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 September 30, 2008
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from: ________ to ________
Commission
File Number 001-13937
ANTHRACITE
CAPITAL, INC.
(Exact
name of registrant as specified in its charter)
Maryland
|
|
13-3978906
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
|
|
|
40
East 52nd
Street, New York, New York
|
|
10022
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(Registrant's
telephone number including area code): (212)
810-3333
NOT
APPLICABLE
(Former
name, former address, and for new fiscal year; if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
x No
¨
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 ¨
|
|
Non-accelerated filer ¨
|
Smaller reporting
company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
¨ No
x
At
November 10, 2008, 76,898,810 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
September 30, 2008 and December 31, 2007
|
4
|
|
|
|
|
Consolidated
Statements of Operations (Unaudited)
|
|
|
For
the Three and Nine Months Ended September 30, 2008 and
2007
|
5
|
|
|
|
|
Consolidated
Statement of Changes in Stockholders' Equity (Unaudited)
|
|
|
For
the Nine Months Ended September 30, 2008
|
6
|
|
|
|
|
Consolidated
Statements of Cash Flows (Unaudited)
|
|
|
For
the Nine Months Ended September 30, 2008 and 2007
|
7
|
|
|
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
8
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and
|
|
|
Results
of Operations
|
41
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
75
|
|
|
|
Item
4.
|
Controls
and Procedures
|
79
|
|
|
|
Part
II – OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
80
|
|
|
|
Item
1A.
|
Risk
Factors
|
80
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
84
|
|
|
|
Item
5.
|
Other
Information
|
85
|
|
|
|
Item
6.
|
Exhibits
|
85
|
|
|
|
SIGNATURES
|
86
|
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 and liabilities;
(3)
the
amount and timing of any future margin calls and their impact on the Company's
financial condition and liquidity;
(4)
the
Company's ability to meet its liquidity requirements to continue to fund its
business operations, including its ability to renew the existing facilities
or
obtain replacement financing, to meet margin calls and amortization payments
under the facilities;
(5)
the
relative and absolute investment performance and operations of BlackRock
Financial Management, Inc. (“BlackRock”), the Company’s Manager;
(6)
the
impact of increased competition;
(7)
the
impact of future acquisitions or divestitures;
(8)
the
unfavorable resolution of legal proceedings;
(9)
the
impact of legislative and regulatory actions and reforms and regulatory,
supervisory or enforcement actions of government agencies relating to the
Company or BlackRock;
(10)
terrorist activities and international hostilities, which may adversely affect
the general economy, domestic and global financial and capital markets, specific
industries, and the Company;
(11)
the
ability of BlackRock to attract and retain highly talented professionals;
(12)
fluctuations in foreign currency exchange rates; and
(13)
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)
|
|
September 30, 2008
|
|
December 31, 2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
45,810
|
|
|
|
|
$
|
91,547
|
|
Restricted
cash equivalents
|
|
|
|
|
|
16,019
|
|
|
|
|
|
32,105
|
|
Securities
held-for-trading, at estimated fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
commercial mortgage-backed securities (“CMBS”)
|
|
$
|
607,864
|
|
|
|
|
$
|
1,380
|
|
|
|
|
Investment
grade CMBS
|
|
|
1,005,630
|
|
|
|
|
|
15,923
|
|
|
|
|
Residential
mortgage-backed securities (“RMBS”)
|
|
|
840
|
|
|
|
|
|
901
|
|
|
|
|
Total
securities held-for-trading
|
|
|
|
|
|
1,614,334
|
|
|
|
|
|
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 $43,752 in
2008)
|
|
|
|
|
|
897,955
|
|
|
|
|
|
983,387
|
|
Commercial
mortgage loan pools, at amortized cost
|
|
|
|
|
|
1,223,630
|
|
|
|
|
|
1,240,793
|
|
Equity
investments
|
|
|
|
|
|
136,545
|
|
|
|
|
|
108,748
|
|
Derivative
instruments, at estimated fair value
|
|
|
|
|
|
495,032
|
|
|
|
|
|
404,910
|
|
Other
assets (includes $1,389 at estimated fair value in 2008)
|
|
|
|
|
|
64,948
|
|
|
|
|
|
101,886
|
|
Total
Assets
|
|
|
|
|
$
|
4,494,273
|
|
|
|
|
$
|
5,247,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
by pledge of subordinated CMBS
|
|
$
|
189,299
|
|
|
|
|
$
|
293,287
|
|
|
|
|
Secured
by pledge of investment grade CMBS
|
|
|
121,448
|
|
|
|
|
|
207,829
|
|
|
|
|
Secured
by pledge of commercial mortgage loans
|
|
|
201,348
|
|
|
|
|
|
244,476
|
|
|
|
|
Secured
by pledge of equity investments
|
|
|
30,000
|
|
|
|
|
|
-
|
|
|
|
|
Collateralized
debt obligations ("CDOs") (at estimated fair value in
2008)
|
|
|
1,040,435
|
|
|
|
|
|
1,823,328
|
|
|
|
|
Senior
unsecured notes (at estimated fair value in 2008)
|
|
|
47,305
|
|
|
|
|
|
162,500
|
|
|
|
|
Senior
unsecured convertible notes (at estimated fair value in
2008)
|
|
|
58,744
|
|
|
|
|
|
80,000
|
|
|
|
|
Junior
unsecured notes (at estimated fair value in 2008)
|
|
|
16,641
|
|
|
|
|
|
73,103
|
|
|
|
|
Junior
subordinated notes to subsidiary trusts issuing preferred
securities
(at estimated fair value in 2008)
|
|
|
37,056
|
|
|
|
|
|
180,477
|
|
|
|
|
Secured
by pledge of commercial mortgage loan pools
|
|
|
1,205,628
|
|
|
|
|
|
1,225,223
|
|
|
|
|
Total
borrowings
|
|
|
|
|
|
2,947,904
|
|
|
|
|
|
4,290,223
|
|
Payable
for investments purchased
|
|
|
|
|
|
-
|
|
|
|
|
|
4,693
|
|
Distributions
payable
|
|
|
|
|
|
26,784
|
|
|
|
|
|
21,064
|
|
Derivative
instruments, at estimated fair value
|
|
|
|
|
|
523,898
|
|
|
|
|
|
442,114
|
|
Other
liabilities
|
|
|
|
|
|
34,015
|
|
|
|
|
|
38,245
|
|
Total
Liabilities
|
|
|
|
|
|
3,532,601
|
|
|
|
|
|
4,796,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12%
Series E-1 Cumulative Convertible Redeemable Preferred Stock, liquidation
preference $23,375
|
|
|
|
|
|
23,275
|
|
|
|
|
|
-
|
|
12%
Series E-2 Cumulative Convertible Redeemable Preferred Stock, liquidation
preference $23,375
|
|
|
|
|
|
23,275
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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;
76,660,206 shares issued and outstanding in 2008; 63,263,998 shares
issued
and outstanding in 2007
|
|
|
|
|
|
77
|
|
|
|
|
|
63
|
|
Additional
paid-in capital
|
|
|
|
|
|
782,930
|
|
|
|
|
|
691,071
|
|
Retained
earnings (distributions in excess of earnings)
|
|
|
|
|
|
24,073
|
|
|
|
|
|
(122,738
|
)
|
Accumulated
other comprehensive loss (“OCI”)
|
|
|
|
|
|
(30,652
|
)
|
|
|
|
|
(255,719
|
)
|
Total
Stockholders’ Equity
|
|
|
|
|
|
915,122
|
|
|
|
|
|
451,371
|
|
Total
Liabilities, Mezzanine and Stockholders’ Equity
|
|
|
|
|
$
|
4,494,273
|
|
|
|
|
$
|
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
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
from securities
|
|
$
|
53,387
|
|
$
|
49,560
|
|
$
|
156,261
|
|
$
|
147,195
|
|
Interest
from commercial mortgage loans
|
|
|
22,674
|
|
|
20,494
|
|
|
69,506
|
|
|
49,942
|
|
Interest
from commercial mortgage loan pools
|
|
|
12,779
|
|
|
12,985
|
|
|
38,445
|
|
|
39,119
|
|
Earnings
from equity investments
|
|
|
3,067
|
|
|
6,611
|
|
|
2,510
|
|
|
28,982
|
|
Interest
from cash and cash equivalents
|
|
|
558
|
|
|
1,784
|
|
|
2,540
|
|
|
3,648
|
|
Total
income
|
|
|
92,465
|
|
|
91,434
|
|
|
269,262
|
|
|
268,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
56,652
|
|
|
62,525
|
|
|
164,189
|
|
|
178,450
|
|
Management
and incentive fees
|
|
|
3,432
|
|
|
3,970
|
|
|
22,591
|
|
|
18,652
|
|
General
and administrative expense
|
|
|
2,025
|
|
|
1,624
|
|
|
5,706
|
|
|
4,448
|
|
Total
expenses
|
|
|
62,109
|
|
|
68,119
|
|
|
192,486
|
|
|
201,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
loss on securities and swaps held-for-trading, net
|
|
|
(5,005
|
)
|
|
(4,435
|
)
|
|
(14,840
|
)
|
|
(4,063
|
)
|
Unrealized
loss on securities held-for-trading
|
|
|
(247,348
|
)
|
|
-
|
|
|
(572,675
|
)
|
|
-
|
|
Unrealized
loss on swaps classified as held-for-trading
|
|
|
(5,859
|
)
|
|
-
|
|
|
(811
|
)
|
|
-
|
|
Unrealized
gain on liabilities
|
|
|
261,723
|
|
|
-
|
|
|
667,980
|
|
|
-
|
|
Gain
(loss) on sale of securities available-for-sale, net
|
|
|
-
|
|
|
(1,331
|
)
|
|
-
|
|
|
5,576
|
|
Dedesignation
of derivative instruments
|
|
|
(7,084
|
)
|
|
-
|
|
|
(7,084
|
)
|
|
-
|
|
Provision
for loan losses
|
|
|
(18,752
|
)
|
|
-
|
|
|
(43,942
|
)
|
|
-
|
|
Foreign
currency gain (loss)
|
|
|
7,273
|
|
|
775
|
|
|
(2,913
|
)
|
|
3,631
|
|
Loss
on impairment of assets
|
|
|
-
|
|
|
(2,938
|
)
|
|
-
|
|
|
(7,036
|
)
|
Total
other gains (losses)
|
|
|
(15,052
|
)
|
|
(7,929
|
)
|
|
25,715
|
|
|
(1,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
15,304
|
|
|
15,386
|
|
|
102,491
|
|
|
65,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on preferred stock
|
|
|
4,529
|
|
|
3,127
|
|
|
12,738
|
|
|
8,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
10,775
|
|
$
|
12,259
|
|
$
|
89,753
|
|
$
|
56,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share, basic:
|
|
$
|
0.14
|
|
$
|
0.19
|
|
$
|
1.30
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share, diluted:
|
|
$
|
0.14
|
|
$
|
0.19
|
|
$
|
1.23
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
74,365,259
|
|
|
63,861,985
|
|
|
69,099,689
|
|
|
60,450,020
|
|
Diluted
|
|
|
74,748,560
|
|
|
64,178,519
|
|
|
81,724,651
|
|
|
60,662,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
declared per share of common stock
|
|
$
|
0.31
|
|
$
|
0.30
|
|
$
|
0.92
|
|
$
|
0.89
|
|
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 Nine Months Ended September 30, 2008
(in
thousands)
|
|
|
|
Series
|
|
Series
|
|
|
|
Retained
Earnings
|
|
Accumulated
|
|
|
|
|
|
|
|
Common
|
|
C
|
|
D
|
|
Additional
|
|
(Distributions
|
|
Other
|
|
|
|
Total
|
|
|
|
Stock,
|
|
Preferred
|
|
Preferred
|
|
Paid-In
|
|
in Excess
|
|
Comprehensive
|
|
Comprehensive
|
|
Stockholders'
|
|
|
|
Par Value
|
|
Stock
|
|
Stock
|
|
Capital
|
|
of Earnings)
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,988
|
|
|
227,635
|
|
|
|
|
|
350,623
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,491
|
|
|
|
|
$
|
102,
491
|
|
|
102,
491
|
|
Unrealized
loss on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,219
|
)
|
|
(6,219
|
)
|
|
(6,219
|
)
|
Reclassification
adjustments from cash flow hedges included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,577
|
|
|
4,577
|
|
|
4,577
|
|
Dedesigation
of cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,084
|
|
|
7,084
|
|
|
7,084
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,010
|
)
|
|
(8,010
|
)
|
|
(8,010
|
)
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,568
|
)
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,923
|
|
|
|
|
Dividends
declared-common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65,930
|
)
|
|
|
|
|
|
|
|
(65,930
|
)
|
Dividends
on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,738
|
)
|
|
|
|
|
|
|
|
(12,738
|
)
|
Issuance
of common stock
|
|
|
14
|
|
|
|
|
|
|
|
|
91,859
|
|
|
|
|
|
|
|
|
|
|
|
91,873
|
|
Balance
at September 30, 2008
|
|
$
|
77
|
|
$
|
55,435
|
|
$
|
83,259
|
|
$
|
782,930
|
|
$
|
24,073
|
|
$
|
(30,652
|
)
|
|
|
|
$
|
915,122
|
|
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 Nine Months Ended
September 30, 2008
|
|
For the Nine Months Ended
September 30, 2007
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
|
102,491
|
|
$
|
65,444
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Net
decrease in trading securities
|
|
|
118
|
|
|
6,709
|
|
Sale
of trading securities
|
|
|
-
|
|
|
166,932
|
|
Purchase
of securities held-for-trading
|
|
|
(53,515
|
)
|
|
(42,668
|
)
|
Unrealized
loss on securities held-for-trading
|
|
|
572,675
|
|
|
-
|
|
Unrealized
loss on swaps classified as held-for-trading
|
|
|
811
|
|
|
-
|
|
Realized
loss (gain) on securities and swaps held-for-trading, net
|
|
|
3,236
|
|
|
(1,513
|
)
|
Unrealized
gain on liabilities
|
|
|
(667,980
|
)
|
|
-
|
|
Earnings
from subsidiary trust
|
|
|
(317
|
)
|
|
(316
|
)
|
Distributions
from subsidiary trust
|
|
|
316
|
|
|
316
|
|
Earnings
from equity investments
|
|
|
(2,510
|
)
|
|
(28,982
|
)
|
Distributions
of earnings from equity investments
|
|
|
3,599
|
|
|
11,948
|
|
Provision
for loan loss
|
|
|
43,942
|
|
|
-
|
|
Discount
accretion, net
|
|
|
(14,362
|
)
|
|
(9,010
|
)
|
Amortization
of finance costs
|
|
|
2,505
|
|
|
4,351
|
|
Loss
on impairment of assets
|
|
|
-
|
|
|
7,036
|
|
Unrealized
net foreign currency loss (gain)
|
|
|
28,528
|
|
|
(41,796
|
)
|
Non-cash
management and incentive fees
|
|
|
11,934
|
|
|
3,838
|
|
(Disbursements)
proceeds from termination of interest rate swap agreements
|
|
|
(17,101
|
)
|
|
17,737
|
|
Amortization
of terminated interest rate swaps from OCI
|
|
|
4,577
|
|
|
928
|
|
Dedesignation
of cash flow hedges
|
|
|
7,084
|
|
|
-
|
|
Increase
in other assets
|
|
|
(8,910
|
)
|
|
(11,074
|
)
|
(Decrease)
increase in other liabilities
|
|
|
(6,287
|
)
|
|
6,903
|
|
Net
cash provided by operating activities
|
|
|
10,834
|
|
|
156,783
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of securities
|
|
|
-
|
|
|
(505,119
|
)
|
Proceeds
from sale of securities
|
|
|
74,272
|
|
|
591,360
|
|
Principal
payments received on securities
|
|
|
56,968
|
|
|
58,857
|
|
Funding
of commercial mortgage loans
|
|
|
(2,286
|
)
|
|
(687,316
|
)
|
Repayments
received from commercial mortgage loans
|
|
|
19,341
|
|
|
275,127
|
|
Repayments
received from commercial mortgage loan pools
|
|
|
7,639
|
|
|
14,835
|
|
Decrease
in restricted cash equivalents
|
|
|
16,086
|
|
|
29,254
|
|
Return
of capital from equity investments
|
|
|
-
|
|
|
25,000
|
|
Investment
in equity investments
|
|
|
(35,538
|
)
|
|
(38,555
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
136,482
|
|
|
(236,557
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
(Decrease)
increase in borrowings under reverse repurchase agreements and
credit
facilities:
|
|
|
|
|
|
|
|
Secured
by pledge of subordinated CMBS
|
|
|
(102,998
|
)
|
|
230,100
|
|
Secured
by pledge of investment grade CMBS
|
|
|
(85,617
|
)
|
|
(480,927
|
)
|
Secured
by pledge of commercial mortgage loans
|
|
|
(39,556
|
)
|
|
234,471
|
|
Secured
by pledge of equity investments
|
|
|
30,000
|
|
|
-
|
|
Secured
by pledge of securities held-for-trading
|
|
|
-
|
|
|
(127,249
|
)
|
Repayments
of borrowings secured by commercial mortgage loan pools
|
|
|
(9,157
|
)
|
|
(16,065
|
)
|
Repayments
of collateralized debt obligations
|
|
|
(44,885
|
)
|
|
(50,018
|
)
|
Issuance
of collateralized debt obligations
|
|
|
-
|
|
|
23,875
|
|
Issuance
costs for collateralized debt obligations
|
|
|
-
|
|
|
(1,537
|
)
|
Issuance
of senior convertible debt
|
|
|
-
|
|
|
80,000
|
|
Issuance
costs of senior convertible debt
|
|
|
-
|
|
|
(2,419
|
)
|
Issuance
of senior unsecured notes
|
|
|
-
|
|
|
87,500
|
|
Issuance
costs of senior unsecured notes
|
|
|
-
|
|
|
(2,456
|
)
|
Issuance
of junior unsecured notes
|
|
|
-
|
|
|
68,557
|
|
Issuance
costs of junior unsecured notes
|
|
|
-
|
|
|
(2,113
|
)
|
Dividends
paid on preferred stock
|
|
|
(11,805
|
)
|
|
(7,344
|
)
|
Proceeds
from issuance of preferred stock, net of offering costs
|
|
|
69,839
|
|
|
83,267
|
|
Proceeds
from issuance of common stock, net of offering costs
|
|
|
59,327
|
|
|
66,624
|
|
Repurchase
of common stock
|
|
|
-
|
|
|
(12,000
|
)
|
Dividends
paid on common stock
|
|
|
(61,141
|
)
|
|
(52,943
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(195,993
|
)
|
|
119,323
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
2,940
|
|
|
16,248
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(45,737
|
)
|
|
55,797
|
|
Cash
and cash equivalents, beginning of period
|
|
|
91,547
|
|
|
66,388
|
|
Cash
and cash equivalents, end of period
|
|
$
|
45,810
|
|
$
|
122,185
|
|
|
|
For the Nine Months Ended
September 30, 2008
|
|
For the Nine Months Ended
September 30, 2007
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
167,624
|
|
$
|
168,889
|
|
Series
E-3 preferred stock conversion
|
|
$
|
23,289
|
|
$
|
-
|
|
Incentive
fees paid by the issuance of common stock
|
|
$
|
9,257
|
|
$
|
5,250
|
|
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 primary investment activities are conducted on a global basis in four
investment sectors:
1) Commercial
Real Estate Debt Securities
2) Commercial
Real Estate Loans
3) Commercial
Real Estate Equity
4) RMBS
The
accompanying September 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.
