and CMBS IOs to increase
its liquidity position. 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 market value of the
Company’s U.S. CMBS portfolio during the first quarter of 2008.
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 June 30, 2008 is as follows:
|
|
|
Commercial
Real Estate Securities(2)
|
|
|
Commercial
Real Estate Loans (1)
|
|
|
Commercial
Real Estate
Equity
|
|
|
Commercial
Mortgage Loan Pools
|
|
|
Total
Commercial Real Estate Assets
|
|
|
Total
Commercial Real Estate Assets (USD)
|
|
|
%
of Total
|
|
USD
|
|
$
|
1,507,230
|
|
$
|
418,711
|
|
|
-
|
|
$
|
1,229,442
|
|
$
|
3,155,383
|
|
$
|
3,155,383
|
|
|
74.0
|
%
|
GBP
|
|
£ |
28,487
|
|
£ |
44,679
|
|
|
-
|
|
|
-
|
|
£ |
73,166
|
|
|
145,613
|
|
|
3.4
|
%
|
EURO
|
|
€ |
136,522
|
|
€ |
370,606
|
|
|
-
|
|
|
-
|
|
€ |
507,128
|
|
|
799,006
|
|
|
18.7
|
%
|
Canadian
Dollars
|
|
C$ |
86,907
|
|
C$ |
6,276
|
|
|
-
|
|
|
-
|
|
C$ |
93,183
|
|
|
91,847
|
|
|
2.2
|
%
|
Japanese
Yen
|
|
¥ |
4,079,450
|
|
|
-
|
|
|
-
|
|
|
-
|
|
¥ |
4,079,450
|
|
|
38,484
|
|
|
0.9
|
%
|
Swiss
Francs
|
|
|
-
|
|
CHF |
23,966
|
|
|
-
|
|
|
-
|
|
CHF |
23,966
|
|
|
23,529
|
|
|
0.6
|
%
|
Indian
Rupees
|
|
|
-
|
|
|
-
|
|
Rs |
401,302
|
|
|
-
|
|
Rs |
401,302
|
|
|
9,350
|
|
|
0.2
|
%
|
Total
USD Equivalent
|
|
$
|
1,903,167
|
|
$
|
1,121,253
|
|
$
|
9,350
|
|
$
|
1,229,442
|
|
$
|
4,263,212
|
|
$
|
4,263,212
|
|
|
100.0
|
%
|
(1) |
Includes
the Company’s investments in the Carbon Capital Funds of $96,969 and AHR
International JV of $30,902 at June 30,
2008.
|
(2) |
Includes
the Company’s investment in AHR JV of $1,089 at June 30,
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)
|
|
|
%
of Total
|
|
USD
|
|
$
|
1,881,328
|
|
$
|
445,618
|
|
$
|
-
|
|
$
|
1,240,793
|
|
$
|
3,567,739
|
|
$
|
3,567,739
|
|
|
77.4
|
%
|
GBP
|
|
£ |
35,247
|
|
£ |
45,944
|
|
|
-
|
|
|
-
|
|
£ |
81,191
|
|
|
161,618
|
|
|
3.5
|
%
|
Euro
|
|
€ |
131,645
|
|
€ |
354,458
|
|
|
-
|
|
|
-
|
|
€ |
486,103
|
|
|
710,707
|
|
|
15.4
|
%
|
Canadian
Dollars
|
|
C$ |
89,805
|
|
C$ |
6,249
|
|
|
-
|
|
|
-
|
|
C$ |
96,054
|
|
|
97,324
|
|
|
2.1
|
%
|
Japanese
Yen
|
|
¥ |
4,378,759
|
|
|
-
|
|
|
-
|
|
|
-
|
|
¥ |
4,378,759
|
|
|
39,196
|
|
|
0.9
|
%
|
Swiss
Francs
|
|
|
-
|
|
CHF |
23,939
|
|
|
-
|
|
|
-
|
|
CHF |
23,939
|
|
|
21,145
|
|
|
0.5
|
%
|
Indian
Rupees
|
|
|
-
|
|
|
-
|
|
Rs |
368,483
|
|
|
-
|
|
Rs |
368,483
|
|
|
9,350
|
|
|
0.2
|
%
|
Total
USD Equivalent
|
|
$
|
2,274,151
|
|
$
|
1,082,785
|
|
$
|
9,350
|
|
$
|
1,240,793
|
|
$
|
4,607,079
|
|
$
|
4,607,079
|
|
|
100.0
|
%
|
(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 June 30, 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
|
|
$
|
219,774
|
|
$
|
159,830
|
|
$
|
72.72
|
|
$
|
190,190
|
|
$
|
86.54
|
|
|
7.08
|
%
|
Investment
grade REIT debt
|
|
|
121
|
|
|
117
|
|
|
96.90
|
|
|
123
|
|
|
101.41
|
|
|
5.27
|
|
CMBS
rated BB+ to B
|
|
|
565,361
|
|
|
235,745
|
|
|
41.70
|
|
|
432,343
|
|
|
76.47
|
|
|
8.85
|
|
CMBS
rated B- or lower
|
|
|
514,031
|
|
|
110,761
|
|
|
21.34
|
|
|
161,542
|
|
|
31.40
|
|
|
8.39
|
|
CDO
Investments
|
|
|
347,807
|
|
|
32,732
|
|
|
9.41
|
|
|
62,005
|
|
|
17.83
|
|
|
21.55
|
|
CMBS
Interest Only securities (“IOs”)
|
|
|
110,688
|
|
|
4,427
|
|
|
4.00
|
|
|
2,192
|
|
|
1.98
|
|
|
24.90
|
|
Multifamily
agency securities
|
|
|
350
|
|
|
357
|
|
|
102.00
|
|
|
515
|
|
|
147.08
|
|
|
6.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
commercial real estate assets outside CDOs
|
|
|
1,758,132
|
|
|
543,969
|
|
|
30.88
|
|
|
849,910
|
|
|
48.28
|
|
|
9.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate loans and equity outside CDOs
|
|
|
|
|
|
|
Commercial
real estate loans
|
|
|
645,885
|
|
|
631,391
|
|
|
|
|
|
596,407
|
|
|
|
|
|
|
|
Commercial
mortgage loan pools
|
|
|
1,189,528
|
|
|
1,229,442
|
|
|
103.36
|
|
|
1,229,442
|
|
|
103.36
|
|
|
4.15
|
|
Commercial
real estate
|
|
|
9,350
|
|
|
9,350
|
|
|
|
|
|
9,350
|
|
|
|
|
|
|
|
Total
commercial real estate loans and equity outside CDOs
|
|
|
1,844,763
|
|
|
1,870,183
|
|
|
103.36
|
|
|
1,835,199
|
|
|
103.36
|
|
|
4.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate assets included in CDOs
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
|
808,780
|
|
|
708,420
|
|
|
87.59
|
|
|
759,536
|
|
|
93.91
|
|
|
7.28
|
|
Investment
grade REIT debt
|
|
|
210,624
|
|
|
205,729
|
|
|
97.68
|
|
|
211,767
|
|
|
100.54
|
|
|
5.78
|
|
CMBS
rated BB+ to B
|
|
|
591,077
|
|
|
372,632
|
|
|
63.04
|
|
|
460.937
|
|
|
77.98
|
|
|
9.95
|
|
CMBS
rated B- or lower
|
|
|
199,983
|
|
|
46,545
|
|
|
23.27
|
|
|
71,936
|
|
|
35.97
|
|
|
10.14
|
|
CDO
Investments
|
|
|
4,000
|
|
|
2,840
|
|
|
71.00
|
|
|
3,535
|
|
|
88.38
|
|
|
7.84
|
|
Credit
tenant lease
|
|
|
22,944
|
|
|
23,032
|
|
|
100.38
|
|
|
23,562
|
|
|
102.70
|
|
|
5.66
|
|
Commercial
real estate loans
|
|
|
499,504
|
|
|
489,861
|
|
|
98.07
|
|
|
437,105
|
|
|
87.51
|
|
|
8.60
|
|
Total
commercial real estate assets included in CDOs
|
|
|
2,336,912
|
|
|
1,849,059
|
|
|
79.12
|
|
|
1,968,378
|
|
|
84.23
|
|
|
8.15
|
%
|
Total
commercial real estate assets
|
|
$
|
5,939,807
|
|
$
|
4,263,211
|
|
|
|
|
$
|
4,653,487
|
|
|
|
|
|
|
|
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 June 30, 2008, 57%
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 June 30,
2008.