In
October 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-3,
Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active
(“FSP
157-3”), which became effective upon issuance, including periods for which
financial statements have not been issued. FSP FAS 157-3 clarifies
the application of FAS 157, which the Company adopted as of January 1, 2008,
in
a market that is not active
and
provides an example to illustrate key considerations in the determination of
the
fair value of a financial asset when the market for that asset is not active.
The key considerations illustrated in the FSP FAS 157-3 example include the
use
of an entity’s own assumptions about future cash flows and appropriately
risk-adjusted discount rates, appropriate risk adjustments for nonperformance
and liquidity risks, and the reliance that an entity should place on quotes
that
do not reflect the result of market transactions. The
adoption by the Company of FSP FAS 157-3 did not have a material impact on
its
financial statements or its determination of fair values as of September 30,
2008.
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 unsecured convertible notes,
junior unsecured notes and junior subordinated notes to subsidiary
trust
issuing preferred securities; and
|
(4)
all
CDO liabilities.
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 securities, CDO liabilities, senior unsecured notes,
senior unsecured 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 FSP FAS 140-3, Accounting
for Transfers of Financial Assets and Repurchase Financing
Transactions
("FSP
140-3"). FSP 140-3 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. FSP 140-3 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 Servicing of Financial Assets and Extinguishment of
Liabilities
(“FAS
140”).
FSP
140-3
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 FSP 140-3 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 FSP 140-3’s purpose is to
limit diversity of practice in accounting for these situations, resulting in
more consistent financial reporting. FSP 140-3 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 FSP 140-3 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 for the seller or a purchase for the Company under the
provisions of FAS 140. In such cases, the seller may be required to continue
to
consolidate the assets sold to the Company, based on their continuing
involvement with such investments. The Company has not completed its evaluation
of the impact of FSP 140-3, 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 and
liquidity 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.
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 FAS 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 are 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 FAS 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 senior unsecured convertible notes and
cumulative convertible redeemable preferred stock is calculated using the "if
converted" method.
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for basic earnings per share
|
|
$
|
10,775
|
|
$
|
12,259
|
|
$
|
89,753
|
|
$
|
56,914
|
|
Interest
expense on convertible senior notes
|
|
|
-
|
|
|
-
|
|
|
7,066
|
|
|
-
|
|
Dividends
on Series E convertible preferred stock
|
|
|
-
|
|
|
-
|
|
|
3,343
|
|
|
-
|
|
Numerator
for diluted earnings per share
|
|
$
|
10,775
|
|
$
|
12,259
|
|
$
|
100,162
|
|
$
|
56,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share—weighted average common shares
outstanding
|
|
|
74,365,259
|
|
|
63,861,985
|
|
|
69,099,689
|
|
|
60,450,020
|
|
Dilutive
effect of stock options
|
|
|
-
|
|
|
1,048
|
|
|
-
|
|
|
2,133
|
|
Assumed
conversion of convertible senior notes
|
|
|
-
|
|
|
-
|
|
|
7,416,680
|
|
|
-
|
|
Assumed
conversion of Series E convertible preferred stock
|
|
|
-
|
|
|
-
|
|
|
4,952,748
|
|
|
-
|
|
Dilutive
effect of stock based incentive fee
|
|
|
383,301
|
|
|
315,486
|
|
|
255,534
|
|
|
210,324
|
|
Denominator
for diluted earnings per share—weighted average common shares outstanding
and common stock equivalents outstanding
|
|
|
74,748,560
|
|
|
64,178,519
|
|
|
81,724,651
|
|
|
60,662,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per weighted average common share:
|
|
$
|
0.14
|
|
$
|
0.19
|
|
$
|
1.30
|
|
$
|
0.94
|
|
Diluted
net income per weighted average common share and common share
equivalents:
|
|
$
|
0.14
|
|
$
|
0.19
|
|
$
|
1.23
|
|
$
|
0.94
|
|
Total
anti-dilutive stock options excluded from the calculation of diluted net income
per share were 10,000 for the three and nine months ended September 30, 2008.
Total anti-dilutive stock options excluded from the calculation of diluted
net
income per share were 1,362,151 for the three and nine months ended
September 30,
2007.
Total
anti-dilutive shares related to convertible senior notes and Series E
convertible preferred stock excluded from the calculation of diluted net income
per share were 7,416,680 and 6,239,323, respectively, for the three months
ended
September 30, 2008.
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 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, foreign
currency swaps and foreign currency forward contracts.
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 and for CDO liabilities, management uses broker quotes
as being indicative of fair values, but management ultimately determines the
fair values recorded in the financial statements. 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 September 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 September 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 September 30, 2008
|
|
|
|
Level 1
|
|
Level
2
|
|
Level
3
|
|
Total
|
|
Subordinated
CMBS
|
|
$
|
-
|
|
$
|
-
|
|
$
|
607,864
|
|
$
|
607,864
|
|
Investment
grade CMBS
|
|
|
-
|
|
|
-
|
|
|
1,005,630
|
|
|
1,005,630
|
|
RMBS
|
|
|
-
|
|
|
-
|
|
|
840
|
|
|
840
|
|
Derivative
instruments
|
|
|
-
|
|
|
495,032
|
|
|
-
|
|
|
495,032
|
|
Investments
in equity of subsidiary trusts*
|
|
|
-
|
|
|
-
|
|
|
1,389
|
|
|
1,389
|
|
Total
|
|
$
|
-
|
|
$
|
495,032
|
|
$
|
1,615,723
|
|
$
|
2,110,755
|
|
*
Included as a component of other assets on the consolidated statements of
financial condition.
|
|
Liabilities at Fair Value as of September 30, 2008
|
|
|
|
Level 1
|
|
Level
2
|
|
Level
3
|
|
Total
|
|
Senior
unsecured notes
|
|
$
|
-
|
|
$
|
-
|
|
$
|
47,305
|
|
$
|
47,305
|
|
Senior
unsecured convertible notes
|
|
|
-
|
|
|
-
|
|
|
58,744
|
|
|
58,744
|
|
Junior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
16,641
|
|
|
16,641
|
|
Junior
subordinated notes
|
|
|
-
|
|
|
-
|
|
|
37,056
|
|
|
37,056
|
|
CDOs
|
|
|
-
|
|
|
-
|
|
|
1,040,435
|
|
|
1,040,435
|
|
Derivative
instruments
|
|
|
-
|
|
|
523,898
|
|
|
-
|
|
|
523,898
|
|
Total
|
|
$
|
-
|
|
$
|
523,898
|
|
$
|
1,200,181
|
|
$
|
1,724,079
|
|
The
following table presents the changes in Level 3 assets for the three months
ended September 30, 2008:
|
|
Subordinated
CMBS
|
|
Investment grade
CMBS
|
|
RMBS
|
|
Junior
subordinated
notes
|
|
Balance
at July 1, 2008
|
|
$
|
797,327
|
|
$
|
1,104,751
|
|
$
|
973
|
|
$
|
2,210
|
|
Net
purchases (sales)
|
|
|
(572
|
)
|
|
(483
|
)
|
|
(138
|
)
|
|
-
|
|
Net
transfers in (out)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Gains
(losses) included in earnings
|
|
|
(177,242
|
)
|
|
(93,790
|
)
|
|
5
|
|
|
(821
|
)
|
Losses
included in OCI
(1)
|
|
|
(11,649
|
)
|
|
(4,848
|
)
|
|
-
|
|
|
-
|
|
Balance
at September 30, 2008
|
|
$
|
607,864
|
|
$
|
1,005,630
|
|
$
|
840
|
|
$
|
1,389
|
|
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 September
30, 2008 (2)
|
|
$
|
(161,636
|
)
|
$
|
(88,145
|
)
|
$
|
(51
|
)
|
$
|
(821
|
)
|
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 September
30, 2008 (3)
|
|
$
|
(15,561
|
)
|
$
|
(8,063
|
)
|
$
|
-
|
|
$
|
-
|
|
(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 nine months
ended
September 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)
|
|
|
382
|
|
|
(68,804
|
)
|
|
(9,420
|
)
|
|
-
|
|
Net
transfers in (out)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Gains
(losses) included in earnings
|
|
|
(416,750
|
)
|
|
(170,043
|
)
|
|
77
|
|
|
(1,746
|
)
|
Losses
included in OCI
(1)
|
|
|
(3,921
|
)
|
|
(1,521
|
)
|
|
-
|
|
|
-
|
|
Balance
at September 30, 2008
|
|
$
|
607,864
|
|
$
|
1,005,630
|
|
$
|
840
|
|
$
|
1,389
|
|
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 September
30, 2008 (2)
|
|
$
|
(407,017
|
)
|
$
|
(167,694
|
)
|
$
|
21
|
|
$
|
(1,746
|
)
|
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
September
30, 2008 (3)
|
|
$
|
(9,689
|
)
|
$
|
(4,767
|
)
|
$
|
-
|
|
$
|
-
|
|
(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 September 30, 2008:
|
|
CDOs
|
|
Senior
unsecured
notes
|
|
Senior
unsecured
convertible
notes
|
|
Junior
unsecured
notes
|
|
Junior
subordinated
notes
|
|
Balance
at July 1, 2008
|
|
$
|
1,252,224
|
|
$
|
85,204
|
|
$
|
71,160
|
|
$
|
35,611
|
|
$
|
72,829
|
|
Paydowns
|
|
|
(1,282
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
transfers in (out)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Gains
included in earnings
|
|
|
(165,475
|
)
|
|
(37,899
|
)
|
|
(12,416
|
)
|
|
(18,970
|
)
|
|
(35,773
|
)
|
Gains
included in OCI (1)
|
|
|
(45,032
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance
at September 30, 2008
|
|
$
|
1,040,435
|
|
$
|
47,305
|
|
$
|
58,744
|
|
$
|
16,641
|
|
$
|
37,056
|
|
Amount
of total losses for the period included in earnings attributable
to the
change in unrealized gains relating to liabilities still held at
September
30, 2008 (2)
|
|
$
|
(165,717
|
)
|
$
|
(37,899
|
)
|
$
|
(12,416
|
)
|
$
|
(10,725
|
)
|
$
|
(35,773
|
)
|
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 September 30, 2008 (3)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(8,245
|
)
|
$
|
-
|
|
(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 nine months
ended September 30, 2008:
|
|
CDOs
|
|
Senior
unsecured
notes
|
|
Senior
unsecured
convertible
notes
|
|
Junior
unsecured
notes
|
|
Junior
subordinated
notes
|
|
Balance
at January 1, 2008
|
|
$
|
1,598,502
|
|
$
|
114,473
|
|
$
|
70,186
|
|
$
|
44,833
|
|
$
|
103,312
|
|
Paydowns
|
|
|
(44,885
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
transfers in (out)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Gains
included in earnings
|
|
|
(498,057
|
)
|
|
(67,168
|
)
|
|
(11,442
|
)
|
|
(28,192
|
)
|
|
(66,256
|
)
|
Gains
included in OCI (1)
|
|
|
(15,125
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance
at September 30, 2008
|
|
$
|
1,040,435
|
|
$
|
47,305
|
|
$
|
58,744
|
|
$
|
16,641
|
|
$
|
37,056
|
|
Amount
of total losses for the period included in earnings attributable
to the
change in unrealized gains or losses relating to liabilities still
held at
September 30, 2008 (2)
|
|
|
(498,299
|
)
|
|
(67,168
|
)
|
|
(11,442
|
)
|
|
(25,322
|
)
|
|
(66,256
|
)
|
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 September 30, 2008 (3)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(2,870
|
)
|
$
|
-
|
|
(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 September 30, 2008, for which a
nonrecurring change in fair value has been recorded during the nine months
ended
September 30, 2008:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Carrying
Value
|
|
Commercial
mortgage loans(1)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
45,997
|
|
Total
assets at fair value on a nonrecurring basis
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
45,997
|
|
|
(1)
|
The
Company recorded a provision for loan loss in the amount of $43,942
for
the nine months ended September 30, 2008. This provision relates
to three
loans with a principal balance of $90,580 and accrued interest of
$190.
|
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
|
|
Liability
issuance costs
|
|
|
35,137
|
|
|
(35,137
|
)
|
|
-
|
|
Senior
unsecured notes
|
|
|
(162,500
|
)
|
|
48,027
|
|
|
(114,473
|
)
|
Senior
unsecured 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
|
|
|
|
|
$
|
122,988
|
|
|
|
|
(1)
Prior
to January 1, 2008, 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 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. 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.
Senior
unsecured 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 September
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 junior subordinated notes - The estimated fair
values of these liabilities were developed based on the price obtained by the
Company for the senior unsecured convertible notes. The senior unsecured
convertible notes are senior to the unsecured and junior subordinated notes.
The
Company priced the senior unsecured convertible notes without the conversion
option to obtain a straight bond price, converted that price to a spread to
swap
curve and then applied an additional spread to account for the fact that these
liabilities were junior to the senior unsecured convertible 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 nine
months ended September 30, 2008, respectively, $(247,348) and $(572,675) were
recorded as unrealized loss on the securities and is included in loss on
securities held-for-trading on the consolidated statements of operations. The
estimated fair value of securities held-for-trading at September 30, 2008 is
summarized as follows:
Security
Description
|
|
Estimated
Fair
Value
|
|
U.S.
Dollar Denominated:
|
|
|
|
|
CMBS:
|
|
|
|
|
Investment
grade CMBS
|
|
$
|
638,163
|
|
Non-investment
grade rated subordinated CMBS
|
|
|
359,360
|
|
Non-rated
subordinated CMBS
|
|
|
70,329
|
|
CMBS
interest only securities (“IOs”)
|
|
|
4,424
|
|
Credit
tenant leases
|
|
|
22,203
|
|
Investment
grade REIT debt
|
|
|
201,735
|
|
Multifamily
agency securities
|
|
|
354
|
|
CDO
investments - investment grade
|
|
|
2,600
|
|
CDO
investments - non-investment grade
|
|
|
27,187
|
|
Total
CMBS
|
|
|
1,326,355
|
|
|
|
|
|
|
RMBS:
|
|
|
|
|
Residential
CMOs
|
|
|
428
|
|
Hybrid
adjustable rate mortgages (“ARMs”)
|
|
|
412
|
|
Total
RMBS
|
|
|
840
|
|
Total
U.S. dollar denominated
|
|
|
1,327,195
|
|
|
|
|
|
|
Non-U.S.
Dollar Denominated:
|
|
|
|
|
Investment
grade CMBS
|
|
|
136,151
|
|
Non-investment
grade rated subordinated CMBS
|
|
|
124,531
|
|
Non-rated
subordinated CMBS
|
|
|
26,457
|
|
Total
non-U.S. dollar denominated
|
|
|
287,139
|
|
Total
securities held-for-trading
|
|
$
|
1,614,334
|
|
At
September 30, 2008, an aggregate of $1,556,603 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
September 30, 2008, the anticipated reported yield based upon the adjusted
cost
of the Company's entire subordinated CMBS portfolio was 12.8% per annum. The
anticipated reported yield of the Company's investment grade securities was
7.2%. 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 September 30, 2008 and December 31, 2007:
|
|
Loan Outstanding
|
|
Weighted
|
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
Average Yield
|
|
Property Type
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
52,533
|
|
|
5.9
|
%
|
$
|
52,209
|
|
|
5.3
|
%
|
|
9.6
|
%
|
|
9.6
|
%
|
Office
|
|
|
45,393
|
|
|
5.1
|
|
|
45,640
|
|
|
4.6
|
|
|
10.3
|
|
|
10.3
|
|
Multifamily(1)
|
|
|
170,463
|
|
|
19.0
|
|
|
174,873
|
|
|
17.8
|
|
|
9.9
|
|
|
9.7
|
|
Storage
|
|
|
32,080
|
|
|
3.6
|
|
|
32,307
|
|
|
3.3
|
|
|
9.1
|
|
|
9.1
|
|
Land(2)
|
|
|
-
|
|
|
-
|
|
|
25,000
|
|
|
2.5
|
|
|
-
|
|
|
9.6
|
|
Hotel
|
|
|
12,387
|
|
|
1.4
|
|
|
12,208
|
|
|
1.2
|
|
|
13.0
|
|
|
10.9
|
|
Other
Mixed Use
|
|
|
3,996
|
|
|
0.4
|
|
|
3,983
|
|
|
0.5
|
|
|
8.5
|
|
|
8.5
|
|
Total
U.S.
|
|
|
316,852
|
|
|
35.4
|
|
|
346,220
|
|
|
35.2
|
|
|
9.9
|
|
|
9.7
|
|
Non-U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
259,983
|
|
|
29.0
|
|
|
278,669
|
|
|
28.3
|
|
|
9.0
|
|
|
8.9
|
|
Office(3)
|
|
|
212,950
|
|
|
23.6
|
|
|
238,691
|
|
|
24.3
|
|
|
9.2
|
|
|
8.8
|
|
Multifamily
|
|
|
39,145
|
|
|
4.3
|
|
|
41,403
|
|
|
4.2
|
|
|
8.8
|
|
|
8.6
|
|
Storage
|
|
|
45,974
|
|
|
5.1
|
|
|
51,272
|
|
|
5.2
|
|
|
9.2
|
|
|
9.5
|
|
Industrial
|
|
|
15,340
|
|
|
1.7
|
|
|
17,274
|
|
|
1.8
|
|
|
10.3
|
|
|
10.6
|
|
Hotel
|
|
|
3,407
|
|
|
0.4
|
|
|
5,016
|
|
|
0.5
|
|
|
10.7
|
|
|
10.1
|
|
Other
Mixed Use
|
|
|
4,304
|
|
|
0.5
|
|
|
4,842
|
|
|
0.5
|
|
|
10.3
|
|
|
9.0
|
|
Total
Non-U.S.
|
|
|
581,103
|
|
|
64.6
|
|
|
637,167
|
|
|
64.8
|
|
|
9.1
|
|
|
8.9
|
|
Total
|
|
$
|
897,955
|
|
|
100.00
|
%
|
$
|
983,387
|
|
|
100.00
|
%
|
|
9.4
|
%
|
|
9.2
|
%
|
(1)
Net
of a
loan loss reserve of $5,000 at September 30, 2008.
(2)
Net
of a
loan loss reserve of $25,000 at September 30, 2008.
(3)
Net of a
loan loss reserve of $13,752 at September 30, 2008.
As
of
September 30, 2008, the Company’s loans had the following maturity
characteristics:
Year of initial
maturity *
|
|
Number of
loans maturing
|
|
Current
carrying value
|
|
% of total
|
|
2008
|
|
|
1
|
|
$
|
32,000
|
|
|
3.6
|
%
|
2009
|
|
|
-
|
|
|
-
|
|
|
-
|
|
2010
|
|
|
3
|
|
|
24,818
|
|
|
2.8
|
|
2011
|
|
|
15
|
|
|
279,476
|
|
|
31.1
|
|
2012
|
|
|
17
|
|
|
228,218
|
|
|
25.4
|
|
Thereafter
|
|
|
23
|
|
|
333,443
|
|
|
37.1
|
|
Total
|
|
|
59
|
|
$
|
897,955
|
|
|
100.0
|
%
|
*
Does not include potential extension options.
|
|
Activity
for the nine months ended September 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
|
|
|
(19,341
|
)
|
Provision
for loan loss
|
|
|
(43,752
|
)
|
Foreign
currency translation
|
|
|
(30,239
|
)
|
Discount
accretion, net
|
|
|
5,614
|
|
Balance
at September 30, 2008
|
|
$
|
897,955
|
|
The
Company recorded a provision for loan losses of $18,752 and $43,942 for the
three and nine months ended September 30, 2008, respectively. This provision
relates to three loans with an aggregate principal balance of $90,580 and
accrued interest of $190. The first is a $25,000 loan secured by land in
California which required a provision totaling $25,190 (includes accrued
interest of $190). The second is a $20,500 mezzanine loan secured by a 1,802
unit apartment complex located in New York City which required a provision
totaling $5,000. The third loan is a €32,094 ($45,080) junior mezzanine loan
secured by a portfolio of office buildings in the Netherlands which required
a
provision totaling €9,790 ($13,752). The loans are in various stages of
resolution and due to the estimated reduction in value of the underlying
collateral below the principal balance of the loans, the Company believes the
full collectibility of the loans 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
|
|
|
43,942
|
|
Reserve
for possible loan losses, September 30, 2008
|
|
$
|
43,942
|
|
During
the third quarter of 2008, one of the Company’s mezzanine loans with a carrying
value of $32,000 (€22,781) defaulted. The borrower executed a standstill
agreement which is being extended to allow time to conclude an extension
agreement. As of September 30, 2008, the Company concluded that a loan loss
reserve is not necessary because the value of the underlying collateral is
greater than the principal balance of the loan. As such, the Company believes
the collectibility of the loan is probable. At September 30, 2008, all other
commercial real estate loans owned directly by the Company are performing
according to their terms or have been appropriately reserved.
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 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. The Company compares the yields resulting from
the updated cash flows to the current accrual yields. An impairment is required
under EITF 99-20 if the updated yield is lower than the current accrual yield
and the security has an estimated fair value less than its adjusted purchase
price. The Company carries these securities at their estimated fair value on
its
consolidated statements of financial condition.
For
the
nine months ended September 30, 2008, changes in timing of assumed credit loss
and prepayments on the Company’s 2005 through 2007 vintage Controlling Class
CMBS required an impairment totaling $456,620.
For
the
nine months ended September 30, 2007, changes in timing of assumed credit loss
and prepayments on three CMBS required an impairment totaling $4,468. Also,
the
Company increased its underlying loss expectations for one below investment
grade European CMBS during the nine months ended September 30, 2007, resulting
in an additional impairment of $1,321. In addition, the Company incurred a
charge of $1,247 related to the mark to market of its remaining high credit
quality securities because similar securities were sold at a loss during the
third quarter of 2007.
As
a
result of the adoption of FAS 159 on January 1, 2008, the Company will no longer
be required to make an adjustment to OCI in stockholder’s equity for
other-than-temporary impairment because the changes in fair value are recorded
in the statement of operations. However, because the Company records interest
income as a separate line item in the consolidated statements of operations,
the
Company does assess securities for other-than-temporary impairment in order
to
adjust the amount of interest income recorded on such securities.
Note
8 EQUITY INVESTMENTS
The
following table is a summary of the Company’s equity investments for the nine
months ended September 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
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,351
|
|
|
30,886
|
|
|
32,237
|
|
Equity
earnings
|
|
|
75
|
|
|
1,372
|
|
|
-
|
|
|
(367
|
)
|
|
1,430
|
|
|
2,510
|
|
Foreign
currency translation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,351
|
)
|
|
(3,351
|
)
|
Distributions
of earnings
|
|
|
-
|
|
|
(3,206
|
)
|
|
-
|
|
|
-
|
|
|
(393
|
)
|
|
(3,599
|
)
|
Balance
at September 30, 2008
|
|
$
|
1,711
|
|
$
|
95,928
|
|
$
|
9,350
|
|
$
|
984
|
|
$
|
28,572
|
|
$
|
136,545
|
|
*
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
September 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 Company has pledged its interest in Carbon II as collateral under a
revolving credit agreement (see Note 9 for further details). 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.
On
December 22, 2005, the Company entered into an $11,000 commitment to indirectly
acquire shares of Dynamic India Fund IV. At September 30, 2008, the Company’s
capital commitment was $11,000, of which $9,350 had been drawn.
The
Company is committed to invest up to $5,000, for up to a 10% interest, in
Anthracite JV LLC (“AHR JV”). AHR JV invests in U.S. CMBS rated higher than BB.
As of September 30, 2008, the Company had invested $1,351 in AHR JV. The other
member in AHR JV is managed by or otherwise associated with an affiliate of
Credit Suisse. AHR JV is managed by the Manager (see Note 12 of the consolidated
financial statements).
On
June
26, 2008, the Company invested $30,886 in RECP Anthracite International JV
Limited (“AHR International JV”). AHR International JV invests in investments
backed by non-U.S. real estate assets and is managed by the Manager (see Note
12
of the consolidated financial statements). 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.
Note
9
BORROWINGS
Certain
information with respect to the Company's borrowings at September 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)
|
|
$
|
546,704
|
|
$
|
546,704
|
|
|
5.55
|
%
|
|
1.17
years
|
|
$
|
902,291
|
|
Commercial
mortgage loan pools
|
|
|
1,201,019
|
|
|
1,201,019
|
|
|
4.00
|
%
|
|
4.18
years
|
|
|
1,223,630
|
|
CDOs
(2)
|
|
|
1,040,435
|
|
|
1,764,303
|
|
|
4.67
|
%
|
|
5.19
years
|
|
|
1,896,427
|
|
Senior
unsecured notes (2)
|
|
|
47,305
|
|
|
162,500
|
|
|
7.59
|
%
|
|
8.82
years
|
|
|
Unsecured
|
|
Junior
unsecured notes (2)
|
|
|
16,641
|
|
|
70,233
|
|
|
6.56
|
%
|
|
13.84 years
|
|
|
Unsecured
|
|
Senior
unsecured convertible notes (2)
|
|
|
58,744
|
|
|
80,000
|
|
|
11.75
|
%
|
|
19.18
years
|
|
|
Unsecured
|
|
Junior
subordinated notes (2)
|
|
|
37,056
|
|
|
180,477
|
|
|
7.64
|
%
|
|
27.61
years
|
|
|
Unsecured
|
|
Total
Borrowings
|
|
$
|
2,947,904
|
|
$
|
4,005,236
|
|
|
5.03
|
%
|
|
5.78
years
|
|
|
|
|
(1)
Includes
$ 4,610 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 nine months ended September 30, 2008, the Company recorded
an unrealized gain of $667,980 due to the reduction of the fair value of such
liabilities.
At
September 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 (1)
|
|
$
|
0
|
|
$
|
-
|
|
$
|
257,405
|
|
$
|
289,299
|
|
$
|
-
|
|
$
|
-
|
|
$
|
546,704
|
|
Commercial
mortgage loan pools(2)
|
|
|
6,054
|
|
|
5,866
|
|
|
333,448
|
|
|
102,892
|
|
|
43,396
|
|
|
709,363
|
|
$
|
1,201,019
|
|
CDOs(2)
|
|
|
829
|
|
|
319
|
|
|
52,075
|
|
|
222,710
|
|
|
775,967
|
|
|
712,403
|
|
|
1,764,303
|
|
Senior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
162,500
|
|
$
|
162,500
|
|
Junior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
70,233
|
|
$
|
70,233
|
|
Senior
unsecured convertible notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
80,000
|
|
|
80,000
|
|
Junior
subordinated notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
180,477
|
|
$
|
180,477
|
|
Total
Borrowings
|
|
$
|
6,883
|
|
$
|
6,185
|
|
$
|
642,928
|
|
$
|
614,901
|
|
$
|
819,363
|
|
$
|
1,914,976
|
|
$
|
4,005,236
|
|
|
(1)
|
Includes
$4,610 of borrowings under facilities related to commercial mortgage
loan
pools.
|
|
(2)
|
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
As
credit
market conditions have permitted, the Company has entered into short-term
reverse repurchase agreements to finance securities that are not financed under
its credit facilities or CDOs. The reverse repurchase agreements bear interest
at a LIBOR-based variable rate. At September 30, 2008, the Company did not
have
any reverse repurchase agreements outstanding. At December 31, 2007, the Company
had $80,119 of reverse repurchase agreements outstanding.
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. See Note 15 to the consolidated
financial statements for additional discussion of the Company’s exposure to
potential margin calls.
The
Company’s credit facilities have been used to replace 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 September 30, 2008 and December 31, 2007:
|
|
September 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) (5)
|
|
|
9/18/10
|
|
$
|
275,000
|
|
$
|
141,694
|
|
$
|
133,306
|
|
$
|
275,000
|
|
$
|
211,088
|
|
$
|
63,912
|
|
Deutsche
Bank AG, Cayman Islands Branch (2)
|
|
|
7/08/10
|
|
|
92,166
|
|
|
92,166
|
|
|
-
|
|
|
200,000
|
|
|
174,186
|
|
|
25,814
|
|
Bank
of America, N.A.(3)
|
|
|
9/18/10
|
|
|
100,000
|
|
|
55,439
|
|
|
44,561
|
|
|
100,000
|
|
|
87,706
|
|
|
12,294
|
|
Morgan
Stanley Bank (3) (4)
|
|
|
2/07/09
|
|
|
300,000
|
|
|
227,405
|
|
|
72,595
|
|
|
300,000
|
|
|
198,621
|
|
|
101,379
|
|
BlackRock
HoldCo 2, Inc. (1)
|
|
|
3/06/09
|
|
|
53,624
|
|
|
30,000
|
|
|
23,624
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
$
|
820,790
|
|
$
|
546,704
|
|
$
|
274,086
|
|
$
|
875,000
|
|
$
|
671,601
|
|
$
|
203,399
|
|
(1)
USD
only.
(2)
Multicurrency
(USD and Non-USD).
(3)
Non-USD
only.
(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)
Includes
$4,610 of borrowings under facilities related to commercial mortgage loan
pools.
As
further detailed below, the Company is subject to financial covenants in its
credit facilities. For the quarter ended September 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 recourse
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 as of September 30, 2008
amounted to $546,704) and (vii) cumulative income cannot be less than one dollar
for two consecutive quarters. Morgan Stanley Bank can require the Company to
fund margin calls in the event the lender determines the value of the underlying
assets have declined in value. The Company has commenced discussions with Morgan
Stanley Bank to extend the maturity date of the facility beyond February 7,
2009.
On
July
8, 2008, Deutsche Bank AG, Cayman Islands Branch, extended its multicurrency
credit facility 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 to procure an
extension of any of its existing facilities with Bank of America, N.A. and
Morgan Stanley Bank as of the 30th day before the maturity date (or the 15th
day
before the maturity date if the Company demonstrates to the satisfaction of
Deutsche Bank that it is negotiating a bona fide commitment to extend or replace
such facility) 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 the
multicurrency repurchase agreement when due. Under the terms of the extension
agreement, no additional borrowings are permitted under the facility. In
addition, monthly amortization payments of approximately $1,600 are required
under the facility. The monthly amortization payment can be increased or
decreased based on a monthly repricing of all the assets that collaterize the
credit 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 (i) is required to make amortization payments totaling $31,000 on
various dates through September 30, 2008, and (ii) is required to make monthly
installment 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. Bank of America, N.A,
can require the Company to fund margin calls in the event the lender determines
the value of the underlying collateral has declined.
To
satisfy a margin call of $11,582 made in October 2008 by Bank of America under
its credit facilities, the Company agreed with Bank of America to increase
the
Company's monthly installment payments from $2,250 to $3,250 commencing November
15, 2008 through March 15, 2010 under its non-USD facility and commencing April
15, 2010 through September 18, 2010 under its 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 "BlackRock 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 BlackRock Facility. The
BlackRock Facility has a term of 364 days with two 364-day extension periods,
subject to the Lender's approval. The BlackRock Facility is collateralized
by a
pledge of equity shares that the Company holds in Carbon II. The maximum
principal amount of the BlackRock Facility is the lesser of $60,000 or a number
determined in accordance with a borrowing base calculation equal to 60% of
the
fair market value of the shares of Carbon II that are pledged to secure the
BlackRock Facility. At September 30, 2008, based on the value of the Carbon
II
shares on a mark-to-market basis, the maximum principal amount of the BlackRock
Facility has declined to $53,624 and the Company has remaining unused borrowing
capacity of $23,624. As of October 31, 2008, unused borrowing capacity from
the
BlackRock Facility declined to $16,835 due to a decline in the fair market
value
of the shares of Carbon II that are pledged to secure the BlackRock
Facility.
The
BlackRock 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 BlackRock
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 BlackRock Facility and reduce the outstanding balance.
The
terms
of the BlackRock Facility give the Lender the option to purchase from the
Company the shares of Carbon II that serve as collateral for the BlackRock
Facility, up to the BlackRock Facility commitment amount, at a price equal
to
the fair market value (as determined by the terms of the BlackRock Facility
agreement) of those shares, unless the Company elects to prepay outstanding
loans under the BlackRock Facility in an amount equal to the Lender's desired
share purchase amount and reduce the BlackRock Facility's commitment amount
accordingly, which may require termination of the BlackRock Facility. Upon
the
consummation of the purchase, the BlackRock Facility’s commitment amount shall
be reduced by the share purchase amount and the share purchase amount paid
shall
be applied to repay any outstanding loans under the BlackRock Facility as if
the
Company had prepaid the loans. The balance of the share 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 BlackRock Facility. On July 28, 2008,
the
Company reborrowed $30,000 under the BlackRock Facility which was still
outstanding at September 30, 2008.
Failure
to meet a margin call or required amortization payment under any of the five
aforementioned facilities would constitute an event of default under the
applicable facility. An event of default would allow the lender to accelerate
all facility obligations under such agreement.