|
|
|
Collateral
at June 30, 2008
|
|
|
Debt
at June 30, 2008
|
|
|
|
|
|
|
|
Adjusted
Purchase
Price
|
|
|
Loss
Adjusted
Yield
|
|
|
Adjusted
Issue Price
|
|
|
Weighted
Average Cost of Funds *
|
|
|
Net
Spread
|
|
CDO
I
|
|
$
|
454,341
|
|
|
8.23
|
%
|
$
|
384,179
|
|
|
6.75
|
%
|
|
1.48
|
%
|
CDO
II
|
|
|
301,221
|
|
|
7.82
|
|
|
262,559
|
|
|
5.77
|
|
|
2.05
|
%
|
CDO
III
|
|
|
374,462
|
|
|
7.05
|
|
|
375,638
|
|
|
5.14
|
|
|
1.91
|
%
|
CDO
HY3
|
|
|
415,232
|
|
|
9.79
|
|
|
372,725
|
|
|
5.29
|
|
|
4.50
|
%
|
Euro
CDO
|
|
|
423,122
|
|
|
8.24
|
|
|
415,157
|
|
|
5.07
|
|
|
3.17
|
%
|
Total
**
|
|
$
|
1,968,378
|
|
|
8.28
|
%
|
$
|
1,810,258
|
|
|
5.59
|
%
|
|
2.69
|
%
|
*
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 views its below investment grade CMBS investment activity as two
portfolios: Controlling Class CMBS and other below investment grade CMBS. The
Company considers the CMBS securities where it maintains the right to influence
the foreclosure/workout process on the underlying loans its controlling class
CMBS (“Controlling Class”). The distinction between the two is in the rights the
Company obtains with its investment in Controlling Class CMBS. Controlling
Class
rights allow the Company to influence the workout and/or disposition of defaults
that occur in the underlying loans. These securities absorb the first losses
realized in the underlying loan pools. The coupon payment on the non-rated
security also can be reduced for special servicer fees charged to the trust.
The
next highest rated security in the structure then generally will be downgraded
to non-rated and become the first to absorb losses and expenses from that point
on. At June 30, 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 $58,356,845. At June 30, 2008, subordinated Controlling
Class CMBS with a par of $1,556,235 were included on the Company’s consolidated
statement of financial condition and subordinated Controlling Class CMBS with
a
par of $750,623 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 June 30, 2008 was $313,079; the average credit protection, or subordination
level, of this portfolio was 0.93%.
The
Company’s investment in its subordinated Controlling Class CMBS securities by
credit rating category at June 30, 2008 was as follows:
|
|
Par
|
|
Estimated
Fair Value
|
|
Dollar
Price
|
|
Adjusted
Purchase Price
|
|
Dollar
Price
|
|
Weighted
Average Subordination Level
|
|
BB+
|
|
$
|
250,
135
|
|
$
|
127,960
|
|
$
|
51.16
|
|
$
|
210,257
|
|
$
|
84.06
|
|
|
4.18
|
%
|
BB
|
|
|
191,578
|
|
|
88,612
|
|
|
46.25
|
|
|
156,143
|
|
|
81.50
|
|
|
3.16
|
%
|
BB-
|
|
|
182,916
|
|
|
94,521
|
|
|
51.67
|
|
|
133,211
|
|
|
72.83
|
|
|
5.03
|
%
|
B+
|
|
|
106,635
|
|
|
40,594
|
|
|
38.07
|
|
|
70,207
|
|
|
65.84
|
|
|
2.12
|
%
|
B
|
|
|
133,772
|
|
|
49,770
|
|
|
37.20
|
|
|
81,965
|
|
|
61.27
|
|
|
1.85
|
%
|
B-
|
|
|
117,106
|
|
|
30,789
|
|
|
26.29
|
|
|
61,188
|
|
|
52.25
|
|
|
1.36
|
%
|
CCC+
|
|
|
13,214
|
|
|
3,171
|
|
|
24.00
|
|
|
7,206
|
|
|
54.53
|
|
|
0.65
|
%
|
CCC
|
|
|
28,161
|
|
|
5,056
|
|
|
17.95
|
|
|
10,504
|
|
|
37.30
|
|
|
0.75
|
%
|
NR
|
|
|
532,718
|
|
|
93,027
|
|
|
17.46
|
|
|
133,503
|
|
|
25.06
|
|
|
n/a
|
|
Total
|
|
$
|
1,556,235
|
|
$
|
533,500
|
|
$
|
34.28
|
|
$
|
864,184
|
|
$
|
55.53
|
|
|
|
|
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 six months ended June 30, 2008, the loan pools were paid down by $2,103,618.
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 book 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 six months ended June 30,
2008, four securities in one of the Company’s Controlling Class CMBS was
upgraded by at least one rating agency and thirteen securities in one
Controlling Class CMBS were downgraded. Additionally, at least one rating agency
upgraded eleven of the Company’s non-Controlling Class commercial real estate
securities and downgraded eight.
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
$851,920 related to principal of the underlying loans will not be recoverable,
of which $399,403 is
expected to occur over the next five years. The total loss estimate of $851,920
represents 1.46% 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
June
30, 2008 are shown in the table below:
Vintage
Year
|
|
Underlying
Collateral
|
|
Delinquencies
Outstanding
|
|
Lehman
Brothers Conduit Guide
|
|
1998
|
|
$
|
1,640,063
|
|
|
2.58
|
%
|
|
0.81
|
%
|
1999
|
|
|
497,288
|
|
|
2.22
|
%
|
|
0.83
|
%
|
2001
|
|
|
805,373
|
|
|
0.91
|
%
|
|
0.83
|
%
|
2002
|
|
|
914,620
|
|
|
0.00
|
%
|
|
0.62
|
%
|
2003
|
|
|
1,751,059
|
|
|
1.48
|
%
|
|
0.87
|
%
|
2004
|
|
|
6,315,137
|
|
|
0.70
|
%
|
|
0.39
|
%
|
2005
|
|
|
11,819,255
|
|
|
0.63
|
%
|
|
0.41
|
%
|
2006
|
|
|
13,684,183
|
|
|
0.71
|
%
|
|
0.27
|
%
|
2007
|
|
|
20,929,867
|
|
|
0.24
|
%
|
|
0.17
|
%
|
Total
|
|
$
|
58,356,845
|
|
|
0.59
|
%
|
|
0.33
|
%* |
*
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 relative to
the market in the first six months of 2008, 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 June 30,
2008:
|
|
June
30, 2008
|
|
|
|
Principal
|
|
Number
of Loans
|
|
%
of Collateral
|
|
Past
due 30 days to 59 days
|
|
$
|
67,839
|
|
|
8
|
|
|
0.11
|
%
|
Past
due 60 days to 89 days
|
|
|
28,257
|
|
|
5
|
|
|
0.05
|
%
|
Past
due 90 days or more
|
|
|
207,783
|
|
|
34
|
|
|
0.36
|
%
|
Real
Estate owned
|
|
|
26,633
|
|
|
13
|
|
|
0.05
|
%
|
Foreclosure
|
|
|
15,120
|
|
|
2
|
|
|
0.03
|
%
|
Total
Delinquent
|
|
|
345,632
|
|
|
62
|
|
|
0.59
|
%
|
Total
Collateral Balance
|
|
|
58,356,845
|
|
|
4,573
|
|
|
|
|
Of
the 62
delinquent loans at June 30, 2008, 13 loans were real estate owned and being
marketed for sale, 2 loans were in foreclosure and the remaining 47 loans were
in some form of workout negotiations. The Controlling Class CMBS owned by the
Company have a delinquency rate of 0.59%. During 2008, the underlying collateral
experienced early payoffs of $2,103,618 representing 3.60% of the quarter-end
pool balance. These loans were paid off at par with no loss. Aggregate losses
related to the underlying collateral of $1,533 were realized during the six
months ended June 30, 2008. This brings cumulative realized losses to $128,437,
which is 12.76% 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 June 30, 2008 was as follows:
|
|
June
30, 2008
Exposure
|
|
Property
Type
|
|
Collateral
Balance
|
|
%
of Total
|
|
Office
|
|
$
|
19,921,612
|
|
|
34.1
|
%
|
Retail
|
|
|
16,575,136
|
|
|
28.4
|
%
|
Multifamily
|
|
|
12,555,914
|
|
|
21.5
|
%
|
Industrial
|
|
|
4,437,281
|
|
|
7.6
|
%
|
Lodging
|
|
|
4,055,537
|
|
|
6.9
|
%
|
Healthcare
|
|
|
324,298
|
|
|
0.6
|
%
|
Other
|
|
|
487,067
|
|
|
0.9
|
%
|
Total
|
|
$
|
58,356,845
|
|
|
100.0
|
%
|
At
June
30, 2008, the estimated fair value of the Company’s holdings of subordinated
Controlling Class CMBS is $330,684 lower than the adjusted cost for these
securities, which consists of a gross unrealized gain of $7,010 and a gross
unrealized loss of $337,694. The adjusted purchase price of the Company’s
subordinated Controlling Class CMBS portfolio at June 30, 2008 represents
approximately 55.53% of its par amount. The estimated fair value of the
Company’s subordinated Controlling Class CMBS portfolio at June 30, 2008
represents approximately 34.28% of its par amount. As the portfolio matures,
the
Company expects to recoup the $330,684 of unrealized loss, provided that the
credit losses experienced are not greater than the credit losses assumed in
the
projected cash flow analysis. At June 30, 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 June 30, 2008 and December 31, 2007:
|
|
Loan
Outstanding
|
|
Weighted
|
|
|
|
June
30, 2008
|
|
December
31, 2007
|
|
Average
Yield
|
|
Property
Type
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
52,437
|
|
|
5.30
|
%
|
$
|
52,209
|
|
|
5.30
|
%
|
|
9.6
|
%
|
|
9.6
|
%
|
Office
|
|
|
45,549
|
|
|
4.6
|
|
|
45,640
|
|
|
4.6
|
|
|
10.3
|
|
|
10.3
|
|
Multifamily
|
|
|
175,301
|
|
|
17.6
|
|
|
174,873
|
|
|
17.8
|
|
|
9.9
|
|
|
9.7
|
|
Storage
|
|
|
32,159
|
|
|
3.2
|
|
|
32,307
|
|
|
3.3
|
|
|
9.1
|
|
|
9.1
|
|
Land(1)
|
|
|
-
|
|
|
-
|
|
|
25,000
|
|
|
2.5
|
|
|
-
|
|
|
9.6
|
|
Hotel
|
|
|
12,302
|
|
|
1.2
|
|
|
12,208
|
|
|
1.2
|
|
|
10.4
|
|
|
10.9
|
|
Other
Mixed Use
|
|
|
3,994
|
|
|
0.4
|
|
|
3,983
|
|
|
0.5
|
|
|
8.5
|
|
|
8.5
|
|
Total
U.S.