Each
of
the five facilities contains cross default provisions that provide that any
default by the Company under any loan, guaranty or similar agreement that
permits acceleration of the balance due under such agreement would constitute
an
event of default under such 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 $69,839. 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).
On
or
after April 4, 2012, each holder of Series E-1 Preferred Stock has the right
to
require, at its option, the Company to repurchase all of such holder's shares
of
Series E-1 Preferred Stock, in whole but not in part, for cash, at a repurchase
price equal to the liquidation preference of $1,000 per share, plus all
accumulated but unpaid dividends thereon.
On
or
after April 4, 2013, each holder of Series E-2 Preferred Stock has the right
to
require, at its option, the Company to repurchase all of such holder's shares
of
Series E-2 Preferred Stock, in whole but not in part, for cash, at a repurchase
price equal to the liquidation preference of $1,000 per share, plus all
accumulated but unpaid dividends thereon.
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.
Whenever dividends on the Series E Preferred Stock are in arrears for six or
more quarterly periods (whether or not consecutive), then the holder, together
with the holders of the Company's Series C and Series D Preferred Stock which
rank equally with the Series E Preferred Stock, shall be entitled to elect
a
total of two additional directors to the Company’s Board of Directors in
addition to the one director appointed to the Board at consummation of this
transaction.
Note
11 COMMON
STOCK
The
following table summarizes Common Stock issued by the Company for the nine
months ended September 30, 2008, net of offering costs:
|
|
Shares
|
|
Net
Proceeds
|
|
Dividend
Reinvestment and Stock Purchase Plan
|
|
|
152,332
|
|
$
|
1,071
|
|
Sales
agency agreement
|
|
|
5,226,800
|
|
|
35,012
|
|
Management
and incentive fees*
|
|
|
1,065,818
|
|
|
7,013
|
|
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
|
|
|
23,244
|
|
Director
compensation
|
|
|
21,256
|
|
|
128
|
|
Total
|
|
|
13,396,208
|
|
$
|
91,873
|
|
*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 $23,244.
On
March
12, 2008, the Company declared dividends to its common stockholders of $0.30
per
share, which were paid 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, which were paid 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.
On
September 10, 2008, the Company declared dividends to its common stockholders
of
$0.31 per share, which were paid on October 31, 2008 to stockholders of record
on September 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 fees 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 ($10.76 per common share at September 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
following is a summary of management and incentive fees incurred for the three
and nine months ended September 30, 2008 and 2007:
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Management
fee
|
|
$
|
3,050
|
|
$
|
3,473
|
|
$
|
9,286
|
|
$
|
10,862
|
|
Incentive
fee
|
|
|
-
|
|
|
-
|
|
|
11,879
|
|
|
5,645
|
|
Incentive
fee - stock based
|
|
|
382
|
|
|
497
|
|
|
1,426
|
|
|
2,145
|
|
Total
management and incentive fees
|
|
$
|
3,432
|
|
$
|
3,970
|
|
$
|
22,591
|
|
$
|
18,652
|
|
At
September 30, 2008 and 2007, management and incentive fees of $11,077 and
$5,434, 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 $(175) and $75 for certain expenses (accrual
adjustments) during the three and nine months ended September 30, 2008 and
$184
and $486 for the three and nine months ended September 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 nine months ended September 30, 2008, the Company recorded
administration and investment accounting service fees of $250 and $735,
respectively, which are included in general and administrative expense on the
accompanying consolidated statements of operations. For the three and nine
months ended September 30, 2007, the Company recorded administration and
investment accounting service fees of $181 and $544, 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”). 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 credit facility with a subsidiary of
BlackRock, Inc. BlackRock, Inc. is the parent of the Company’s manager,
BlackRock Financial Management, Inc. (See Note 9).
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 September 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 September 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 September 30, 2008 was
$95,928. The Company does not incur any additional management or incentive
fees
to the Manager related to its investment in Carbon II. On September 30, 2008,
the Company owned approximately 26% of the outstanding shares of Carbon
II.
The
Company is committed to invest up to $5,000, for up to a 10% interest, in
Anthracite JV LLC (“AHR JV”). AHR JV invests in U.S. CMBS rated higher than BB.
As of September 30, 2008, the Company had invested $1,351 in AHR JV. AHR JV
is
managed by the Manager. 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 invests in investments
backed by non-U.S. real estate assets and is managed by the Manager. The Company
will invest on a deal-by-deal basis and has no committed capital obligation.
The
other shareholder in AHR International JV is managed by or otherwise associated
with an affiliate of Credit Suisse.
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 September 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 September 30, 2008, the balance of such net deposits
pledged to counterparties as collateral under these agreements totaled $20,266
and is recorded as a component of other assets on the consolidated statement
of
financial condition.
At
September 30, 2008, the Company had interest rate swaps with notional amounts
aggregating $88,493 designated as cash flow hedges of borrowings under credit
facilities. Cash flow hedges with an estimated fair value of $229 were included
in derivative assets in the consolidated statement of financial condition and
cash flow hedges with an estimated fair value of $307 were included in
derivative liabilities in the consolidated statement of financial condition.
For
the three months ended September 30, 2008, the net change in the estimated
fair
value of the interest rate swaps was a decrease of $1,780, of which $769 was
deemed ineffective and is included as an increase of interest expense and $1,011
was recorded as a reduction of OCI. For the nine months ended September 30,
2008, the net change in the estimated fair value of the interest rate swaps
was
a decrease of $5,685, of which $534 was deemed ineffective and is included
as a
decrease of interest expense and $6,219 was recorded as a reduction of OCI.
At
September 30, 2008, the $88,493 of notional swaps designated as cash flow hedges
had a weighted average remaining term of 3.2 years.
During
the nine months ended September 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. Prior to the dedesignation discussed below, the Company expected
to
reclassify the $18,253 loss in value from OCI to interest expense over
approximately 7.6 years, which was the weighted average remaining term of the
swaps at the time they were closed out.
During
the third quarter of 2008, the Company extended two of its credit facilities.
In
connection with the extension of the credit facilities, there was a reduction
in
the balance of the Company’s 90-day repurchase agreements and the forecasted
transactions related to certain balances in OCI for interest rate swaps that
had
been hedging 90-day repurchase agreements were no longer probable of occurring.
As a result, the Company reclassified $(7,084) out of OCI which is included
in
dedesignation of derivative instruments on the consolidated statements of
operations. This amount was previously being reclassified to interest expense
over the weighted average remaining term of the swaps at the time the swaps
were
closed. At September 30, 2008, the Company had, in aggregate, $12,209 of net
losses related to terminated swaps recorded in OCI. For the quarter ended
September 30, 2008, $639 was reclassified as an increase to interest expense
and
$2,557 is expected to be reclassified as an increase to interest expense over
the next twelve months.
In
connection with the adoption of FAS 159 on January 1, 2008, the Company
dedesignated CDO interest rate swaps with notional amounts aggregating $875,548
as trading derivatives. The Company will reclassify the $25,410 loss in value
from OCI to interest expense over 8.3 years. For the quarter ended September
30,
2008, $1,238 was reclassified as an increase to interest expense and $5,204
will
be reclassified as an increase to interest expense over the next twelve
months.
At
September 30, 2008, the Company had interest rate swaps with notional amounts
aggregating $1,209,731 designated as trading derivatives. Trading derivatives
with an estimated fair value of $497 were included in derivative assets on
the
consolidated statement of financial condition and trading derivatives with
an
estimated fair value of $30,295 were included in derivative liabilities on
the
consolidated statement of financial condition. For the nine months ended
September 30, 2008, the change in estimated fair value for these trading
derivatives was a decrease of $1,426 which is included as a component of gain
(loss) on securities held-for-trading on the consolidated statement of
operations. At September 30, 2008, the $1,209,731 notional of swaps designated
as trading derivatives had a weighted average remaining term of 5.0 years.
At
September 30, 2008, the Company had a forward LIBOR cap with a notional amount
of $85,000 and an estimated fair value at September 30, 2008, of $277 which
is
included in derivative assets, and the change in estimated fair value related
to
this derivative of $18 and $82 for the three and nine months ended September
30,
2008, respectively 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. These contracts are recorded at their
estimated fair value at September 30, 2008 and are included in derivative
instruments on the consolidated statement of financial conditions. The Company
recorded foreign currency gains (losses) of $7,273 and $(2,913) for the three
and nine months ended September 30, 2008 and $775 and $3,631 for the three
and
nine months ended September 30, 2007, respectively.
Foreign
currency agreements at September 30, 2008 consisted of the
following:
|
|
Estimated Fair
Value
|
|
Unamortized
Cost
|
|
Weighted Average
Remaining Term
|
|
Currency
swaps
|
|
$
|
(15,474
|
)
|
$
|
-
|
|
|
7.7
years
|
|
CDO
currency swaps
|
|
$
|
13,437
|
|
$
|
-
|
|
|
9.1
years
|
|
Forwards
|
|
$
|
2,770
|
|
$
|
-
|
|
|
49
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 nine months
ended September 30, 2008, the foreign currency translation loss included in
accumulated OCI was $8,010. 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 nine months ended September 30, 2008 and 2007:
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Interest
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
from securities
|
|
$
|
53,387
|
|
$
|
49,560
|
|
$
|
156,261
|
|
$
|
147,195
|
|
Interest
from commercial mortgage loans
|
|
|
22,674
|
|
|
20,494
|
|
|
69,506
|
|
|
49,942
|
|
Interest
from commercial mortgage loan pools
|
|
|
12,779
|
|
|
12,985
|
|
|
38,445
|
|
|
39,119
|
|
Interest
from cash and cash equivalents
|
|
|
558
|
|
|
1,784
|
|
|
2,540
|
|
|
3,648
|
|
Total
interest income
|
|
|
89,398
|
|
|
84,823
|
|
|
266,752
|
|
|
239,904
|
|
Interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
– securities
|
|
|
56,652
|
|
|
62,525
|
|
|
164,189
|
|
|
178,450
|
|
Total
interest expense
|
|
|
56,652
|
|
|
62,525
|
|
|
164,189
|
|
|
178,450
|
|
Net
interest income
|
|
$
|
32,746
|
|
$
|
22,298
|
|
$
|
102,563
|
|
$
|
61,454
|
|
Note
15 CURRENT AND SUBSEQUENT EVENTS IN THE CREDIT MARKETS
The
Company does not currently know the full extent to which the current market
disruption will affect it or the markets in which it operates, and the Company
is unable to predict its length or ultimate severity. The
values of real estate debt securities and loans are subject to changes in credit
spreads. Credit spreads measure the yield demanded on debt securities and loans
by the market based on credit relative to a specific benchmark. The ongoing
weaknesses in the subprime mortgage sector and in the broader mortgage market
have resulted in reduced liquidity and demand for mortgage-backed securities
and
have caused the credit spreads to widen substantially since the beginning of
2007. Under these conditions, the values of real estate securities and loans
have declined, and such decline has resulted in margin calls. The Company’s
credit facilities (including its repurchase agreements) allow the lender, to
varying degrees, to revalue the collateral to values that the lender considers
to reflect market value. If a lender determines that the value of the collateral
has decreased, it may initiate a margin call requiring the Company to repay
a
portion of the outstanding borrowings to cover the decrease or to post
additional collateral with minimal notice.
During
2007, the Company paid $82,570 related to margin calls. During the period from
January 1, 2008 through November 10, 2008, the Company paid $189,352 ($84,733
since July 1, 2008) related to margin calls and
amortization payments (including payments the Company made to lenders upon
their
determination that the value of collateral declined and fixed payments the
Company made to lenders pursuant to the terms of the facilities).
Of the
$84,733 paid since July 1, 2008, $41,223 represented contractual payments
negotiated upon the extension of two of the Company’s credit facilities. The
Company will fund an additional margin call of approximately $6,600 on November
11, 2008. It
has
also agreed to make increased monthly installment payments to one of its lenders
in full satisfaction of a margin call of $11,582 originally scheduled to be
paid
in October 2008.
Additional
margin calls as a result of the widening of credit spreads or otherwise could
harm the Company’s liquidity, results of operations, financial condition and
business prospects in a number of ways. In order to obtain cash to satisfy
a
margin call
and
absent other capital resources becoming available,
the
Company would be required to liquidate assets at a disadvantageous time, which
would cause the Company to incur losses and consequently adversely affect the
Company’s results of operations and financial condition. Posting additional
collateral would decrease available cash limiting the Company’s ability to
satisfy other obligations, including future margin calls or to make additional
investments. In addition, the Company may need to hold increased levels of
cash
or cash equivalents in anticipation of potential margin calls which could also
limit the Company’s ability to make additional investments. If the Company did
not have sufficient cash available or was unable to sell sufficient assets
to
satisfy margin calls, the Company would be in default under its facilities
which
would trigger cross default provisions in each of the Company’s five credit
facilities. In such an event, the Company would be required to repay outstanding
indebtedness under its credit facilities immediately. (As of September 30,
2008,
the Company had $546,704 of indebtedness outstanding under its credit
facilities.) Absent other capital resources becoming available, the Company
will
not have sufficient liquid assets to repay such indebtedness and will be unable
to fund its operations and continue its business.
The
aforementioned market 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 and thereby 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 extend the current credit facilities at the maturity date 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. Moreover, the Company may not be able to sell those
investments at all under current market conditions. In addition, the failure
to
extend certain of the Company’s credit facilities as
of the
30th day before the maturity date (or the 15th day before the maturity date
if
the Company demonstrates to the satisfaction of Deutsche Bank AG, Cayman Islands
Branch that it is negotiating a bona fide commitment to extend or replace such
facility) will constitute an event of default under the Company’s credit
facility with Deutsche Bank AG.
If
one or
more major market participants that provide 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 liquidity. 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 thereby further
reducing the Company’s liquidity.
To
date,
the credit performance of the majority 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 nine
months of 2008, the capital markets have been marking down the value of all
credit-sensitive securities regardless of performance.
In
addition to the covenants under the Company’s secured facilities, certain of the
Company’s seven CDOs contain compliance tests which, if violated, could trigger
a diversion of cash flows from the Company to bondholders. The Company's first
three CDOs contain certain interest coverage and overcollateralization tests.
At
September 30, 2008, all such tests are passing by a wide margin. The Company’s
three CDOs designated as its high yield (“HY”) series do not have any compliance
tests. The Euro-denominated CDO's ("Euro CDO") most significant test is the
weighted average rating test which is affected by credit rating agency
downgrades to underlying CDO collateral. The Company can actively manage the
Euro CDO collateral pool to maintain compliance with those tests. At September
30, 2008, the Company is meeting all such tests.
During
the first nine months of 2008, the Company raised $35,012 of capital by issuing
common shares under its 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
$93,128. 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 $45,810 of unrestricted
cash and cash equivalents (of which $20,501 must be retained under the
provisions of the Company’s financial debt covenants and would not be available
to fund operations) held as of September 30, 2008, potential common stock
issuances under the Company’s sales agency agreement, and $23,624 of unused
borrowing capacity from HoldCo 2 as of September 30, 2008. As of October 31,
2008, unused borrowing capacity from the BlackRock Facility declined to $16,835
due to a decline in the fair market value of the shares of Carbon II that are
pledged to secure the BlackRock Facility.
The
Company believes it has sufficient sources of liquidity to fund operations
for
the next twelve months (November 1, 2008 to October 31, 2009). This analysis
is
based on a number of assumptions. The following are the most
critical:
|
1)
|
The
Company will be successful in renewing the facility with Morgan Stanley
Bank prior to January 23, 2009 and will have no amortization payments
under the terms of the renewal.
|
|
2)
|
The
Company will have sufficient available cash to meet its periodic
loan
amortization payments to Deutsche Bank and Bank of America, N.A.
|
|
3)
|
The
Company does not receive any significant margin calls from its
lenders.
|
|
4)
|
The
Company will be successful in renewing the facility with HoldCo 2
prior to
March 6, 2009 and will not have any required paydowns under the terms
of
the renewal.
|
Based
on
current projections of cash for the next twelve months, the Company expects
it will have cash resources to pay quarterly
cash dividends on its common stock at the current rate for the
dividend typically payable in the first quarter of 2009 and, if the Company
raises additional capital, obtains additional financing and/or receives cash
proceeds from the future sale of assets or asset repayments, thereafter.
However, no decision has been made by the Company with respect to the
declaration or payment of any future dividend, including the rate or time
of declaration and payment of any such dividend. The Company may
consider payment of dividends on its common stock all or partially in
common stock and intends to continue to comply with REIT dividend
requirements.
The
Company's ability to meet its long-term (greater than twelve months) liquidity
requirements is also 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.
I. General
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 Debt Securities
|
|
2) |
Commercial
Real Estate Loans
|
|
3) |
Commercial
Real Estate Equity
|
The
commercial real estate securities portfolio provides diversification and high
yields that are adjusted for anticipated losses over a period of time (typically
a ten-year weighted average life). Commercial real estate loans and equity
provide attractive risk adjusted returns over shorter periods of time through
strategic investments in specific property types or regions. The Company may
consider investing in RMBS given their current relative value and
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 $1.27 trillion of assets under management at September
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 September
30, 2008 and December 31, 2007:
|
|
Carrying Value at
|
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities(1)
|
|
$
|
1,614,478
|
|
|
41.7
|
%
|
|
2,274,151
|
|
|
49.3
|
%
|
Commercial
real estate loans(2)
|
|
|
1,024,166
|
|
|
26.4
|
|
|
1,082,785
|
|
|
23.5
|
|
Commercial
mortgage loan pools(3)
|
|
|
1,223,630
|
|
|
31.6
|
|
|
1,240,793
|
|
|
26.9
|
|
Commercial
real estate equity(4)
|
|
|
9,350
|
|
|
0.3
|
|
|
9,350
|
|
|
0.2
|
|
Total
commercial real estate assets
|
|
|
3,871,624
|
|
|
100.0
|
|
|
4,607,079
|
|
|
99.9
|
|
Residential
mortgage-backed securities
|
|
|
840
|
|
|
-
|
|
|
10,183
|
|
|
0.1
|
|
Total
|
|
$
|
3,872,464
|
|
|
100.0
|
%
|
$
|
4,617,262
|
|
|
100.0
|
%
|
|
(1)
|
Includes
equity investment in AHR JV.
|
|
(2)
|
Includes
equity investments in the Carbon Capital funds and AHR International
JV.
|
|
(3)
|
Represents
a Controlling Class CMBS that is consolidated for accounting purposes.
See
Note 6 of the consolidated financial
statements.
|
|
(4)
|
Represents
equity investment in Dynamic India Fund
IV.
|
During
the nine months ended September 30, 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 nine 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 2008 caused CMBS spreads to widen significantly. This
development resulted in a significant decline in the market value of the
Company’s CMBS portfolio during the nine months ended September 30,
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 September 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
|
|
$
|
1,327,339
|
|
$
|
414,490
|
|
|
-
|
|
$
|
1,223,630
|
|
$
|
2,965,459
|
|
$
|
2,965,459
|
|
|
76.6
|
%
|
GBP
|
|
£ |
22,824
|
|
£ |
43,975
|
|
|
-
|
|
|
-
|
|
£ |
66,799
|
|
|
119,066
|
|
|
3.1
|
%
|
EURO
|
|
€ |
97,724
|
|
€ |
358,813
|
|
|
-
|
|
|
-
|
|
€ |
456,537
|
|
|
641,273
|
|
|
16.6
|
%
|
Canadian
Dollars
|
|
|
C$77,045
|
|
|
C$6,281
|
|
|
-
|
|
|
-
|
|
|
C$83,326
|
|
|
78,373
|
|
|
2.0
|
%
|
Japanese
Yen
|
|
¥ |
3,898,669
|
|
|
-
|
|
|
-
|
|
|
-
|
|
¥
|
3,898,669
|
|
|
36,723
|
|
|
0.9
|
%
|
Swiss
Francs
|
|
|
-
|
|
|
CHF
23,972
|
|
|
-
|
|
|
-
|
|
|
CHF
23,972
|
|
|
21,380
|
|
|
0.6
|
%
|
Indian
Rupees
|
|
|
-
|
|
|
-
|
|
|
Rs
434,308
|
|
|
-
|
|
|
Rs
434,308
|
|
|
9,350
|
|
|
0.2
|
%
|
Total
USD Equivalent
|
|
$
|
1,614,478
|
|
$
|
1,024,166
|
|
$
|
9,350
|
|
$
|
1,223,630
|
|
$
|
3,871,624
|
|
$
|
3,871,624
|
|
|
100.0
|
%
|
|
(1)
|
Includes
the Company’s investments in the Carbon Capital Funds of $97,639 and AHR
International JV of $28,572 at September 30,
2008.
|
|
(2)
|
Includes
the Company’s investment in AHR JV of $984 at September 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
|
|
|
-
|
|
|
CHF23,939
|
|
|
-
|
|
|
-
|
|
|
CHF23,939
|
|
|
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
|
|
$
|
|
|
|
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 contracts 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 September 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
|
|
$
|
205,776
|
|
$
|
127,026
|
|
$
|
61.73
|
|
$
|
174,342
|
|
$
|
84.72
|
|
|
7.54
|
%
|
Investment
grade REIT debt
|
|
|
121
|
|
|
116
|
|
|
95.51
|
|
|
123
|
|
|
101.41
|
|
|
5.27
|
|
CMBS
rated BB+ to B
|
|
|
551,008
|
|
|
161,252
|
|
|
29.26
|
|
|
220,319
|
|
|
39.98
|
|
|
9.60
|
|
CMBS
rated B- or lower
|
|
|
512,802
|
|
|
94,106
|
|
|
18.16
|
|
|
109,385
|
|
|
21.07
|
|
|
14.00
|
|
CDO
Investments
|
|
|
329,718
|
|
|
27,186
|
|
|
8.25
|
|
|
17,384
|
|
|
5.41
|
|
|
66.62
|
|
CMBS
Interest Only securities (“IOs”)
|
|
|
88,686
|
|
|
4,425
|
|
|
4.99
|
|
|
1,873
|
|
|
2.11
|
|
|
22.45
|
|
Multifamily
agency securities
|
|
|
347
|
|
|
354
|
|
|
102.00
|
|
|
516
|
|
|
148.66
|
|
|
6.75
|
|
Total
commercial real estate assets outside CDOs
|
|
|
1,688,458
|
|
|
414,465
|
|
|
24.49
|
|
|
524,392
|
|
|
30.98
|
|
|
11.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate loans and equity outside CDOs
|
|
|
|
|
|
|
Commercial
real estate loans
|
|
|
588,652
|
|
|
577,957
|
|
|
|
|
|
579,789
|
|
|
|
|
|
|
|
Commercial
mortgage loan pools
|
|
|
1,189,528
|
|
|
1,223,630
|
|
|
102.87
|
|
|
1,223,630
|
|
|
102.87
|
|
|
4.15
|
|
Commercial
real estate
|
|
|
9,350
|
|
|
9,350
|
|
|
|
|
|
9,350
|
|
|
|
|
|
|
|
Total
commercial real estate loans and equity outside CDOs
|
|
|
1,787,530
|
|
|
1,810,937
|
|
|
102.87
|
|
|
1,812,769
|
|
|
102.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate assets included in CDOs
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
|
797,569
|
|
|
647,288
|
|
|
81.16
|
|
|
734,888
|
|
|
92.14
|
|
|
7.58
|
|
Investment
grade REIT debt
|
|
|
210,624
|
|
|
201,619
|
|
|
95.72
|
|
|
211,697
|
|
|
100.51
|
|
|
5.48
|
|
CMBS
rated BB+ to B
|
|
|
583,464
|
|
|
290,222
|
|
|
49.72
|
|
|
384,578
|
|
|
65.91
|
|
|
11.18
|
|
CMBS
rated B- or lower
|
|
|
199,962
|
|
|
36,080
|
|
|
18.04
|
|
|
45,439
|
|
|
22.72
|
|
|
17.56
|
|
CDO
Investments
|
|
|
4,000
|
|
|
2,600
|
|
|
65.00
|
|
|
2,600
|
|
|
65.00
|
|
|
7.81
|
|
Credit
tenant lease
|
|
|
22,795
|
|
|
22,203
|
|
|
97.40
|
|
|
23,406
|
|
|
102.68
|
|
|
5.66
|
|
Commercial
real estate loans
|
|
|
457,745
|
|
|
446,210
|
|
|
97.48
|
|
|
430,885
|
|
|
92.12
|
|
|
8.97
|
|
Total
commercial real estate assets included in CDOs
|
|
|
2,276,159
|
|
|
1,646,222
|
|
|
72.32
|
|
|
1,833,493
|
|
|
80.15
|
|
|
8.63
|
%
|
Total
commercial real estate assets
|
|
$
|
5,752,147
|
|
$
|
3,871,624
|
|
|
|
|
$
|
2,947,024
|
|
|
|
|
|
|
|
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 September 30, 2008,
56% 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 September 30,
2008.
|
|
Collateral at September 30, 2008
|
|
Debt at September 30, 2008
|
|
|
|
|
|
Adjusted
Purchase Price
|
|
Loss
Adjusted Yield
|
|
Adjusted Issue
Price
|
|
Weighted
Average Cost
of Funds *
|
|
Net
Spread
|
|
CDO
I
|
|
$
|
446,067
|
|
|
8.44
|
%
|
$
|
384,579
|
|
|
7.71
|
%
|
|
0.73
|
%
|
CDO
II
|
|
|
294,145
|
|
|
8.17
|
%
|
|
262,111
|
|
|
6.00
|
%
|
|
2.17
|
%
|
CDO
III
|
|
|
368,956
|
|
|
7.32
|
%
|
|
375,162
|
|
|
4.76
|
%
|
|
2.56
|
%
|
CDO
HY3
|
|
|
320,853
|
|
|
11.11
|
%
|
|
372,325
|
|
|
5.91
|
%
|
|
5.20
|
%
|
Euro
CDO
|
|
|
413,322
|
|
|
8.55
|
%
|
|
370,126
|
|
|
5.84
|
%
|
|
2.71
|
%
|
Total
**
|
|
$
|
1,843,343
|
|
|
8.66
|
%
|
$
|
1,764,303
|
|
|
6.06
|
%
|
|
2.60
|
%
|
*
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 September 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 $57,668,750. At September 30, 2008, subordinated
Controlling Class CMBS with a par of $1,557,973 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 September 30, 2008 was $287,912; the average credit protection, or
subordination level, of this portfolio was 1.01%.
The
Company’s investment in its subordinated Controlling Class CMBS securities by
credit rating category at September 30, 2008 was as follows:
|
|
Par
|
|
Estimated
Fair
Value
|
|
Dollar
Price
|
|
Adjusted
Purchase
Price
|
|
Dollar
Price
|
|
Weighted
Average
Subordination
Level
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB+
|
|
$
|
249,067
|
|
$
|
96,773
|
|
$
|
38.86
|
|
$
|
112,014
|
|
$
|
45.33
|
|
|
4.31
|
%
|
BB
|
|
|
182,788
|
|
|
62,053
|
|
|
33.80
|
|
|
81,930
|
|
|
44.82
|
|
|
3.39
|
%
|
BB-
|
|
|
182,768
|
|
|
75,941
|
|
|
41.45
|
|
|
88,945
|
|
|
48.67
|
|
|
5.15
|
%
|
B+
|
|
|
98,967
|
|
|
28,337
|
|
|
28.47
|
|
|
35,835
|
|
|
36.21
|
|
|
2.33
|
%
|
B
|
|
|
124,438
|
|
|
37,496
|
|
|
30.02
|
|
|
44,292
|
|
|
35.59
|
|
|
1.99
|
%
|
B-
|
|
|
110,861
|
|
|
25,000
|
|
|
22.37
|
|
|
31,636
|
|
|
28.54
|
|
|
1.41
|
%
|
CCC+
|
|
|
37,594
|
|
|
7,443
|
|
|
19.80
|
|
|
9,811
|
|
|
26.10
|
|
|
1.02
|
%
|
CCC
|
|
|
39,806
|
|
|
8,576
|
|
|
21.54
|
|
|
12,105
|
|
|
30.41
|
|
|
0.81
|
%
|
NR
|
|
|
531,684
|
|
|
76,152
|
|
|
14.26
|
|
|
90,932
|
|
|
17.10
|
|
|
n/a
|
|
Total
|
|
$
|
1,557,973
|
|
$
|
417,771
|
|
$
|
26.69
|
|
$
|
507,500
|
|
$
|
32.59
|
|
|
|
|
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 nine months ended September 30, 2008, the loan pools were paid down by
$2,610,685. 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 nine months ended September
30, 2008, five securities in one of the Company’s Controlling Class CMBS were
upgraded by at least one rating agency and twenty eight securities in one
Controlling Class CMBS were downgraded. Additionally, at least one rating agency
upgraded sixteen of the Company’s non-Controlling Class commercial real estate
securities and downgraded twelve.
As
part
of its underwriting process, the Company assumes a certain amount of loans
will
incur losses over time. In performing continuing credit reviews on the 39
Controlling Class trusts, the Company estimates that specific losses totaling
$857,492 related to principal of the underlying loans will not be recoverable,
of which $410,489 is
expected to occur over the next five years. The total loss estimate of $857,492
represents 1.49% of the total underlying loan pools.
The
Company considers delinquency information from the Barclays Capital 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
September 30, 2008 are shown in the table below:
Vintage
Year
|
|
Underlying
Collateral
|
|
Delinquencies
Outstanding
|
|
Barclays Capital
Conduit Guide
|
|
1998
|
|
$
|
1,235,068
|
|
|
5.23
|
%
|
|
5.39
|
%
|
1999
|
|
|
491,250
|
|
|
2.84
|
%
|
|
0.92
|
%
|
2001
|
|
|
808,996
|
|
|
1.68
|
%
|
|
1.32
|
%
|
2002
|
|
|
917,122
|
|
|
0.62
|
%
|
|
0.72
|
%
|
2003
|
|
|
1,720,895
|
|
|
1.92
|
%
|
|
0.61
|
%
|
2004
|
|
|
6,202,813
|
|
|
0.65
|
%
|
|
0.51
|
%
|
2005
|
|
|
11,799,815
|
|
|
1.11
|
%
|
|
0.61
|
%
|
2006
|
|
|
13,638,598
|
|
|
1.04
|
%
|
|
0.65
|
%
|
2007
|
|
|
20,854,193
|
|
|
0.62
|
%
|
|
0.42
|
%
|
Total
|
|
$
|
57,668,750
|
|
|
0.99
|
%
|
|
0.66
|
%*
|
*
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 under-performed relative to the
market in the first nine months of 2008, the absolute amount of the
delinquencies experienced by the Company remains low. See “Item 3 - 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 related to the aggregate
principal balance and payment status of delinquent commercial mortgage loans
underlying the Controlling Class CMBS held by the Company at September 30,
2008:
|
|
September 30, 2008
|
|
|
|
Principal
|
|
Number
of
Loans
|
|
% of
Collateral
|
|
Past
due 30 days to 59 days
|
|
$
|
238,007
|
|
|
18
|
|
|
0.41
|
%
|
Past
due 60 days to 89 days
|
|
|
12,247
|
|
|
5
|
|
|
0.02
|
%
|
Past
due 90 days or more
|
|
|
221,614
|
|
|
38
|
|
|
0.39
|
%
|
Real
Estate owned
|
|
|
52,945
|
|
|
12
|
|
|
0.08
|
%
|
Foreclosure
|
|
|
48,044
|
|
|
2
|
|
|
0.09
|
%
|
Total
Delinquent
|
|
|
572,857
|
|
|
75
|
|
|
0.99
|
%
|
Total
Collateral Balance
|
|
$
|
57,668,750
|
|
|
4,487
|
|
|
|
|
Of
the 75
delinquent loans at September
30,
2008, 12 loans were real estate owned and being marketed for sale, 2 loans
were
in foreclosure and the remaining 61 loans were in some form of workout
negotiations. The Controlling Class CMBS owned by the Company have a delinquency
rate of 0.99%. During 2008, the underlying collateral experienced early payoffs
of $2,610,685 representing 4.52% of the quarter-end pool balance. These loans
were paid off at par with no loss. Aggregate losses related to the underlying
collateral of $16,088 were realized during the nine months ended September
30,
2008. This brings cumulative realized losses to $142,992, which is 14.53% 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.
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 September 30, 2008 was as
follows:
|
|
September 30, 2008
Exposure
|
|
Property
Type
|
|
Collateral
Balance
|
|
% of
Total
|
|
Office
|
|
$
|
19,699,645
|
|
|
34.16
|
%
|
Retail
|
|
|
16,400,992
|
|
|
28.44
|
%
|
Multifamily
|
|
|
12,335,346
|
|
|
21.39
|
%
|
Industrial
|
|
|
4,394,359
|
|
|
7.62
|
%
|
Lodging
|
|
|
4,031,046
|
|
|
6.99
|
%
|
Healthcare
|
|
|
322,945
|
|
|
0.56
|
%
|
Other
|
|
|
484,417
|
|
|
0.84
|
%
|
Total
|
|
$
|
57,668,750
|
|
|
100.0
|
%
|
At
September 30, 2008, the estimated fair value of the Company’s holdings of
subordinated Controlling Class CMBS was $89,729 lower than the adjusted cost
for
these securities, which consisted of a gross unrealized gain of $5,533 and
a
gross unrealized loss of $95,262. The adjusted purchase price of the Company’s
subordinated Controlling Class CMBS portfolio at September 30, 2008 represents
approximately 32.6% of its par amount. The estimated fair value of the Company’s
subordinated Controlling Class CMBS portfolio at September 30, 2008 represented
approximately 26.8% of its par amount. As the portfolio matures, the Company
expects to recoup the $96,375 of unrealized loss, provided that the credit
losses experienced are not greater than the credit losses assumed in the
projected cash flow analysis. At September 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.
During
the nine months ended September 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 $19,341.
The
Company recorded a provision for loan losses of $18,752 and $43,942 for the
three and nine months ended September 30, 2008, respectively. This provision
relates to three loans with an aggregate principal balance of $90,580 and
accrued interest of $190. The loans are in various stages of resolution and
due
to the estimated reduction in value of the underlying collateral below the
principal balance of the loans, the Company believes the full collectibility
of
the loans are not probable.