|
|
|
321,742
|
|
|
32.4
|
|
|
346,220
|
|
|
35.2
|
|
|
9.8
|
|
|
9.7
|
|
Non-U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
293,915
|
|
|
29.6
|
|
|
278,669
|
|
|
28.3
|
|
|
8.7
|
|
|
8.9
|
|
Office
|
|
|
255,904
|
|
|
25.8
|
|
|
238,691
|
|
|
24.3
|
|
|
8.4
|
|
|
8.8
|
|
Multifamily
|
|
|
44,139
|
|
|
4.4
|
|
|
41,403
|
|
|
4.2
|
|
|
8.5
|
|
|
8.6
|
|
Storage
|
|
|
51,352
|
|
|
5.2
|
|
|
51,272
|
|
|
5.2
|
|
|
9.2
|
|
|
9.5
|
|
Industrial
|
|
|
17,202
|
|
|
1.7
|
|
|
17,274
|
|
|
1.8
|
|
|
10.3
|
|
|
10.6
|
|
Hotel
|
|
|
4,175
|
|
|
0.4
|
|
|
5,016
|
|
|
0.5
|
|
|
10.0
|
|
|
10.1
|
|
Other
Mixed Use
|
|
|
4,953
|
|
|
0.5
|
|
|
4,842
|
|
|
0.5
|
|
|
9.0
|
|
|
9.0
|
|
Total
Non-U.S.
|
|
|
671,640
|
|
|
67.6
|
|
|
637,167
|
|
|
64.8
|
|
|
8.7
|
|
|
8.9
|
|
Total
|
|
$
|
993,382
|
|
|
100.00
|
%
|
$
|
983,387
|
|
|
100.00
|
%
|
|
9.00
|
%
|
|
9.20
|
%
|
(1) |
Net
of a loan loss reserve of $25,000 at June 30,
2008.
|
During
the six months ended June 30, 2008, the Company funded an additional $2,286
for
a commercial real estate loan. The Company received repayments of commercial
real estate loans in the aggregate amount of $14,140.
The
Company invests in the Carbon Capital Funds which also invest in commercial
real
estate loans. For the three and six months ended June 30, 2008, respectively,
the Company recorded $2,534 and $(525) of earnings (loss) related to the Carbon
Capital Funds primarily due to the establishment of a loan loss reserve in
Carbon II. Carbon II increased its investment in U.S. commercial real estate
loans by funding an additional investment of $910 during the second quarter
of
2008. Paydowns in the Carbon Capital Funds during the quarter totaled $3,376.
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:
|
|
June
30, 2008
|
|
December
31, 2007
|
|
Carbon
I
|
|
$
|
1,711
|
|
$
|
1,636
|
|
Carbon
II
|
|
|
95,258
|
|
|
97,762
|
|
|
|
$
|
96,969
|
|
$
|
99,398
|
|
As
of
June 30, 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 six months ended June 30, 2008, Carbon II increased its loan
loss reserves for two loans by $911. At June 30, 2008 the total loan loss
reserve for these loans is $4,242. For the property owned, Carbon II recognized
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 was restructured,
modified and extended. However, Carbon II established a loan loss reserve
of $17,700 during the second quarter of 2008 based upon management's assessment
of the probability of recovery.
During
the second quarter of 2008, a $30,000 first leasehold mortgage on a 43.9 acre
tract of land in Las Vegas, zoned for commercial use, went
into
default. Carbon II is engaged in workout discussions, and other alternatives
are
being explored. Carbon II believes a loan loss reserve is not necessary at
June
30, 2008. 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 June 30, 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
June
30,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
U.S.
dollar denominated income
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities
|
|
$
|
41,094
|
|
$
|
43,596
|
|
$
|
(2,502
|
)
|
|
(5.7
|
)%
|
Commercial
real estate loans
|
|
|
8,041
|
|
|
7,548
|
|
|
493
|
|
|
6.5
|
%
|
Commercial
mortgage loan pools
|
|
|
12,801
|
|
|
13,002
|
|
|
(201
|
)
|
|
(1.5
|
)%
|
Residential
mortgage-backed securities
|
|
|
16
|
|
|
1,443
|
|
|
(1,427
|
)
|
|
(98.9
|
)%
|
Cash
and cash equivalents
|
|
|
586
|
|
|
648
|
|
|
(62
|
)
|
|
(9.6
|
)%
|
Total
U.S. interest income
|
|
|
62,538
|
|
|
66,237
|
|
|
(3,699
|
)
|
|
(5.6
|
)%
|
Non-U.S
dollar denominated income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities
|
|
|
9,494
|
|
|
4,417
|
|
|
5,077
|
|
|
114.9
|
%
|
Commercial
real estate loans
|
|
|
15,059
|
|
|
10,735
|
|
|
4,324
|
|
|
40.3
|
%
|
Cash
and cash equivalents
|
|
|
332
|
|
|
291
|
|
|
41
|
|
|
14.1
|
%
|
Total
non-U.S. dollar denominated interest income
|
|
|
24,885
|
|
|
15,443
|
|
|
9,442
|
|
|
61.1
|
%
|
Total
Interest Income
|
|
$
|
87,423
|
|
$
|
81,680
|
|
$
|
5,743
|
|
|
7.0
|
%
|
|
|
For
the Six Months Ended
June
30,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
U.S.
dollar denominated income
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities
|
|
$
|
84,718
|
|
$
|
85,983
|
|
$
|
(1,265
|
)
|
|
(1.5
|
)%
|
Commercial
real estate loans
|
|
|
16,368
|
|
|
13,597
|
|
|
2,771
|
|
|
20.4
|
%
|
Commercial
mortgage loan pools
|
|
|
25,666
|
|
|
26,134
|
|
|
(468
|
)
|
|
(1.8
|
)%
|
Residential
mortgage-backed securities
|
|
|
76
|
|
|
3,742
|
|
|
(3,666
|
)
|
|
(98.0
|
)%
|
Cash
and cash equivalents
|
|
|
1,386
|
|
|
1,036
|
|
|
350
|
|
|
33.8
|
%
|
Total
U.S. interest income
|
|
|
128,214
|
|
|
130,492
|
|
|
(2,278
|
)
|
|
(1.7
|
)%
|
Non-U.S
dollar denominated income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities
|
|
|
18,080
|
|
|
7,910
|
|
|
10,170
|
|
|
128.6
|
%
|
Commercial
real estate loans
|
|
|
30,463
|
|
|
15,852
|
|
|
14,611
|
|
|
92.2
|
%
|
Cash
and cash equivalents
|
|
|
596
|
|
|
827
|
|
|
(231
|
)
|
|
(27.9
|
)%
|
Total
non-U.S. dollar denominated interest income
|
|
|
49,139
|
|
|
24,589
|
|
|
24,550
|
|
|
99.8
|
%
|
Total
Interest Income
|
|
$
|
177,353
|
|
$
|
155,081
|
|
$
|
22,272
|
|
|
14.4
|
%
|
U.S.
dollar denominated income
For
the
three and six months ended June 30, 2008 versus 2007, interest income from
U.S.
assets decreased $3,699, or 5.6% and $2,278, or 1.7%. As of March 31, 2008,
the
Company increased the loss assumptions on certain of its controlling class
CMBS.