The
Company invests in the Carbon Capital Funds which also invest in commercial
real
estate loans. For the three and nine months ended September 30, 2008,
respectively, the Company recorded $1,972 and $1,447 of earnings related to
the
Carbon Capital Funds. Carbon II increased its investment in U.S. commercial
real
estate loans by funding an additional investment of $636 during 2008. Paydowns
in the Carbon Capital Funds during 2008 totaled $72,626. 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:
|
|
September 30,
2008
|
|
December 31,
2007
|
|
Carbon
I
|
|
$
|
1,711
|
|
$
|
1,636
|
|
Carbon
II
|
|
|
95,928
|
|
|
97,762
|
|
|
|
$
|
97,639
|
|
$
|
99,398
|
|
As
of
September 30, 2008, Carbon II has three loans collateralized by 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 nine months ended
September 30, 2008, Carbon II increased its loan loss reserves for two loans
by
$2,574. At September 30, 2008, the total loan loss reserve for these loans
was
$4,413. For the property owned, Carbon II recognized impairments of $1,281
and
$5,181 for the nine months ended September 30, 2008 and 2007,
respectively.
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 $60,000 first leasehold mortgage on a 43.9 acre
tract of land in Las Vegas, zoned for commercial use, went into default. Carbon
II owns fifty percent of the mortgage. Carbon II is engaged in workout
discussions, and other alternatives are being explored. Carbon II believes
a
loan loss reserve is not necessary at September 30, 2008.
During
the third quarter of 2008, a first mortgage secured by a building in New York
City defaulted. Carbon II is exploring its alternatives including a foreclosure
of the real estate. Carbon II believes a loan loss reserve is not necessary
at
September 30, 2008. All other commercial real estate loans in Carbon II are
performing according to their terms.
Commercial
Real Estate
The
Company has an indirect investment in a commercial real estate development
fund
located in India. At September 30, 2008, the Company’s capital commitment 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
September 30,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
U.S.
dollar denominated income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities
|
|
$
|
43,809
|
|
$
|
43,016
|
|
$
|
793
|
|
|
1.9
|
%
|
Commercial
real estate loans
|
|
|
8,267
|
|
|
8,933
|
|
|
(666
|
)
|
|
(7.5
|
)
|
Commercial
mortgage loan pools
|
|
|
12,779
|
|
|
12,985
|
|
|
(206
|
)
|
|
(1.6
|
)
|
Residential
mortgage-backed securities
|
|
|
13
|
|
|
128
|
|
|
(115
|
)
|
|
(90.1
|
)
|
Cash
and cash equivalents
|
|
|
195
|
|
|
1,242
|
|
|
(1,047
|
)
|
|
(84.3
|
)
|
Total
U.S. interest income
|
|
|
65,063
|
|
|
66,304
|
|
|
(1,241
|
)
|
|
(1.9
|
)
|
Non-U.S
dollar denominated income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities
|
|
|
9,564
|
|
|
6,415
|
|
|
3,149
|
|
|
49.1
|
|
Commercial
real estate loans
|
|
|
14,408
|
|
|
11,562
|
|
|
2,846
|
|
|
24.6
|
|
Cash
and cash equivalents
|
|
|
363
|
|
|
542
|
|
|
(179
|
)
|
|
(33.0
|
)
|
Total
non-U.S. dollar denominated interest income
|
|
|
24,335
|
|
|
18,519
|
|
|
5,816
|
|
|
31.4
|
|
Total
Interest Income
|
|
$
|
89,398
|
|
$
|
84,823
|
|
$
|
4,575
|
|
|
5.4
|
%
|
|
|
For the nine months ended
September 30,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
U.S.
dollar denominated income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities
|
|
$
|
128,529
|
|
$
|
128,999
|
|
$
|
(470
|
)
|
|
(0.4
|
)%
|
Commercial
real estate loans
|
|
|
24,635
|
|
|
22,530
|
|
|
2,105
|
|
|
9.3
|
|
Commercial
mortgage loan pools
|
|
|
38,445
|
|
|
39,119
|
|
|
(674
|
)
|
|
(1.7
|
)
|
Residential
mortgage-backed securities
|
|
|
88
|
|
|
3,868
|
|
|
(3,780
|
)
|
|
(97.7
|
)
|
Cash
and cash equivalents
|
|
|
1,581
|
|
|
2,316
|
|
|
(735
|
)
|
|
(31.7
|
)
|
Total
U.S. interest income
|
|
|
193,278
|
|
|
196,833
|
|
|
(3,555
|
)
|
|
(1.8
|
)
|
Non-U.S
dollar denominated income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities
|
|
|
27,644
|
|
|
14,326
|
|
|
13,318
|
|
|
93.0
|
|
Commercial
real estate loans
|
|
|
44,871
|
|
|
27,413
|
|
|
17,458
|
|
|
63.7
|
|
Cash
and cash equivalents
|
|
|
959
|
|
|
1,332
|
|
|
(373
|
)
|
|
(28.0
|
)
|
Total
non-U.S. dollar denominated interest income
|
|
|
73,474
|
|
|
43,071
|
|
|
30,397
|
|
|
70.6
|
|
Total
Interest Income
|
|
$
|
266,752
|
|
$
|
239,904
|
|
$
|
26,848
|
|
|
11.2
|
%
|
U.S.
dollar denominated income
For
the
three and nine months ended September 30, 2008 versus 2007, interest income
from
U.S. assets decreased $1,241, or 1.9% and $3,555, or 1.8%. During
the third quarter of 2007, the Company sold most of its multifamily agency
securities and IOs which decreased interest income by approximately $4.0 million
for the three months ended September 30, 2008. Off setting this decline was an
increase in interest income related to commercial real estate securities due
to
higher yields resulting from the application of EITF 99-20. Interest
income on commercial real estate loans for the three months ended September
30,
2008 versus 2007 decreased $666 or 7.5%, due primarily to non-accrual status
of
a $25,000 loan (see Note 5). 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 $115, or 90.1%
for
the three months ended September 30, 2008 and $3,780, or 97.7%, for the nine
months ended September 30, 2008.
Non-U.S.
dollar denominated income
For
the
three and nine months ended September 30, 2008 versus 2007, interest income
from
non-U.S. assets increased $5,816, or 31.4% and $30,397, or 70.6%. During 2007,
the Company continued to increase its investment in non-U.S. dollar commercial
real estate assets. As a result, 2008 interest income from non-U.S. commercial
real estate securities and loans increased due to the full year impact of
holding such securities. The Company increased its investments outside the
U.S.
in order to provide geographic diversification for its portfolio.
The
following table reconciles interest income and total income for the three months
ended September 30, 2008 and 2007:
|
|
For the three months ended
September 30,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
Interest
Income
|
|
$
|
89,398
|
|
$
|
84,823
|
|
$
|
4,575
|
|
|
5.4
|
%
|
Earnings
from JVs
|
|
|
1,095
|
|
|
-
|
|
|
1,095
|
|
|
n/a
|
|
Earnings
from Carbon II
|
|
|
1,972
|
|
|
2,268
|
|
|
(296
|
)
|
|
(13.1
|
)
|
Earnings
from Carbon I
|
|
|
-
|
|
|
(47
|
)
|
|
47
|
|
|
100.0
|
|
Earnings
from BlackRock
Diamond
Property Fund, Inc.
|
|
|
-
|
|
|
4,390
|
|
|
(4,390
|
)
|
|
(100.0
|
)
|
Total
Income
|
|
$
|
92,465
|
|
$
|
91,434
|
|
$
|
1,031
|
|
|
1.1
|
%
|
|
|
For the nine months ended
September 30,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
Interest
Income
|
|
$
|
266,752
|
|
$
|
239,904
|
|
|
26,848
|
|
|
11.2
|
%
|
Earnings
from JVs
|
|
|
1,063
|
|
|
-
|
|
|
1,063
|
|
|
n/a
|
|
Earnings
from Carbon II
|
|
|
1,372
|
|
|
9,380
|
|
|
(8,008
|
)
|
|
(85.4
|
)
|
Earnings
from Carbon I
|
|
|
75
|
|
|
812
|
|
|
(737
|
)
|
|
(90.8
|
)
|
Earnings
from BlackRock
Diamond
Property Fund, Inc.
|
|
|
-
|
|
|
18,790
|
|
|
(18,790
|
)
|
|
(100.0
|
)
|
Total
Income
|
|
$
|
269,262
|
|
$
|
268,886
|
|
|
376
|
|
|
0.1
|
%
|
The
Company fully redeemed its interest in the BlackRock Diamond Property Fund,
Inc.
by September 30, 2007. Therefore, the three and nine months ended September
30,
2008 show no activity for this investment. For the nine months ended September
30, 2008, earnings from Carbon II declined $8,008 or 85.4%. The decline is
primarily the result of Carbon II establishing a loan loss reserve of $17,700,
the entire face amount of the loan. The Company owns 26% of Carbon II, resulting
in a $4,602 decline in income.
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 nine months ended September 30, 2008 and 2007.
|
|
For the three months ended
September 30,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
U.S.
dollar denominated interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized
debt obligations
|
|
$
|
18,109
|
|
$
|
22,905
|
|
$
|
(4,796
|
)
|
|
(20.9
|
)%
|
Commercial
real estate securities
|
|
|
2,727
|
|
|
6,021
|
|
|
(3,294
|
)
|
|
(54.7
|
)
|
Commercial
real estate loans
|
|
|
929
|
|
|
1,625
|
|
|
(696
|
)
|
|
(42.8
|
)
|
Commercial
mortgage loan pools
|
|
|
12,089
|
|
|
12,353
|
|
|
(264
|
)
|
|
(2.1
|
)
|
Residential
mortgage-backed securities
|
|
|
-
|
|
|
778
|
|
|
(778
|
)
|
|
(100.0
|
)
|
Senior
unsecured convertible notes
|
|
|
2,383
|
|
|
794
|
|
|
1,589
|
|
|
200.0
|
|
Senior
unsecured notes
|
|
|
3,072
|
|
|
3,226
|
|
|
(154
|
)
|
|
(4.8
|
)
|
Junior
subordinated notes
|
|
|
3,354
|
|
|
3,396
|
|
|
(42
|
)
|
|
(1.2
|
)
|
Equity
investments
|
|
|
287
|
|
|
331
|
|
|
(44
|
)
|
|
(13.3
|
)
|
Cash
flow hedges
|
|
|
276
|
|
|
(181
|
)
|
|
457
|
|
|
(252.5
|
)
|
Hedge
ineffectiveness*
|
|
|
770
|
|
|
106
|
|
|
664
|
|
|
626.4
|
|
Total
U.S. Interest Expense
|
|
|
43,996
|
|
|
51,354
|
|
|
(7,358
|
)
|
|
(14.3
|
)
|
Non-U.S.
dollar denominated interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
CDO
|
|
|
5,880
|
|
|
4,950
|
|
|
930
|
|
|
18.8
|
|
Commercial
real estate securities
|
|
|
3,082
|
|
|
1,971
|
|
|
1,111
|
|
|
56.4
|
|
Commercial
real estate loans
|
|
|
2,260
|
|
|
3,055
|
|
|
(795
|
)
|
|
(26.0
|
)
|
Junior
subordinated notes
|
|
|
1,434
|
|
|
1,195
|
|
|
239
|
|
|
20.0
|
|
Total
Non- U.S. Interest Expense
|
|
|
12,656
|
|
|
11,171
|
|
|
1,485
|
|
|
13.3
|
|
Total
Interest Expense
|
|
$
|
56,652
|
|
$
|
62,525
|
|
$
|
(5,873
|
)
|
|
(9.4
|
)%
|
|
|
For the nine months ended
September 30,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
U.S.
dollar denominated interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized
debt obligations
|
|
$
|
51,830
|
|
$
|
68,238
|
|
$
|
(16,408
|
)
|
|
(24.1
|
)%
|
Commercial
real estate securities
|
|
|
8,453
|
|
|
22,983
|
|
|
(14,530
|
)
|
|
(63.2
|
)
|
Commercial
real estate loans
|
|
|
3,203
|
|
|
3,636
|
|
|
(433
|
)
|
|
(11.9
|
)
|
Commercial
mortgage loan pools
|
|
|
36,480
|
|
|
37,233
|
|
|
(753
|
)
|
|
(2.0
|
)
|
Residential
mortgage-backed securities
|
|
|
45
|
|
|
5,841
|
|
|
(5,796
|
)
|
|
(99.2
|
)
|
Senior
unsecured convertible notes
|
|
|
7,066
|
|
|
794
|
|
|
6,272
|
|
|
789.9
|
|
Senior
unsecured notes
|
|
|
9,147
|
|
|
6,432
|
|
|
2,715
|
|
|
42.2
|
|
Junior
subordinated notes
|
|
|
9,949
|
|
|
10,115
|
|
|
(166
|
)
|
|
(1.6
|
)
|
Equity
investments
|
|
|
500
|
|
|
331
|
|
|
169
|
|
|
51.1
|
|
Cash
flow hedges
|
|
|
1,159
|
|
|
(1,040
|
)
|
|
2,199
|
|
|
(211.4
|
)
|
Hedge
ineffectiveness*
|
|
|
(534
|
)
|
|
163
|
|
|
(697
|
)
|
|
(427.6
|
)
|
Total
U.S. Interest Expense
|
|
|
127,298
|
|
|
154,726
|
|
|
(27,428
|
)
|
|
17.7
|
|
Non-U.S.
dollar denominated interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
CDO
|
|
|
16,578
|
|
|
13,041
|
|
|
3,537
|
|
|
27.1
|
|
Commercial
real estate securities
|
|
|
9,271
|
|
|
2,857
|
|
|
6,414
|
|
|
224.5
|
|
Commercial
real estate loans
|
|
|
6,838
|
|
|
5,684
|
|
|
1,154
|
|
|
20.3
|
|
Junior
subordinated notes
|
|
|
4,204
|
|
|
2,142
|
|
|
2,062
|
|
|
96.3
|
|
Total
Non- U.S. Interest Expense
|
|
|
36,891
|
|
|
23,724
|
|
|
13,167
|
|
|
55.5
|
|
Total
Interest Expense
|
|
$
|
164,189
|
|
$
|
178,450
|
|
$
|
(14,261
|
)
|
|
(8.0
|
)%
|
*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 nine months ended September 30, 2008 versus 2007, U.S. dollar interest
expense decreased $7,358, or 14.3%, and $27,428, or 17.7%, respectively. 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 $778, or 100.0%, for the three months ended September
30, 2008 and $5,796, or 99.2%, for the nine months ended September 30, 2008.
This was offset by the issuance of convertible notes in August and September
of
2007 and senior unsecured notes in May of 2007.
For
the
three and nine months ended September 30, 2008 versus September 30, 2007, U.S.
dollar interest expense related to collateralized debt obligations declined
$4,796, or 20.9%, and $16,408, or 24.1%, respectively. The decline was caused
primarily by an income statement reclassification. Due to the redesignation
of
CDO interest rate swaps to trading derivatives as of January 1, 2008, interest
expense related to CDO swaps is classified in realized gain (loss) and is no
longer included in interest expense. For the three and nine months ended
September 30, 2008, $(4,872) and $(11,604), respectively, were included in
realized gain (loss). Also as a result of the redesignation, $2,813 of swap
cost
amortization was included in CDO interest expense in 2008.
Non-U.S.
dollar denominated interest expense
For
the
three and nine months ended September 30, 2008 versus 2007, non-U.S. dollar
interest expense increased $1,485, or 13.3%, and increased $13,167, or 55.5%,
respectively. The increase was due primarily to increased purchases of non-U.S.
dollar securities and loans during 2007. Also during the second quarter of
2007,
the Company issued €50,000 junior subordinated notes. As a result, related
interest expense increased $2,062, or 96.3%, for the nine months ended September
30, 2008.
Net
Interest Margin and Net Interest Spread from the Portfolio:
The
Company considers its interest generating portfolio to consist of its securities
held-for-trading, securities available-for-sale for 2007, 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. 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 September 30,
|
|
For the nine months
ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Interest
income
|
|
$
|
89,398
|
|
$
|
84,823
|
|
$
|
266,752
|
|
$
|
239,904
|
|
Interest
expense related to the consolidation of commercial mortgage loan
pools
|
|
|
(12,089
|
)
|
|
(12,353
|
)
|
|
(36,480
|
)
|
|
(37,233
|
)
|
Short
term interest expense related to commercial
mortgage
loan pools
|
|
|
33
|
|
|
94
|
|
|
153
|
|
|
266
|
|
Adjusted
interest income
|
|
|
77,342
|
|
$
|
72,564
|
|
|
230,425
|
|
$
|
202,937
|
|
|
|
For the three months
ended September 30,
|
|
For the nine months
ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Interest expense
|
|
$
|
56,652
|
|
$
|
62,525
|
|
$
|
164,189
|
|
$
|
178,450
|
|
Interest
expense related to the consolidation of commercial mortgage loan
pools
|
|
|
(12,089
|
)
|
|
(12,353
|
)
|
|
(36,480
|
)
|
|
(37,233
|
)
|
Short
term interest expense related to commercial
mortgage
loan pools
|
|
|
33
|
|
|
94
|
|
|
153
|
|
|
266
|
|
Hedge
ineffectiveness
|
|
|
(770
|
)
|
|
(106
|
)
|
|
534
|
|
|
(163
|
)
|
Adjusted
interest expense
|
|
$
|
43,826
|
|
$
|
50,160
|
|
$
|
128,396
|
|
$
|
141,320
|
|
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 September 30,
|
|
For the nine months
ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Adjusted
interest income
|
|
$
|
77,342
|
|
$
|
72,564
|
|
$
|
230,425
|
|
$
|
202,937
|
|
Adjusted
interest expense
|
|
$
|
43,826
|
|
$
|
50,160
|
|
$
|
128,396
|
|
$
|
141,320
|
|
Adjusted
net interest income ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
4.7
|
%
|
|
2.5
|
%
|
|
4.6
|
%
|
|
2.4
|
%
|
Average
yield
|
|
|
10.9
|
%
|
|
8.2
|
%
|
|
10.3
|
%
|
|
7.8
|
%
|
Cost
of funds
|
|
|
6.1
|
%
|
|
6.1
|
%
|
|
5.8
|
%
|
|
6.0
|
%
|
Net
interest spread
|
|
|
4.8
|
%
|
|
2.1
|
%
|
|
4.5
|
%
|
|
1.8
|
%
|
Ratios
including income from equity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
4.9
|
%
|
|
3.1
|
%
|
|
4.5
|
%
|
|
3.3
|
%
|
Average
yield
|
|
|
10.9
|
%
|
|
8.5
|
%
|
|
10.0
|
%
|
|
8.5
|
%
|
Cost
of funds
|
|
|
6.1
|
%
|
|
6.1
|
%
|
|
5.8
|
%
|
|
6.0
|
%
|
Net
interest spread
|
|
|
4.8
|
%
|
|
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 nine months ended September 30, 2008 and 2007,
respectively.
|
|
For the three months
ended September 30,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
Management fee
|
|
$
|
3,050
|
|
$
|
3,473
|
|
$
|
(423
|
)
|
|
(12.1
|
)%
|
Incentive
fee – stock based
|
|
|
382
|
|
|
497
|
|
|
(115
|
)
|
|
(23.1
|
)
|
General
and administrative expense
|
|
|
2,025
|
|
|
1,624
|
|
|
401
|
|
|
24.7
|
|
Total
other expenses
|
|
$
|
5,457
|
|
$
|
5,594
|
|
$
|
(137
|
)
|
|
(2.4
|
)%
|
|
|
For the nine months
ended September 30,
|
|
Variance
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
Management
fee
|
|
$
|
9,286
|
|
$
|
10,862
|
|
$
|
(1,576
|
)
|
|
(14.5
|
)%
|
Incentive
fee
|
|
|
11,879
|
|
|
5,645
|
|
|
6,234
|
|
|
110.4
|
|
Incentive
fee – stock based
|
|
|
1,426
|
|
|
2,145
|
|
|
(719
|
)
|
|
(33.5
|
)
|
General
and administrative expense
|
|
|
5,706
|
|
|
4,448
|
|
|
1,258
|
|
|
28.3
|
|
Total
other expenses
|
|
$
|
28,297
|
|
$
|
23,100
|
|
$
|
5,197
|
|
|
22.5
|
%
|
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 $115 and $719 for the three and nine
months ended September 30, 2008, respectively, was 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 expenses for the three months ended September
30,
2008 was due to $454 of professional fees associated with capital raising
activities offset partially by a decrease in due diligence costs due to a
decline in investment activity. The increase in general and administrative
expense for the nine months ended September 30, 2008 was 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 trading securities, long-term liabilities, and certain interest
swaps are recorded in earnings. The gain of $72,570 for the nine months ended
September 30, 2008 was comprised of realized losses of $(14,840), unrealized
losses on securities and swaps of $(573,486) and losses from the dedesignation
of derivative instruments of $(7,084), offset by unrealized gains on liabilities
of $667,980. Foreign currency gains (loss) were $(2,913) and $3,631 for the
nine
months ended September 30, 2008 and 2007. Included in accumulated other
comprehensive loss was a $(8,010) loss on foreign currency translation. As
a
result, the Company’s foreign currency exposure for the nine months ended
September 30, 2008 resulted in a net economic loss of $(10,923). The provision
for loan losses for the nine months ended September 30, 2008 totaled $(43,942)
and was related to three loans in various stages of resolution. The losses
on
impairment of assets of $(7,036) for the nine month period ended September
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 30, 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.
On
September 10, 2008, the Company declared dividends to its common stockholders
of
$0.31 per share, payable on October 31, 2008 to stockholders of record on
September 30, 2008. For U.S. federal income tax purposes, all dividends paid
in
2008 are expected to be ordinary income to the Company’s
stockholders.
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 September 30, 2008 and December 31,
2007:
U.S. dollar denominated securities
|
|
September
30, 2008
Estimated
Fair
Value
|
|
Percentage
|
|
December
31, 2007
Estimated
Fair
Value (1)
|
|
Percentage
|
|
Commercial mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS
IOs
|
|
$
|
4,424
|
|
|
0.3
|
%
|
$
|
15,915
|
|
|
0.7
|
%
|
Investment
grade CMBS
|
|
|
638,163
|
|
|
39.6
|
|
|
766,996
|
|
|
33.6
|
|
Non-investment
grade rated subordinated securities
|
|
|
359,360
|
|
|
22.2
|
|
|
630,139
|
|
|
27.6
|
|
Non-rated
subordinated securities
|
|
|
70,329
|
|
|
4.4
|
|
|
110,481
|
|
|
4.8
|
|
Credit
tenant lease
|
|
|
22,203
|
|
|
1.4
|
|
|
24,949
|
|
|
1.1
|
|
Investment
grade REIT debt
|
|
|
201,735
|
|
|
12.5
|
|
|
246,095
|
|
|
10.8
|
|
Multifamily
agency securities
|
|
|
354
|
|
|
-
|
|
|
37,123
|
|
|
1.6
|
|
CDO
investments
|
|
|
29,787
|
|
|
1.8
|
|
|
49,630
|
|
|
2.2
|
|
Total
CMBS
|
|
|
1,326,355
|
|
|
82.1
|
|
|
1,881,328
|
|
|
82.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
adjustable rate securities
|
|
|
-
|
|
|
-
|
|
|
1,193
|
|
|
0.1
|
|
Residential
CMOs
|
|
|
428
|
|
|
-
|
|
|
627
|
|
|
-
|
|
Hybrid
adjustable rate mortgages (“ARMs”)
|
|
|
412
|
|
|
-
|
|
|
8,363
|
|
|
0.4
|
|
Total
RMBS
|
|
|
840
|
|
|
0.1
|
|
|
10,183
|
|
|
0.5
|
|
Total
U.S. dollar denominated securities
|
|
|
1,327,195
|
|
|
82.2
|
|
|
1,891,511
|
|
|
82.9
|
|
Non-U.S. dollar denominated securities
|
|
|
|
|
|
|
|
|
|
Commercial
mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
|
136,151
|
|
|
8.4
|
|
|
151,532
|
|
|
6.6
|
|
Non-investment
grade rated subordinated securities
|
|
|
124,531
|
|
|
7.7
|
|
|
212,433
|
|
|
9.3
|
|
Non-rated
subordinated securities
|
|
|
26,457
|
|
|
1.6
|
|
|
28,858
|
|
|
1.2
|
|
Total
Non-U.S. dollar denominated securities
|
|
|
287,139
|
|
|
17.8
|
|
|
392,823
|
|
|
17.1
|
|
Total
securities
|
|
$
|
1,614,334
|
|
|
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 nine 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 nine 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 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
September 30, 2008 and December 31, 2007, the Company's debt consisted of credit
facilities, CDOs, senior unsecured notes, senior unsecured 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 September 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
Company's 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:
|
|
September 30, 2008
|
|
|
|
Market
Value
|
|
Adjusted
Issuance Price
|
|
Maximum
Balance
|
|
Range of
Maturities
|
|
CDO debt*
|
|
$
|
1,040,435
|
|
$
|
1,764,303
|
|
$
|
1,803,315
|
|
|
3.3
to 6.5 years
|
|
Commercial
mortgage loan pools
|
|
|
1,201,019
|
|
|
1,201,019
|
|
|
1,201,019
|
|
|
0.3 to 10.2 years
|
|
Credit
facilities
|
|
|
546,704
|
|
|
546,704
|
|
|
613,570
|
|
|
0.4
to 2.2 years
|
|
Senior
unsecured convertible notes
|
|
|
58,744
|
|
|
80,000
|
|
|
80,000
|
|
|
19.18
years
|
|
Senior
unsecured notes**
|
|
|
47,305
|
|
|
162,500
|
|
|
162,500
|
|
|
8.82
years
|
|
Junior
unsecured notes
|
|
|
16,641
|
|
|
70,233
|
|
|
70,233
|
|
|
13.59
years
|
|
Junior
subordinated notes***
|
|
|
37,056
|
|
|
180,477
|
|
|
180,477
|
|
|
27.36
years
|
|
Total
|
|
$
|
2,947,904
|
|
$
|
4,005,236
|
|
|
|
|
|
|
|
*
Disclosed as adjusted issue price. Total par of the Company’s CDO debt at
September 30, 2008 was $1,764,303.
**
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.
At
September 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
|
|
|
5.55
|
%
|
|
5.71
|
%
|
|
4.00
|
%
|
|
7.64
|
%
|
|
7.59
|
%
|
|
6.56
|
%
|
|
11.75
|
%
|
|
5.48
|
%
|
Interest
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
-
|
%
|
|
6.79
|
%
|
|
4.00
|
%
|
|
7.64
|
%
|
|
7.59
|
%
|
|
6.56
|
%
|
|
11.75
|
%
|
|
6.16
|
%
|
Floating
|
|
|
5.55
|
%
|
|
3.86
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
4.26
|
%
|
Effective
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
-
|
%
|
|
7.23
|
%
|
|
4.00
|
%
|
|
7.64
|
%
|
|
7.59
|
%
|
|
6.56
|
%
|
|
11.75
|
%
|
|
6.43
|
%
|
Floating
|
|
|
5.55
|
%
|
|
3.86
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
-
|
%
|
|
4.26
|
%
|
The
table
above does not present 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
nine months ended September 30, 2008 were $167,624.
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 September 30, 2008 and December 31, 2007 consisted
of the following:
|
|
At September 30, 2008
|
|
|
|
Notional Value
|
|
Estimated Fair
Value
|
|
Unamortized
Cost
|
|
Weighted Average
Remaining Term
(years)
|
|
Cash flow
hedges
|
|
$
|
88,493
|
|
$
|
(78
|
)
|
$
|
(1,612
|
)
|
|
3.2
|
|
Trading
swaps
|
|
|
76,187
|
|
|
(395
|
)
|
|
-
|
|
|
3.0
|
|
CDO
trading swaps
|
|
|
1,133.544
|
|
|
(29,403
|
)
|
|
-
|
|
|
5.1
|
|
CDO
LIBOR cap
|
|
|
85,000
|
|
|
277
|
|
|
1,407
|
|
|
4.6
|
|
|
|
At December 31, 2007
|
|
|
|
Notional Value
|
|
Estimated Fair
Value
|
|
Unamortized
Cost
|
|
Weighted 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 September 30, 2008 and December 31, 2007 consisted of
the
following:
|
|
At September 30, 2008
|
|
|
|
Estimated Fair
Value
|
|
Unamortized
Cost
|
|
Weighted Average
Remaining Term
|
|
Currency
swaps
|
|
$
|
(15,474
|
)
|
$
|
-
|
|
|
7.7
years
|
|
CDO
currency swaps
|
|
|
13,437
|
|
|
-
|
|
|
9.1
years
|
|
Forwards
|
|
|
2,770
|
|
|
-
|
|
|
49
days
|
|
|
|
At December 31, 2007
|
|
|
|
Estimated Fair
Value
|
|
Unamortized
Cost
|
|
Weighted 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
Company does not currently know the full extent to which the current market
disruption will affect it or the markets in which it operates, and the Company
is unable to predict its length or ultimate severity. The values of real estate
debt securities and loans are subject to changes in credit spreads. Credit
spreads measure the yield demanded on debt securities and loans by the market
based on credit relative to a specific benchmark. The ongoing weaknesses in
the
subprime mortgage sector and in the broader mortgage market have resulted in
reduced liquidity and demand for mortgage-backed securities and have caused
the
credit spreads to widen substantially since the beginning of 2007. Under these
conditions, the values of real estate securities and loans have declined, and
such decline has resulted in margin calls. The Company’s credit facilities
(including its repurchase agreements) allow the lender, to varying degrees,
to
revalue the collateral to values that the lender considers to reflect market
value. If a lender determines that the value of the collateral has decreased,
it
may initiate a margin call requiring the Company to repay a portion of the
outstanding borrowings to cover the decrease or to post additional collateral
with minimal notice.
During
2007, the Company paid $82,570 related to margin calls. During the period from
January 1, 2008 through November 10, 2008, the Company paid $189,352 ($84,733
since July 1, 2008) related to margin calls and
amortization payments (including payments the Company made to lenders upon
their
determination that the value of collateral declined and fixed payments the
Company made to lenders pursuant to the terms of the facilities).
Of the
$84,733 paid since July 1, 2008, $41,223 represented contractual payments
negotiated upon the extension of two of the Company’s credit facilities. The
Company will fund an additional margin call of approximately $6,600 on November
11, 2008. It
has
also agreed to make increased monthly installment payments to one of its lenders
in full satisfaction of a margin call of $11,582 originally scheduled to be
paid
in October 2008.
Additional
margin calls as a result of the widening of credit spreads or otherwise could
harm the Company’s liquidity, results of operations, financial condition and
business prospects in a number of ways. In order to obtain cash to satisfy
a
margin call
and
absent other capital resources becoming available,
the
Company would be required to liquidate assets at a disadvantageous time, which
would cause the Company to incur losses and consequently adversely affect the
Company’s results of operations and financial condition. Posting additional
collateral would decrease available cash limiting the Company’s ability to
satisfy other obligations, including future margin calls or to make additional
investments. In addition, the Company may need to hold increased levels of
cash
or cash equivalents in anticipation of potential margin calls which could also
limit the Company’s ability to make additional investments. If the Company did
not have sufficient cash available or was unable to sell sufficient assets
to
satisfy margin calls, the Company would be in default under its facilities
which
would trigger cross default provisions in each of the Company’s five credit
facilities. In such an event, the Company would be required to repay outstanding
indebtedness under its credit facilities immediately. (As of September 30,
2008,
the Company had $546,704 of indebtedness outstanding under its credit
facilities.) Absent other capital resources becoming available, the Company
will
not have sufficient liquid assets to repay such indebtedness and will be unable
to fund its operations and continue its business.
The
aforementioned market 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 and thereby 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 extend the current credit facilities at the maturity date 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. Moreover, the Company may not be able to sell those
investments at all under current market conditions. In addition, the failure
to
extend certain of the Company’s credit facilities as
of the
30th day before the maturity date (or the 15th day before the maturity date
if
the Company demonstrates to the satisfaction of Deutsche Bank AG, Cayman Islands
Branch that it is negotiating a bona fide commitment to extend or replace such
facility) will constitute an event of default under the Company’s credit
facility with Deutsche Bank AG.
If
one or
more major market participants that provide 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 liquidity. 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 thereby further
reducing the Company’s liquidity.
To
date,
the credit performance of the majority 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 nine
months of 2008, the capital markets have been marking down the value of all
credit-sensitive securities regardless of performance.
In
addition to the covenants under the Company’s secured facilities, certain of the
Company’s seven CDOs contain compliance tests which, if violated, could trigger
a diversion of cash flows from the Company to bondholders. The Company's first
three CDOs contain certain interest coverage and overcollateralization tests.
At
September 30, 2008, all such tests are passing by a wide margin. The Company’s
three CDOs designated as its high yield (“HY”) series do not have any compliance
tests. The Euro CDO’s most significant test is the weighted average rating test
which is affected by credit rating agency downgrades to underlying CDO
collateral. The Company can actively manage the Euro CDO collateral pool to
maintain compliance with this test. At September 30, 2008, the Company is
meeting all such tests.
During
the first nine months of 2008, the Company raised $35,012 of capital by issuing
common shares under its 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
$93,128. 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 $45,810 of unrestricted
cash and cash equivalents (of which $20,501 must be retained under the
provisions of the Company’s financial debt covenants and would not be available
to fund operations) held as of September 30, 2008, potential common stock
issuances under the Company’s sales agency agreement, and $23,624 of unused
borrowing capacity from HoldCo 2 as of September 30, 2008. As of October 31,
2008, unused borrowing capacity from the BlackRock Facility declined to $16,835
due to a decline in the fair market value of the shares of Carbon II that are
pledged to secure the BlackRock Facility.
The
Company believes it has sufficient sources of liquidity to fund operations
for
the next twelve months (November 1, 2008 to October 31, 2009). This analysis
is
based on a number of assumptions. The following are the most
critical:
|
1)
|
The
Company will be successful in renewing the facility with Morgan Stanley
Bank prior to January 23, 2009 and will have no amortization payments
under the terms of the renewal.
|
|
2)
|
The
Company will have sufficient available cash to meet its periodic
loan
amortization payments to Deutsche Bank and Bank of America, N.A.
|
|
3)
|
The
Company does not receive any significant margin calls from its
lenders.
|
|
4)
|
The
Company will be successful in renewing the facility with HoldCo 2
prior to
March 6, 2009 and will not have any required paydowns under the terms
of
the renewal.
|
Based
on
current projections of cash for the next twelve months, the Company expects
it will have cash resources to pay quarterly
cash dividends on its common stock at the current rate for the
dividend typically payable in the first quarter of 2009 and, if the Company
raises additional capital, obtains additional financing and/or receives cash
proceeds from the future sale of assets or asset repayments, thereafter.
However, no decision has been made by the Company with respect to the
declaration or payment of any future dividend, including the rate or time
of declaration and payment of any such dividend. The Company may
consider payment of dividends on its common stock all or partially in
common stock and intends to continue to comply with REIT dividend
requirements.
The
Company's ability to meet its long-term (greater than twelve months) liquidity
requirements is also 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.