This contributed to the majority of the decline in income from commercial real
estate securities of $2,502 or 5.7% for the three months ended June 30, 2008
and
$1,265 or 1.5% for the six months ended June 30, 2008. During the second half
of
2007 and the first quarter of 2008, the Company sold most of its residential
mortgage backed securities portfolio. As a result, interest income declined
$1,427 or 98.9% for the three months ended June 30, 2008 and $3,666 or 98.0%
for
the six months ended June 30, 2008.
Non-U.S.
dollar denominated income
For
the
three and six months ended June 30, 2008 versus 2007, interest income from
non-U.S. assets increased $9,441, or 61.1% and $24,550, or 99.8%. During 2007,
the Company continued to increase its investment in non-U.S. dollar commercial
real estate 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 June 30, 2008 and 2007:
|
|
For
the three months ended June 30,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
Interest
Income
|
|
$
|
87,423
|
|
$
|
81,680
|
|
$
|
5,743
|
|
|
7.0
|
%
|
Earnings
from BlackRock Diamond
Property Fund, Inc.
|
|
|
-
|
|
|
8,430
|
|
|
(8,430
|
)
|
|
(100.0
|
)
|
Earnings
from JVs
|
|
|
(32
|
)
|
|
-
|
|
|
(32
|
)
|
|
100.0
|
|
Earnings
from Carbon I
|
|
|
4
|
|
|
18
|
|
|
(14
|
)
|
|
(77.8
|
)
|
Earnings
from Carbon II
|
|
|
(2,538
|
)
|
|
3,965
|
|
|
(6,503
|
)
|
|
(164.0
|
)
|
Total
Income
|
|
$
|
84,857
|
|
$
|
94,093
|
|
$
|
(9,236
|
)
|
|
(9.8
|
)%
|
|
|
For
the six months ended June 30,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
Interest
Income
|
|
$
|
177,353
|
|
$
|
155,081
|
|
$
|
22,272
|
|
|
14.4
|
%
|
Earnings
from BlackRock Diamond
Property Fund, Inc.
|
|
|
-
|
|
|
14,400
|
|
|
(14,400
|
)
|
|
(100.0
|
)
|
Earnings
from JVs
|
|
|
(32
|
)
|
|
-
|
|
|
(32
|
)
|
|
100.0
|
|
Earnings
from Carbon I
|
|
|
75
|
|
|
858
|
|
|
(783
|
)
|
|
(91.1
|
)
|
Earnings
from Carbon II
|
|
|
(600
|
)
|
|
7,111
|
|
|
(7,711
|
)
|
|
(108.4
|
)
|
Total
Income
|
|
$
|
176,796
|
|
$
|
177,450
|
|
$
|
(654
|
)
|
|
(0.4
|
)%
|
Interest
Expense:
The
following tables sets forth information regarding the total amount of interest
expense from certain of the Company’s borrowings and cash flow hedges for the
three and six months ended June 30, 2008 and 2007.
|
|
For
the three months ended
June
30,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
U.S.
dollar denominated interest expense
|
|
|
|
|
|
|
|
|
|
Collateralized
debt obligations
|
|
$
|
15,391
|
|
$
|
22,437
|
|
$
|
(7,046
|
)
|
|
(31.4
|
)%
|
Commercial
real estate securities
|
|
|
2,316
|
|
|
8,773
|
|
|
(6,457
|
)
|
|
(73.6
|
)
|
Commercial
real estate loans
|
|
|
914
|
|
|
1,470
|
|
|
(556
|
)
|
|
(37.8
|
)
|
Commercial
mortgage loan pools
|
|
|
12,183
|
|
|
12,308
|
|
|
(125
|
)
|
|
(1.0
|
)
|
Residential
mortgage-backed securities
|
|
|
-
|
|
|
1,738
|
|
|
(1,738
|
)
|
|
(100.0
|
)
|
Senior
convertible notes
|
|
|
2,370
|
|
|
-
|
|
|
2,370
|
|
|
100.0
|
|
Senior
unsecured notes
|
|
|
3,016
|
|
|
1,860
|
|
|
1,156
|
|
|
62.2
|
|
Junior
subordinated notes
|
|
|
3,328
|
|
|
3,439
|
|
|
(111
|
)
|
|
(3.2
|
)
|
HoldCo
2 loan
|
|
|
55
|
|
|
-
|
|
|
55
|
|
|
100.0
|
|
Cash
flow hedges
|
|
|
466
|
|
|
(265
|
)
|
|
731
|
|
|
(275.6
|
)
|
Hedge
ineffectiveness*
|
|
|
(1,382
|
)
|
|
165
|
|
|
(1,547
|
)
|
|
(937.8
|
)
|
Total
U.S. Interest Expense
|
|
$
|
38,657
|
|
$
|
51,925
|
|
$
|
(13,268
|
)
|
|
(25.6
|
)%
|
Non-U.S.
dollar denominated interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
CDO
|
|
$
|
5,041
|
|
$
|
4,160
|
|
$
|
881
|
|
|
21.2
|
%
|
Commercial
real estate securities
|
|
|
2,336
|
|
|
886
|
|
|
1,450
|
|
|
163.7
|
|
Commercial
real estate loans
|
|
|
3,208
|
|
|
2,167
|
|
|
1,041
|
|
|
48.0
|
|
Junior
subordinated notes
|
|
|
1,441
|
|
|
947
|
|
|
494
|
|
|
52.2
|
|
Total
Non- U.S. Interest Expense
|
|
|
12,026
|
|
|
8,160
|
|
|
3,866
|
|
|
47.4
|
|
Total
Interest Expense
|
|
$
|
50,683
|
|
$
|
60,085
|
|
$
|
(9,402
|
)
|
|
(15.6
|
)%
|
|
|
For
the six months ended
June
30,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
U.S.
dollar denominated interest expense
|
|
|
|
|
|
|
|
|
|
Collateralized
debt obligations
|
|
$
|
34,020
|
|
$
|
45,333
|
|
$
|
(11,313
|
)
|
|
(25.0
|
)%
|
Commercial
real estate securities
|
|
|
5,726
|
|
|
17,134
|
|
|
(11,408
|
)
|
|
(66.6
|
)
|
Commercial
real estate loans
|
|
|
2,274
|
|
|
2,011
|
|
|
263
|
|
|
13.1
|
|
Commercial
mortgage loan pools
|
|
|
24,391
|
|
|
24,708
|
|
|
(317
|
)
|
|
(1.3
|
)
|
Residential
mortgage-backed securities
|
|
|
45
|
|
|
5,062
|
|
|
(5,017
|
)
|
|
(99.1
|
)
|
Senior
convertible notes
|
|
|
4,683
|
|
|
-
|
|
|
4,683
|
|
|
100.0
|
|
Senior
unsecured notes
|
|
|
6,074
|
|
|
3,207
|
|
|
2,867
|
|
|
89.4
|
|
Junior
subordinated notes
|
|
|
6,595
|
|
|
6,719
|
|
|
(124
|
)
|
|
(1.8
|
)
|
HoldCo
2 loan
|
|
|
213
|
|
|
-
|
|
|
213
|
|
|
100.0
|
|
Cash
flow hedges
|
|
|
885
|
|
|
(859
|
)
|
|
1,744
|
|
|
(203.0
|
)
|
Hedge
ineffectiveness*
|
|
|
(1,303
|
)
|
|
56
|
|
|
(1,359
|
)
|
|
(2,426.8
|
)
|
Total
U.S. Interest Expense
|
|
$
|
83,603
|
|
$
|
103,371
|
|
$
|
(19,768
|
)
|
|
(19.1
|
)%
|
Non-U.S.
dollar denominated interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
CDO
|
|
$
|
10,397
|
|
$
|
8,092
|
|
$
|
2,305
|
|
|
28.5
|
%
|
Commercial
real estate securities
|
|
|
6,189
|
|
|
886
|
|
|
5,303
|
|
|
598.5
|
|
Commercial
real estate loans
|
|
|
4,578
|
|
|
2,628
|
|
|
1,950
|
|
|
74.2
|
|
Junior
subordinated notes
|
|
|
2,769
|
|
|
947
|
|
|
1,822
|
|
|
192.4
|
|
Total
Non- U.S. Interest Expense
|
|
|
23,933
|
|
|
12,553
|
|
|
11,380
|
|
|
90.7
|
|
Total
Interest Expense
|
|
$
|
107,536
|
|
$
|
115,924
|
|
$
|
(8,388
|
)
|
|
(7.2
|
)%
|
*See
Note
13 of the consolidated financial statements, Derivative Instruments and Hedging
Activities, for a further description of the Company’s hedge
ineffectiveness.
U.S
dollar denominated interest expense
For
the
three and six months ended June 30, 2008 versus 2007, U.S. dollar interest
expense decreased $13,268 or 25.6% and $19,768 or 19.1%. The Company sold most
of its residential mortgage backed securities portfolio during the second half
of 2007 and the first quarter of 2008. As a result, related interest expense
declined $1,738 or 100.0% for the three months ended June 30, 2008 and $5,017
or
99.1% for the six months ended June 30, 2008. This was offset by the issuance
of
convertible notes in August and September of 2007 and senior unsecured notes
in
May and June of 2007.
Non-U.S.
dollar denominated interest expense
For
the
three and six months ended June 30, 2008 versus 2007, non-U.S. dollar interest
expense increased $3,866 or 47.4% and $11,380, or 90.7%. The increase was due
to
increased purchases of non-U.S. dollar securities and loans during 2007. Also,
the junior subordinated notes were issued in April of 2007. As a result, the
junior subordinated notes were outstanding for the full quarter and six months
ended June 30, 2008. For the three and six months ended June 30, 2008 versus
June 30, 2007, U.S. dollar interest expense related to collateralized debt
obligations declined $7,046 or 31.4% and $11,313 or 25%. The decline was caused
primarily due to an income statement reclassification. Under FAS 159, interest
expense related to CDO swaps are classified in realized gain (loss) and are
no
longer included in interest expense. For the three and six months ended June
30,
2008, $4,796 and $6,732 were included in realized gain (loss). The balance
of
the decline in CDO interest expense was primarily due to lower libor rates
in
2008 versus 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 June 30,
|
|
For
the six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Interest
income
|
|
$
|
87,423
|
|
$
|
81,680
|
|
$
|
177,353
|
|
$
|
155,081
|
|
Interest
expense related to the consolidation of commercial mortgage loan
pools
|
|
|
(12,110
|
)
|
|
(12,409
|
)
|
|
(24,271
|
)
|
|
(24,880
|
)
|
Adjusted
interest income
|
|
$
|
75,313
|
|
$
|
69,271
|
|
$
|
153,082
|
|
$
|
130,201
|
|
|
|
For
the three months ended June 30,
|
|
For
the six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Interest
expense
|
|
$
|
50,683
|
|
$
|
60,085
|
|
$
|
107,536
|
|
$
|
115,924
|
|
Interest
expense related to the consolidation of commercial mortgage loan
pools
|
|
|
(12,110
|
)
|
|
(12,409
|
)
|
|
(24,271
|
)
|
|
(24,880
|
)
|
Hedge
ineffectiveness
|
|
|
(1,382
|
)
|
|
165
|
|
|
(1,303
|
)
|
|
56
|
|
Adjusted
interest expense
|
|
$
|
37,191
|
|
$
|
47,841
|
|
$
|
81,962
|
|
$
|
91,100
|
|
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
June
30,
|
|
For
the Six Months ended
June
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Adjusted
interest income
|
|
$
|
75,313
|
|
$
|
69,271
|
|
$
|
153,082
|
|
$
|
130,201
|
|
Adjusted
interest expense
|
|
$
|
37,191
|
|
$
|
47,841
|
|
$
|
81,962
|
|
$
|
91,100
|
|
Adjusted
net interest income ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
5.2
|
%
|
|
2.4
|
%
|
|
4.6
|
%
|
|
2.3
|
%
|
Average
yield
|
|
|
10.2
|
%
|
|
7.8
|
%
|
|
10.0
|
%
|
|
7.6
|
%
|
Cost
of funds
|
|
|
5.1
|
%
|
|
6.2
|
%
|
|
5.5
|
%
|
|
6.0
|
%
|
Net
interest spread
|
|
|
5.1
|
%
|
|
1.6
|
%
|
|
4.5
|
%
|
|
1.6
|
%
|
Ratios
including income from equity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
4.7
|
%
|
|
3.6
|
%
|
|
4.5
|
%
|
|
3.4
|
%
|
Average
yield
|
|
|
9.5
|
%
|
|
8.7
|
%
|
|
9.7
|
%
|
|
8.4
|
%
|
Cost
of funds
|
|
|
5.1
|
%
|
|
6.2
|
%
|
|
5.5
|
%
|
|
6.0
|
%
|
Net
interest spread
|
|
|
4.4
|
%
|
|
2.5
|
%
|
|
4.1
|
%
|
|
2.4
|
%
|
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 and six months ended June 30, 2008 and 2007,
respectively.
|
|
For
the three months ended June 30,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
Management
fee
|
|
$
|
2,961
|
|
$
|
3,868
|
|
$
|
(907
|
)
|
|
(23.4
|
)%
|
Incentive
fee
|
|
|
1,334
|
|
|
2,922
|
|
|
(1,588
|
)
|
|
(54.3
|
)
|
Incentive
fee - stock based
|
|
|
645
|
|
|
939
|
|
|
(294
|
)
|
|
(31.3
|
)
|
General
and administrative expense
|
|
|
1,866
|
|
|
1,519
|
|
|
347
|
|
|
22.8
|
|
Total
other expenses
|
|
$
|
6,806
|
|
$
|
9,248
|
|
|
(2,442
|
)
|
|
(26.4
|
)%
|
|
|
For
the six months ended June 30,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
Management
fee
|
|
$
|
6,236
|
|
$
|
7,388
|
|
|
(1,152
|
)
|
|
(15.6
|
)%
|
Incentive
fee
|
|
|
11,879
|
|
|
5,646
|
|
|
6,233
|
|
|
110.4
|
|
Incentive
fee - stock based
|
|
|
1,044
|
|
|
1,648
|
|
|
(604
|
)
|
|
(36.7
|
)
|
General
and administrative expense
|
|
|
3,682
|
|
|
2,824
|
|
|
858
|
|
|
30.4
|
|
Total
other expenses
|
|
$
|
22,841
|
|
$
|
17,506
|
|
|
5,335
|
|
|
30.5
|
%
|
The
Company’s amended Management Agreement includes a change in the quarterly base
management fee from 0.50% of stockholders' equity for the quarter ended June
30,
2008 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.
The
decrease in incentive fee - stock based of $294 and $604 for the three and
six
months ended June 30, 2008, respectively, 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 three and six months ended June
30, 2008 is primarily attributable to increased professional fees, insurance
costs and director fees.
Other
Gains (Losses): Upon
the
adoption of FAS 159 on January 1, 2008, the changes in the estimated fair value
of the Company's available-for-sale securities, long-term liabilities, and
certain interest swaps are recorded in earnings. The gain of $76,142 for the
six
months ended June 30, 2008 is comprised of realized losses of $(9,835) and
unrealized losses on securities and swaps of $(320,279), offset by unrealized
gains on liabilities of $406,257. Foreign currency gains (loss) were $(10,186)
and $2,855 for the six months ended June 30, 2008 and 2007. Included in
accumulated other comprehensive income (loss) was a $9,325 gain on foreign
currency translation. As a result, the Company’s foreign currency exposure for
the six months ended June 30, 2008 resulted in a net economic loss of $861.
The
losses on impairment of assets of $(4,098) for the six month period ended June
30, 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
of
$0.30 per share, which were paid on April 30, 2008 to stockholders of record
on
March 31, 2008.
On
May
15, 2008, the Company declared dividends to its holders of Common Stock of
$0.31
per share, which were paid on July 31, 2008 to stockholders of record on June
30, 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 June 30, 2008 and December 31,
2007:
U.S.
dollar denominated securities
|
|
June
30, 2008 Estimated Fair
Value
|
|
Percentage
|
|
December
31, 2007 Estimated
Fair
Value
(1)
|
|
Percentage
|
|
Commercial
mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
CMBS
IOs
|
|
$
|
4,427
|
|
|
0.2
|
%
|
$
|
15,915
|
|
|
0.7
|
%
|
Investment
grade CMBS
|
|
|
694,844
|
|
|
36.5
|
|
|
766,996
|
|
|
33.6
|
|
Non-investment
grade rated subordinated securities
|
|
|
456,261
|
|
|
24.0
|
|
|
630,139
|
|
|
27.6
|
|
Non-rated
subordinated securities
|
|
|
85,804
|
|
|
4.5
|
|
|
110,481
|
|
|
4.8
|
|
Credit
tenant lease
|
|
|
23,030
|
|
|
1.2
|
|
|
24,949
|
|
|
1.1
|
|
Investment
grade REIT debt
|
|
|
205,846
|
|
|
10.8
|
|
|
246,095
|
|
|
10.8
|
|
Multifamily
agency securities
|
|
|
357
|
|
|
-
|
|
|
37,123
|
|
|
1.6
|
|
CDO
investments
|
|
|
35,573
|
|
|
1.9
|
|
|
49,630
|
|
|
2.2
|
|
Total
CMBS
|
|
|
1,506,142
|
|
|
79.1
|
|
|
1,881,328
|
|
|
82.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
adjustable rate securities
|
|
|
-
|
|
|
-
|
|
|
1,193
|
|
|
0.1
|
|
Residential
CMOs
|
|
|
555
|
|
|
-
|
|
|
627
|
|
|
-
|
|
Hybrid
adjustable rate mortgages (“ARMs”)
|
|
|
418
|
|
|
-
|
|
|
8,363
|
|
|
0.4
|
|
Total
RMBS
|
|
|
973
|
|
|
0.1
|
|
|
10,183
|
|
|
0.5
|
|
Total
U.S. dollar denominated securities
|
|
$
|
1,507,115
|
|
|
79.2
|
%
|
$
|
1,891,511
|
|
|
82.9
|
%
|
Non-U.S.
dollar denominated securities
|
|
|
|
|
|
|
|
|
|
Commercial
mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
$
|
173,407
|
|
|
9.1
|
%
|
$
|
151,532
|
|
|
6.6
|
%
|
Non-investment
grade rated subordinated securities
|
|
|
193,271
|
|
|
10.2
|
|
|
212,433
|
|
|
9.3
|
|
Non-rated
subordinated securities
|
|
|
29,258
|
|
|
1.5
|
|
|
28,858
|
|
|
1.2
|
|
Total
Non-U.S. dollar denominated securities
|
|
|
395,936
|
|
|
20.8
|
|
|
392,823
|
|
|
17.1
|
|
Total
securities
|
|
$
|
1,903,051
|
|
|
100.0
|
%
|
$
|
2,284,334
|
|
|
100.0
|
%
|
(1) |
Includes
securities available-for-sale at December 31, 2007, reclassified
to
securities held-for-trading in the first quarter of
2008.
|
During
the first six months of 2008 the Company purchased $53,515 of non-U.S. dollar
denominated securities in order to continue to increase geographic
diversification of its portfolio. Also during the first six months of 2008,
the
Company sold the majority of its remaining multifamily agency securities and
CMBS IOs to increase its liquidity position. 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 market
value of the Company’s U.S. CMBS portfolio during the first quarter of
2008.
Borrowings: At
June
30, 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 commercial real estate assets. The Company's financial flexibility
is
affected by its ability to renew or replace on a continuous basis its maturing
short-term borrowings. At June 30, 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 lenders retain 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 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:
|
|
June
30, 2008
|
|
|
|
Market
Value
|
|
Adjusted
Issuance Price
|
|
Maximum
Balance
|
|
Range
of
Maturities
|
|
CDO
debt*
|
|
$
|
1,252,224
|
|
$
|
1,810,258
|
|
$
|
1,832,454
|
|
|
3.6
to 6.7 years
|
|
Commercial
mortgage loan pools
|
|
|
1,207,151
|
|
|
1,207,151
|
|
|
1,207,151
|
|
|
199
to 10.5 years
|
|
Credit
facilities
|
|
|
610,317
|
|
|
610,317
|
|
|
687,293
|
|
|
79
to 538 days
|
|
Senior
convertible notes
|
|
|
71,160
|
|
|
80,000
|
|
|
80,000
|
|
|
19.18
years
|
|
Senior
unsecured notes**
|
|
|
85,204
|
|
|
162,500
|
|
|
162,500
|
|
|
8.82
years
|
|
Junior
unsecured notes
|
|
|
35,611
|
|
|
78,777
|
|
|
78,777
|
|
|
13.84
years
|
|
Junior
subordinated notes***
|
|
|
72,829
|
|
|
180,477
|
|
|
180,477
|
|
|
27.61
years
|
|
Total
|
|
$
|
3,334,496
|
|
$
|
4,129,480
|
|
|
|
|
|
|
|
*
Disclosed as adjusted issue price. Total par of the Company’s CDO debt at June
30, 2008 was $1,395,101.
**
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. Disclosure
of interest payments has been omitted because certain borrowings require
variable rate interest payments. The Company’s total interest payments for the
six months ended June 30, 2008 were $108,769.
At
June
30, 2008, the Company's borrowings had the following weighted average yields
and
range of interest rates and yields:
|
|
Lines
of Credit
|
|
Collateralized
Debt Obligations
|
|
Commercial
Mortgage Loan Pools
|
|
Junior
Subordinated Notes
|
|
Senior
Unsecured Notes
|
|
Junior
Unsecured Notes
|
|
Convertible
Debt
|
|
Total
Borrowings
|
|
Weighted
average yield
Interest
Rate
|
|
|
4.92
|
%
|
|
5.71
|
%
|
|
4.00
|
%
|
|
7.64
|
%
|
|
7.59
|
%
|
|
6.56
|
%
|
|
11.75
|
%
|
|
5.39
|
%
|
Fixed
|
|
|
-
|
%
|
|
6.79
|
%
|
|
4.00
|
%
|
|
7.64
|
%
|
|
7.59
|
%
|
|
6.56
|
%
|
|
11.75
|
%
|
|
6.16
|
%
|
Floating
|
|
|
4.92
|
%
|
|
3.54
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
3.89
|
%
|
Effective
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
-
|
%
|
|
7.23
|
%
|
|
4.00
|
%
|
|
7.64
|
%
|
|
7.59
|
%
|
|
6.56
|
%
|
|
11.75
|
%
|
|
6.43
|
%
|
Floating
|
|
|
4.92
|
%
|
|
3.54
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
3.89
|
%
|
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 June 30, 2008 and December 31, 2007 consisted of
the
following:
|
|
At
June 30, 2008
|
|
|
|
Notional
Value
|
|
Estimated
Fair Value
|
|
Unamortized
Cost
|
|
Average
Remaining Term (years)
|
|
Cash
flow hedges
|
|
$
|
99,260
|
|
$
|
1,702
|
|
$
|
(1,612
|
)
|
|
3.5
|
|
Trading
swaps
|
|
|
97,039
|
|
|
(1,829
|
)
|
|
-
|
|
|
2.9
|
|
CDO
trading swaps
|
|
|
1,141,716
|
|
|
(22,838
|
)
|
|
-
|
|
|
5.4
|
|
CDO
LIBOR cap
|
|
|
85,000
|
|
|
260
|
|
|
1,407
|
|
|
4.9
|
|
|
|
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 June 30, 2008 and December 31, 2007 consisted of the
following:
|
|
|
At
June 30, 2008
|
|
|
|
|
Estimated
Fair Value
|
|
|
Unamortized
Cost
|
|
|
Average
Remaining Term
|
|
Currency
swaps
|
|
$
|
(22,181
|
)
|
|
-
|
|
|
8.1
years
|
|
CDO
currency swaps
|
|
|
18,554
|
|
|
-
|
|
|
9.4
years
|
|
Forwards
|
|
|
(1,316
|
)
|
|
-
|
|
|
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 was originally 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 $120,619 from
January 1, 2008 through August 8, 2008, $35,708 of which occurred since April
1,
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 (including repurchase
agreements) 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 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
credit facilities (including repurchase agreement) counterparties which provide
funding for the Company's portfolio or could cause one or more of the Company's
counterparties to be unwilling or unable to provide the Company with additional
financing or to extend current credit facilities on the maturity date. If one
or
more of the Company's counterparties were unwilling or unable to provide the
Company with additional financing and the Company were unable to replace such
facilities, the Company’s liquidity would be reduced, which could have a
material adverse effect on the Company's financial condition and business.
The
Company could be forced to sell its investments at a time when prices are
depressed, which could adversely affect the Company's ability to comply with
REIT asset and income tests and maintain its qualification as a
REIT.
If
one or
more major market participants that provides financing for mortgage-backed
or
other fixed income securities fails or decides to withdraw from the market,
it
could negatively affect the marketability of all fixed income securities,
including the value of the securities in the Company's portfolio, thus reducing
the Company's net book value. In addition, distribution requirements under
the
REIT provisions of the Code limit the Company's ability to retain earnings
and
thereby replenish or increase capital for its operations.
In
addition, the Company's liquidity also may be adversely affected by margin
calls
under the Company's credit facilities (including repurchase agreements) that
are
dependent in part on the valuation of the collateral to secure the financing.
The Company's credit facilities allow the lender, to varying degrees, to revalue
the collateral to values that the lender considers to reflect market value.
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 certain 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 the
widening of credit spreads 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 six months 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.
During
the first six months of 2008, the Company raised $19,253 of capital by issuing
common shares under its sales agency agreement. Through August 8, 2008, the
Company raised an additional $4,103 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. On July 28, 2008, the Company subsequently reborrowed
$30,000 from HoldCo 2.
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 $38,684 of unrestricted
cash and cash equivalents held as of June 30, 2008 as well as future common
stock issuances under the Company’s sales agency agreement, and $30,000 of
unused borrowing capacity from HoldCo 2.
The
Company's ability to meet its long-term (greater than twelve months) liquidity
requirements is subject to obtaining additional long-term debt and equity
financing. Any decision by the Company's lenders and investors to provide the
Company with financing will depend upon a number of factors, such as the
Company's compliance with the terms of its existing credit arrangements, the
Company's financial performance, industry or market trends, the general
availability of and rates applicable to financing transactions, such lenders'
and investors' resources and policies concerning the terms under which they
make
capital commitments and the relative attractiveness of alternative investment
or
lending opportunities.
Certain
information with respect to the Company's borrowings at June 30, 2008 is
summarized as follows:
Borrowing
Type
|
|
Market
Value of Borrowings
|
|
Adjusted
Issue Price of Borrowings
|
|
Weighted
Average Borrowing Rate
|
|
Weighted
Average Remaining Maturity
|
|
Estimated
Fair Value of Assets Pledged
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
facilities (1)
|
|
$
|
610,317
|
|
$
|
610,317
|
|
|
4.92
|
%
|
|
323
days
|
|
$
|
858,382
|
|
Commercial
mortgage loan pools
|
|
|
1,207,151
|
|
|
1,207,151
|
|
|
4.00
|
%
|
|
4.42
years
|
|
|
1,229,442
|
|
CDOs
(2)
|
|
|
1,252,224
|
|
|
1,810,258
|
|
|
5.71
|
%
|
|
5.13
years
|
|
|
1,854,758
|
|
Senior
unsecured notes (2)
|
|
|
85,204
|
|
|
162,500
|
|
|
7.59
|
%
|
|
8.82
years
|
|
|
|
|
Junior
unsecured notes (2)
|
|
|
35,611
|
|
|
78,777
|
|
|
6.56
|
%
|
|
13.84
years
|
|
|
|
|
Senior
convertible notes (2)
|
|
|
71,160
|
|
|
80,000
|
|
|
11.75
|
%
|
|
19.18
years
|
|
|
|
|
Junior
subordinated notes (2)
|
|
|
72,829
|
|
|
180,477
|
|
|
7.64
|
%
|
|
27.61
years
|
|
|
|
|
Total
Borrowings
|
|
$
|
3,334,496
|
|
$
|
4,129,480
|
|
|
5.39
|
%
|
|
5.86
years
|
|
$
|
3,942,582
|
|
(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 six months ended June 30, 2008, $406,527 was
recorded as a result of a reduction in the fair value of such liabilities.
|
At
June
30, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
facilities
|
|
$
|
-
|
|
$
|
-
|
|
$
|
439,474
|
|
$
|
170,843
|
|
$
|
-
|
|
$
|
-
|
|
$
|
610,317
|
|
Commercial
mortgage loan pools(1)
|
|
|
-
|
|
|
2,120
|
|
|
343,333
|
|
|
103,903
|
|
|
40,119
|
|
|
717,676
|
|
|
1,207,151
|
|
CDOs(1)
|
|
|
397
|
|
|
694
|
|
|
45,144
|
|
|
172,900
|
|
|
736,650
|
|
|
854,473
|
|
|
1,810,258
|
|
Junior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
162,500
|
|
|
162,500
|
|
Senior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
78,777
|
|
|
78,777
|
|
Senior
convertible notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
80,000
|
|
|
80,000
|
|
Junior
subordinated notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
180,477
|
|
|
180,477
|
|
Total
Borrowings
|
|
|
397
|
|
|
2,814
|
|
|
827,951
|
|
|
447,646
|
|
|
776,769
|
|
|
2,073,903
|
|
|
4,129,480
|
|
|
(1) |
Commercial
mortgage loan pools and CDOs are non-recourse borrowings and payments
for
these borrowings are supported solely by the cash flows from the
assets in
these structures.
|
Credit
Facilities and Reverse Repurchase Agreements
The
Company is subject to financial covenants in its credit facilities. For the
quarter ended June 30, 2008, the Company is not aware of any instances of
non-compliance with these covenants.
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 the extension, certain financial
covenants were added or modified so that: (i) the Company is required to have
a
minimum debt service coverage ratio (as defined in the related guaranty) 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, (vi) on any
date 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 (mark-to-market
indebtedness is defined under the related guaranty generally to mean short-term
liabilities that have a margin call feature) and (vii) cumulative income cannot
be less than one dollar for two consecutive quarters.
On
July
8, 2008, Deutsche Bank AG, Cayman Islands Branch, extended its multicurrency
repurchase agreement until July 8, 2010. In connection with the extension,
certain financial covenants were added or modified to conform to the covenants
in the Morgan Stanley Bank facility described above. In addition, the Company
separately agreed with Deutsche Bank AG, Cayman Islands Branch, that to the
extent the Company from time to time agrees to covenants that are more
restrictive than those in the Deutsche Bank agreement, the covenants in the
Deutsche Bank agreement will automatically be deemed to be modified to match
the
restrictions in such more restrictive covenants, subject to limited exceptions.
The amended agreement also provides that the Company’s failure (1) to procure an
extension of any of its existing facilities with Bank of America, N.A. and
Morgan Stanley Bank as of the 15th day before the maturity date of such facility
or (2) to demonstrate to the satisfaction of Deutsche Bank that it is
negotiating a bona fide commitment to extend or replace such facility as of
the
30th day before the maturity date, would constitute an event of default under
such agreement; however, any such failure would not be deemed to constitute
an
event of default if the Company demonstrates to the satisfaction of Deutsche
Bank that it has sufficient liquid assets, as defined under such agreement,
to
pay down such the multicurrency repurchase agreement when due. At the time
of
the extension, total borrowings outstanding under the Deutsche Bank agreement
were $110,104. Under the terms of the extension agreements, no additional
borrowings are permitted under the facility. In addition, monthly amortization
payments of approximately $2,000 per month are required under the
facility.
On
August
7, 2008, Bank of America, N.A. extended its USD and non-USD facilities until
September 18, 2010. In connection with the extension, certain financial
covenants were added or modified to conform to more restrictive covenants
contained in other credit facilities. Also in connection with the extension,
the
Company is required to make (i) amortization payments totaling $31,000 on
various dates through September 30, 2008 and (ii) monthly payments of
$2,250 commencing October 15, 2008 until March 15, 2010 under the non-USD
facility and $2,250 per month commencing April 15, 2010 and ending at maturity
under the USD facility.
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.
On
April
8, 2008, the Company repaid $52,500 to HoldCo 2, representing all
then-outstanding borrowings under the facility. On July 28, 2008, the Company
reborrowed $30,000 under the facility.
Preferred
Equity Issuance
On
April
4, 2008, the Company issued $70,125 of Series E Cumulative
Convertible Redeemable Preferred Stock. Net proceeds were $69,866.
Dividends are payable on the three new series of convertible preferred stock
at
a 12% coupon and the holder 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).
Holders
of the Series E-1 and E-2 preferred stock have the right to require the Company
to repurchase their shares for cash equal to the liquidation preference per
share. The Series E-1 preferred stock repurchase date is April 4, 2012 and
the
Series E-2 repurchase date is April 4, 2013.
On
June
20, 2008, the holder of the outstanding 12% Series E-3 Cumulative Convertible
Redeemable Preferred Stock exercised its right to convert its shares into
3,119,661 shares of common stock.
The
holder is a subsidiary of a fund managed by an affiliate of Credit
Suisse.
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 $23,286.
For
the
six months ended June 30, 2008, the Company issued 89,301 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 $675.
For
the
six months ended June 30, 2008, the Company issued 2,601,338 shares of Common
Stock under a sales agency agreement with Brinson Patrick Securities
Corporation. Net proceeds to the Company were approximately $19,253.
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
June
30, 2008 the Company owned securities of 39 Controlling Class CMBS trusts with
a
par of $1,858,015. The total par amount of CMBS issued by the 39 trusts was
$67,618,949. One of the Company's 39 Controlling Class trusts does not qualify
as a QSPE and has been consolidated by the Company (see Note 6 of the
consolidated financial statements).
The
Company's maximum exposure to loss as a result of its investment in these QSPEs
totaled $1,130,541 and $1,126,442 at June 30, 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 June 30, 2008 and December 31, 2007 was $59,561 and $61,206,
respectively.
The
Company also owns non-investment grade 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 June 30,
2008
and December 31, 2007, the Company's total maximum exposure to loss as a result
of its investment in Leaf was $5,980 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 $54,344 and provided
cash flow of $159,608 for the six months ended June 30, 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 was an outflow of $48,922 and an inflow of
$132,870 for the six months ended June 30, 2008 and 2007, respectively. Also,
during the first six months of 2008, the company terminated interest rate swaps
which resulted in an outflow of $17,107, while during the same period of 2007,
it was an inflow of $7,412.
Net
cash
provided by investing activities consists primarily of purchases, sales, and
repayments on securities, commercial loan pools, commercial mortgage loans
and
equity investments. The Company's investing activities provided cash flows
of
$126,614 and used cash flows of $514,248 during the six months ended June 30,
2008 and 2007, respectively. The variance in investing cash flows is primarily
attributable to purchases of securities and funding of commercial mortgage
loans. During the six months ended June 30, 2008 and June 30, 2007, net cash
used to fund commercial loans was $2,286 and $574,980, respectively. Purchases
of securities during the six months ended June 30, 2008 of $53,515 are
classified as operating activities due to the adoption of FAS 159, versus
purchases of securities during the six months ended June 30, 2007 of which
$215,210 were classified as investing activities prior to the adoption of FAS
159.
Net
cash
from financing activities was an outflow of $127,935 for the six months ended
June 30, 2008 versus a cash inflow of $392,797 for the six months ended June
30,
2007, respectively, primarily due to margin calls on reverse repurchase
agreements and credit facilities during the first quarter of 2008, net of
preferred and common stock issuances. During the six months ended June 30,
2008
and June 30, 2007, net cash provided by the issuances of common and preferred
stock was $113,079 and $149,564, respectively. Also, during the six months
ended
June 30, 2007, the company issued senior unsecured notes and junior secured
notes which raised $150,459 of cash in the aggregate.
Transactions
with the Manager and Certain Other Parties
The
Company has a Management Agreement, an administrative services agreement and
an
accounting services agreement with the Manager, the employer of certain
directors and all of the officers of the Company, under which the Manager and
the Company’s officers manage the Company’s day-to-day investment operations,
subject to the direction and oversight of the Company’s Board of Directors.
Pursuant to the Management Agreement and 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 0.5% 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 ($11.21 per common share at June 30, 2008) 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 exceeded
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.
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 June 30, 2008 and 2007:
|
|
For
the Three Months
Ended
June 30,
|
|
For
the Six Months
Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Management
fee
|
|
$
|
2,961
|
|
$
|
3,868
|
|
$
|
6,236
|
|
$
|
7,388
|
|
Incentive
fee
|
|
|
1,334
|
|
|
2,922
|
|
|
11,879
|
|
|
5,646
|
|
Incentive
fee - stock based
|
|
|
645
|
|
|
939
|
|
|
1,044
|
|
|
1,648
|
|
Total
management and incentive fees
|
|
$
|
4,940
|
|
$
|
7,729
|
|
$
|
19,159
|
|
$
|
14,682
|
|
At
June
30, 2008 and 2007, respectively, management and incentive fees of $14,182 and
$7,308 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 $250 for certain expenses incurred
on
behalf of the Company during the three and six months ended June 30, 2008 and
$117 and $235 for the three and six months ended June 30, 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 and six months ended June 30, 2008, the Company recorded administration
and investment accounting service fees of $255 and $510, respectively, which
are
included in general and administrative expense on the accompanying consolidated
statements of operations. For the three and six months ended June 30, 2007,
the
Company recorded administration and investment accounting service fees of $363
and $410, 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. On April 8,
2008, the Company repaid $52,500 to HoldCo 2, representing all then-outstanding
borrowings under the facility. On July 28, 2008, the Company reborrowed $30,000
under the facility.
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 June 30, 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 June 30, 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 June 30, 2008 was $95,258.
The Company does not incur any additional management or incentive fees to the
Manager related to its investment in Carbon II. On June 30, 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.
Certain
of the Company’s 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 spread 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
spread 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 June 30, 2008, 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. 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. The primary risks associated with
acquiring and financing assets under reverse 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. 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 1.9 years based on net asset value at June 30, 2008. This means that
a
100 basis point increase in interest rates would cause a margin call of
approximately $17,000.
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
June 30, 2008, economic duration for the Company's entire portfolio was 2.9
years. This implies that for each 100 basis points of change in interest rates
the Company's economic value will change by approximately 2.9%, or $27,000.
However, the duration of the Company’s portfolio not financed with match funded
debt is 1.9 years. This means that a 100 basis point increase in interest rates
or credit spreads would cause a margin call of approximately
$17,000.
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 June 30, 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. 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 $0.57
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 matching 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 June 30, 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 June 30, 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
June
30, 2008, there were no pending legal proceedings in which the Company was
a
defendant or of which any of its property was subject.
None.
ITEM
2. |
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
During
the six months ended June 30, 2008, the Company issued 740,745 shares
of unregistered Common Stock with an aggregate value of $5,280 as
follows. 316,320 shares of unregistered common stock with an aggregate
value of $2,116 were issued 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. 424,425 restricted shares of unregistered common stock with
an aggregate value of $3,163 were issued to the Manager under the Company's
2008
Manager Equity Plan and pursuant to the provision the Management Agreement
providing that 30% of the Manager's incentive fees earned under the Management
Agreement shall be paid in shares of the Company's Common Stock. The issuances
of common stock were made in reliance upon the exemption from registration
under
Section 4(2) of the Securities Act.
ITEM
4. |
Submission
of Matters to a Vote of Security
Holders
|
At
the
annual meeting of the Company’s stockholders on May 15, 2008, the Company’s
stockholders approved (1) the election of Hugh R. Frater, Jeffrey C. Keil and
Deborah J. Lucas to the Board of Directors of the Company for a three-year
term
expiring in 2011, the election of Walter E. Gregg Jr. to the Board of Directors
of the Company for the two-year balance of a three-year term expiring in 2010
and the election of Christopher A. Milner to the Board of Directors of the
Company for the one-year balance of a three-year term expiring in 2009, (2)
the
ratification of the appointment by the Board of Directors of the Company of
Deloitte & Touche LLP as the Company’s independent auditors for the fiscal
year ending December 31, 2008 and (3) the approval of the Anthracite Capital,
Inc. 2008 Manager Equity Plan.
The
result of the vote is as follows:
Election
of Hugh R. Frater
|
|
For:
|
|
|
56,167,937
|
|
Against/Withheld:
|
|
|
1,586,381
|
|
Abstentions:
|
|
|
0
|
|
Broker
Non-Votes:
|
|
|
0
|
|
Election
of Jeffrey C. Keil
|
For:
|
|
|
56,158,239
|
|
Against/Withheld:
|
|
|
1,596,079
|
|
Abstentions:
|
|
|
0
|
|
Broker
Non-Votes:
|
|
|
0
|
|
Election
of Deborah J. Lucas
|
For:
|
|
|
56,062,340
|
|
Against/Withheld:
|
|
|
1,691,979
|
|
Abstentions:
|
|
|
0
|
|
Broker
Non-Votes:
|
|
|
0
|
|
Election
of Walter E. Gregg Jr.
|
For:
|
|
|
56,059,509
|
|
Against/Withheld:
|
|
|
1,694,809
|
|
Abstentions:
|
|
|
0
|
|
Broker
Non-Votes:
|
|
|
0
|
|
Election
of Christopher A. Milner
|
For:
|
|
|
56,228,723
|
|
Against/Withheld:
|
|
|
1,525,595
|
|
Abstentions:
|
|
|
0
|
|
Broker
Non-Votes:
|
|
|
0
|
|
Ratification
of Deloitte & Touche LLP
|
For:
|
|
|
56,571,102
|
|
Against/Withheld:
|
|
|
869,095
|
|
Abstentions:
|
|
|
314,118
|
|
Broker
Non-Votes:
|
|
|
0
|
|
Approval
of the Anthracite Capital, Inc. 2008 Manager Equity
Plan
|
For:
|
|
|
29,068,522
|
|
Against/Withheld:
|
|
|
3,653,546
|
|
Abstentions:
|
|
|
990,799
|
|
Broker
Non-Votes:
|
|
|
31,078,894
|
|
The
terms
of the following other directors of the Company continued after the meeting:
Scott M. Amero, Carl F. Geuther, John B. Levy and Andrew P. Rifkin.
|
10.1 |
Amendment,
Agreement and Waiver, dated as of August 7, 2008, in respect of the
Credit
Agreement, dated as of March 17, 2006, as amended, restated, supplemented
or otherwise modified, by and among AHR Capital BOFA Limited as a
borrower, each of the borrowers from time to time party thereto,
Anthracite Capital, Inc. as borrower agent and Bank of America, N.A.
as
lender
|
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10.2 |
Amendment
and Agreement, dated as of August 7, 2008, in respect of the Master
Repurchase Agreement, dated as of July 20, 2007, as amended, restated,
supplemented or otherwise modified, by and among Anthracite Capital
BOFA
Funding LLC, as seller, Bank of America, N.A. and Bank of America
Mortgage
Capital Corporation, as buyers, and Bank of America, N.A. as agent
for the
buyers
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10.3 |
Amended
and Restated Guaranty, dated as of August 7, 2008, by Anthracite
Capital,
Inc. for the benefit of Bank of America, N.A. and Bank of America
Mortgage
Capital Corporation
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10.4 |
Amended
and Restated Parent Guaranty, dated as of August 7, 2008, by Anthracite
Capital, Inc. in favor of Bank of America,
N.A.
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31.1 |
Exchange
Act Rule (13a-14a)/15d-14(a) Certification of Chief Executive
Officer
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31.2 |
Exchange
Act Rule (13a-14a)/15d-14(a) Certification of Chief Financial
Officer
|
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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
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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.
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ANTHRACITE
CAPITAL, INC.
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|
|
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Dated:
August 11, 2008 |
By: |
/s/ Christopher
A. Milner |
|
Name:
Christopher A. Milner
|
|
Title:
Chief Executive Officer
|
|
|
|
Dated:
August 11, 2008 |
By: |
/s/ James
J.
Lillis |
|
Name:
James J. Lillis
|
|
Title:
Chief Financial Officer
|