At
September 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
|
|
$
|
-
|
|
$
|
-
|
|
$
|
257,405
|
|
$
|
289,299
|
|
$
|
-
|
|
$
|
-
|
|
$
|
546,704
|
|
Commercial
mortgage loan pools(1)
|
|
|
6,054
|
|
|
5,866
|
|
|
333,448
|
|
|
102,892
|
|
|
43,396
|
|
|
709,363
|
|
|
1,201,019
|
|
CDOs(1)
|
|
|
829
|
|
|
319
|
|
|
52,075
|
|
|
222,710
|
|
|
775,967
|
|
|
712,403
|
|
|
1,764,303
|
|
Senior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
162,500
|
|
|
162.500
|
|
Junior
unsecured notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
70,233
|
|
|
70,233
|
|
Senior
unsecured convertible notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
80,000
|
|
|
80,000
|
|
Junior
subordinated notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
180,477
|
|
|
180,477
|
|
Total
Borrowings
|
|
$
|
6,883
|
|
$
|
6,185
|
|
$
|
642,928
|
|
$
|
614,901
|
|
$
|
819,363
|
|
$
|
1,914,976
|
|
$
|
4,005,236
|
|
(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
As
credit
market conditions have permitted, the Company has entered into short-term
reverse repurchase agreements to finance securities that are not financed
under
its credit facilities or CDOs. The reverse repurchase agreements bear interest
at a LIBOR-based variable rate. At September 30, 2008, the Company did not
have
any reverse repurchase agreements outstanding. At December 31, 2007, the
Company
had $80,119 of reverse repurchase agreements outstanding.
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. See Note 15 to the consolidated
financial statements for additional discussion of the Company’s exposure to
potential margin calls.
The
Company’s credit facilities have been used to replace 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.
As
further detailed below, the Company is subject to financial covenants in
its
credit facilities. For the quarter ended September 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 recourse
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 as of September 30, 2008
amounted to $546,704) and (vii) cumulative income cannot be less than one dollar
for two consecutive quarters. Morgan Stanley Bank can require the Company to
fund margin calls in the event the lender determines the value of the underlying
assets have declined in value. The Company has commenced discussions with Morgan
Stanley Bank to extend the maturity date of the facility beyond February 7,
2009.
On
July
8, 2008, Deutsche Bank AG, Cayman Islands Branch, extended its multicurrency
credit facility 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 to
procure an extension of any of its existing facilities with Bank of America,
N.A. and Morgan Stanley Bank as of the 30th day before the maturity date (or
the
15th day before the maturity date if the Company demonstrates to the
satisfaction of Deutsche Bank that it is negotiating a bona fide commitment
to
extend or replace such facility) 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 the multicurrency
repurchase agreement when due. Under the terms of the extension agreements,
no
additional borrowings are permitted under the facility. In addition, monthly
amortization payments of approximately $1,600 are required under the facility.
The monthly amortization payment can be increased or decreased based on a
monthly repricing of all the assets that collaterize the credit
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 (i) required to make amortization payments totaling $31,000 on
various dates through September 30, 2008, and (ii) is required to make monthly
installment 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. Bank of America, N.A, can require
the
Company to fund margin calls in the event the lender determines the value of
the
underlying collateral has declined.
To
satisfy a margin call of $11,582 made in October 2008 by Bank of America under
its credit facilities, the Company agreed with Bank of America to increase
the
Company's monthly installment payments from $2,250 to $3,250 commencing November
15, 2008 through March 15, 2010 under its non-USD facility and commencing April
15, 2010 through September 18, 2010 under its 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 "BlackRock 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 BlackRock Facility. The
BlackRock Facility has a term of 364 days with two 364-day extension periods,
subject to the Lender's approval. The BlackRock Facility is collateralized
by a
pledge of equity shares that the Company holds in Carbon II. The principal
amount of the BlackRock Facility is the lesser of $60,000 or a number determined
in accordance with a borrowing base calculation equal to 60% of the fair market
value of the shares of Carbon II that are pledged to secure the BlackRock
Facility. At September 30, 2008, based on the value of the Carbon II shares
on a
mark-to-market basis, the maximum principal amount of the BlackRock Facility
has
declined to $53,624 and the Company has remaining unused borrowing capacity
of
$23,624. As of October 31, 2008, unused borrowing capacity from the BlackRock
Facility declined to $16,835 due to a decline in the fair market value of the
shares of Carbon II that are pledged to secure the BlackRock
Facility.
The
BlackRock 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 BlackRock 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 BlackRock Facility and reduce the
outstanding balance.
The
terms
of the BlackRock Facility give the Lender the option to purchase from the
Company the shares of Carbon II that serve as collateral for the BlackRock
Facility, up to the BlackRock Facility commitment amount, at a price equal
to
the fair market value (as determined by the terms of the BlackRock Facility
agreement) of those shares, unless the Company elects to prepay outstanding
loans under the BlackRock Facility in an amount equal to the Lender's desired
share purchase amount and reduce the BlackRock Facility's commitment amount
accordingly, which may require termination of the BlackRock Facility. Upon
the
consummation of the purchase, the BlackRock Facility’s commitment amount shall
be reduced by the share purchase amount and the share purchase amount paid
shall
be applied to repay any outstanding loans under the BlackRock Facility as if
the
Company had prepaid the loans. The balance of the share 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 BlackRock Facility which was still outstanding
at
September 30, 2008.
Failure
to meet a margin call or required amortization payment under any of the five
aforementioned facilities would constitute an event of default under the
applicable facility. An event of default would allow the lender to accelerate
all facility obligations under such agreement.
Each
of
the five facilities contains cross default provisions that provide that any
default by the Company under any loan guaranty or similar agreement that permits
acceleration of the balance due under such agreement would constitute an event
of default under all such facilities.
Preferred
Equity Issuance
On
April
4, 2008, the Company issued $70,125 of Series E Cumulative Convertible
Redeemable Preferred Stock. Net proceeds were $69,839. 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).
On
or
after April 4, 2012, each holder of Series E-1 Preferred Stock has the right
to
require, at its option, the Company to repurchase all of such holder's shares
of
Series E-1 Preferred Stock, in whole but not in part, for cash, at a repurchase
price equal to the liquidation preference of $1,000 per share, plus all
accumulated but unpaid dividends thereon.
On
or
after April 4, 2013, each holder of Series E-2 Preferred Stock has the right
to
require, at its option, the Company to repurchase all of such holder's shares
of
Series E-2 Preferred Stock, in whole but not in part, for cash, at a repurchase
price equal to the liquidation preference of $1,000 per share, plus all
accumulated but unpaid dividends thereon.
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.
Whenever
dividends on the Series E Preferred Stock are in arrears for six or more
quarterly periods (whether or not consecutive), then the holder, together with
the holders of the Company's Series C and Series D Preferred Stock which rank
equally with the Series E Preferred Stock, shall be entitled to elect a total
of
two additional directors to the Company’s Board of Directors in addition to the
one director appointed to the Board at consummation of this
transaction.
Common
Equity Issuances
The
following table summarizes Common Stock issued by the Company for the nine
months ended September 30, 2008, net of offering costs:
|
|
Shares
|
|
Net Proceeds
|
|
Dividend
Reinvestment and Stock Purchase Plan
|
|
|
152,332
|
|
$
|
1,071
|
|
Sales
agency agreement
|
|
|
5,226,800
|
|
|
35,012
|
|
Management
and incentive fees*
|
|
|
1,065,818
|
|
|
7,013
|
|
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
|
|
|
23,244
|
|
Director
compensation
|
|
|
21,256
|
|
|
128
|
|
Total
|
|
|
13,396,208
|
|
$
|
91,873
|
|
*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 $23,244.
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
September 30, 2008 the Company owned securities of 39 Controlling Class CMBS
trusts with a par of $1,853,307. The total par amount of CMBS issued by the
39
trusts was $67,532,074. 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 $741,193 and $1,126,442 at September 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 September 30, 2008 and December 31, 2007 was $15,593 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 September
30,
2008 and December 31, 2007, the Company's total maximum exposure to loss as
a
result of its investment in Leaf was $4,841 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 $10,834 and $156,783
for the nine months ended September 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 increased operating cash flows. Net cash from trading
securities was an outflow of $53,515 and an inflow of $130,973 for the nine
months ended September 30, 2008 and 2007, respectively. Also, during the first
nine months of 2008, the Company terminated interest rate swaps which resulted
in an outflow of $17,101, while during the same period of 2007, it was an inflow
of $17,737.
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
$136,482 and used cash flows of $236,557 during the nine months ended September
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 nine months ended September 30, 2008 and September
30, 2007, net cash used to fund commercial loans was $2,286 and $687,316,
respectively. Purchases of securities during the nine months ended September
30,
2008 of $53,515 are classified as operating activities due to the adoption
of
FAS 159, versus purchases of securities during the nine months ended September
30, 2007 of which $505,119 were classified as investing activities prior to
the
adoption of FAS 159.
Net
cash
from financing activities was an outflow of $195,993 for the nine months ended
September 30, 2008 versus a cash inflow of $119,323 for the nine months ended
September 30, 2007, 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 nine months ended September
30,
2008 and September 30, 2007, net cash provided by the issuances of common and
preferred stock was $129,166 and $149,891, respectively. Also, during the nine
months ended September 30, 2007, the company issued senior unsecured notes
and
junior secured notes which raised $229,069 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.
The
following is a summary of management and incentive fees incurred for the three
and nine months ended September 30, 2008 and 2007:
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Management
fee
|
|
$
|
3,050
|
|
$
|
3,473
|
|
$
|
9,286
|
|
$
|
10,862
|
|
Incentive
fee
|
|
|
-
|
|
|
-
|
|
|
11,879
|
|
|
5,645
|
|
Incentive
fee – stock based
|
|
|
382
|
|
|
497
|
|
|
1,426
|
|
|
2,145
|
|
Total
management and incentive fees
|
|
$
|
3,432
|
|
$
|
3,970
|
|
$
|
22,591
|
|
$
|
18,652
|
|
At
September 30, 2008 and 2007, management and incentive fees of $11,077 and
$5,434, respectively, 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
$(175) and $75 for certain expenses (accrual adjustments) recognized during
the
three and nine months ended September 30, 2008, respectively, and $184 and
$486
for the three and nine months ended September 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 nine months ended September 30, 2008, the Company recorded
administration and investment accounting service fees of $250 and $735,
respectively, which are included in general and administrative expense on the
accompanying consolidated statements of operations. For the three and nine
months ended September 30, 2007, the Company recorded administration and
investment accounting service fees of $181 and $544, 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 credit facility with a subsidiary of
BlackRock, Inc. BlackRock, Inc. is the parent of the Company’s manager,
BlackRock Financial Management, Inc. (See Note 12).
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 September 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 September 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 September 30, 2008 was
$95,928. The Company does not incur any additional management or incentive
fees
to the Manager related to its investment in Carbon II. At September 30,
2008, the Company owned approximately 26% of the outstanding shares of Carbon
II.
The
Company is committed to invest up to $5,000, for up to a 10% interest, in
Anthracite JV LLC (“AHR JV”). AHR JV invests in U.S. CMBS rated higher than BB.
As of September 30, 2008, the Company had invested $1,351 in AHR JV. AHR JV
is
managed by the Manager. 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 invests in investments
backed by non-U.S. real estate assets and is managed by the Manager. The Company
will invest on a deal-by-deal basis and has no committed capital obligation.
The
other shareholder in AHR International JV is managed by or otherwise associated
with an affiliate of Credit Suisse.
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 September 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.
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.
Critical
Accounting Estimates
See
the
discussion of the Company's Critical Accounting Estimates in the Company's
Annual Report on Form 10-K for the year ended December 31,
2007.
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 increases, 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 decreases, 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 September 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 1.5 years based on net asset value at September 30, 2008. This means
that a 100 basis point increase in interest rates would cause a margin call
of
approximately $14,000.
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
September 30, 2008, economic duration for the Company's entire portfolio was
2.6
years. This implies that for each 100 basis points of change in interest rates
the Company's economic value will change by approximately 2.6%, or $24,000.
However, the duration of the Company’s portfolio not financed with match funded
debt is 1.5 years. This means that a 100 basis point increase in interest rates
or credit spreads would cause a margin call of approximately
$14,000.
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 September 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
|
|
$
|
0.01
|
|
Base
Case
|
|
|
|
|
+50
|
|
$
|
(0.01
|
)
|
+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 $0.45
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 September 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 September 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
September 30, 2008, there were no pending legal proceedings in which the Company
was a defendant or of which any of its property was subject.
All
currency figures expressed herein are expressed in thousands.
An
increase in the amount of margin calls may negatively affect the Company's
financial condition, results of operations and business. If the Company were
unable to fund margin calls in a timely manner, its business would be materially
adversely affected.
The
values of real estate securities and loans are subject to changes in credit
spreads. Credit spreads measure the yield demanded on securities and loans
by
the market based on their credit relative to a specific benchmark. The ongoing
weaknesses in the subprime mortgage sector and in the broader mortgage market
have resulted in reduced liquidity for and demand mortgage-backed securities
and
have caused credit spreads to widen substantially since the beginning of 2007.
Under these conditions, the values of real estate securities and loans have
declined, and such decline has resulted in margin calls. The Company does not
currently know the full extent to which the current market disruption will
affect it or the markets in which it operates, and it is unable to predict
the
length or ultimate severity of the disruption.
The
Company's credit facilities, some of which are repurchase agreements, allow
the
lender, to varying degrees, to revalue the collateral to values that the lender
considers to reflect market value. If a lender 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 or to repay a portion of the
outstanding borrowing with minimal notice. During 2007, the Company paid $82,570
related to margin calls. During the period from January 1, 2008 through November
10, 2008, the Company paid $189,352 ($84,733 since July 1, 2008) related to
margin calls and amortization payments (including payments the Company made
to
lenders upon their determination that the value of collateral declined and
fixed
payments the Company made to lenders pursuant to the terms of the facilities).
The Company will fund an additional margin call of approximately $6,600 on
November 11, 2008. It has also agreed to make increased monthly installment
payments to one of its lenders in full satisfaction of a margin call of $11,582
originally scheduled to be paid in October 2008.
Additional
margin calls as a result of the widening of credit spreads or otherwise could
harm the Company's liquidity, results of operations, financial condition and
business prospects in a number of ways. In order to obtain cash to satisfy
a
margin call and absent other capital resources becoming available, the Company
would be required to liquidate assets at a disadvantageous time, which would
cause it to incur further losses and consequently adversely affect its results
of operations and financial condition. Posting additional collateral would
decrease the Company's cash available or ability to make other, higher yielding
investments (thereby decreasing its return on equity) or to satisfy other
obligations, including future margin calls. In addition, in periods of increased
market volatility, such as currently exists, the Company may need to hold
increased levels of cash or cash equivalents in anticipation of potential margin
calls, which would decrease amounts available to invest in its business.
Further, in light of market conditions or other factors, the Company may be
unable to sell sufficient assets or take other actions to satisfy margin calls
within the timeframes required by the applicable counterparties. If the Company
were unable to satisfy margin calls within the timeframes required by the
applicable counterparties, it would be in default under such facilities, which
would, subject to applicable grace periods, trigger cross default and cross
acceleration provisions in all of its facilities. In addition, under certain
of
the Company's facilities, a material adverse change in its business, operations,
financial condition or other specified item constitutes an event of default,
which would also trigger such provisions. In such an event, the Company would
be
required to repay all outstanding indebtedness under its credit facilities
immediately. At September 30, 2008, the Company had $706,450 of recourse
indebtedness outstanding, including $546,704 outstanding under its credit
facilities. If all outstanding indebtedness under the Company's credit
facilities or a substantial portion of the Company's recourse indebtedness
were
to become immediately due, the Company would not have sufficient liquid assets
available to repay such indebtedness and, absent other capital resources
becoming available to it, the Company will be unable to continue to fund its
operations and continue its business.
If
the Company's lenders terminate or fail to renew any of its credit facilities,
the Company may not be able to continue to fund its business.
As
of
September 30, 2008, borrowings under the Company's credit facilities, some
of
which are repurchase agreements, totaled $546,704. These facilities contain
various representations and warranties, covenants, conditions and events of
default that if breached, not satisfied, or triggered could result in
termination of the facilities. Moreover, the current market turmoil and
tightening of credit will continue to have a significant effect on the Company's
ability to extend the term of its existing credit facilities or obtain
sufficient funds to repay any amounts outstanding under the credit facilities
before they expire, either from one or more replacement financing arrangements
or an alternative debt or equity financing. Consequently, if one or more of
these facilities were to terminate prior to its expected maturity date or if
any
such facility were not renewed, the Company's liquidity position could be
materially adversely affected, and it may not be able to satisfy its outstanding
loan commitments, originate new loans or continue to fund its operations.
The
Company's $300,000 credit facility with Morgan Stanley Bank (the "MS facility")
expires on February 7, 2009. As of September 30, 2008, the amount outstanding
under the MS facility was $227,405. The Company may not be able to extend the
term of the MS facility when it expires, and may have to find an alternative
source of financing. Alternative sources of financing may be more expensive,
contain more onerous terms or simply may not be available. If the Company is
unable to extend the MS facility and fails to repay the amount outstanding,
it
will default under the facility, and may not be able to continue to fund its
operations.
In
addition, one of the Company's credit facilities provide that failure to extend
certain of the Company's existing credit facilities, including the MS facility,
thirty days (or fifteen days under certain circumstances) prior to the maturity
date, which includes any subsequently extended maturity date, will constitute
an
event of default and would cause all outstanding indebtedness under the
Company's credit facilities to become immediately due.
Difficult
conditions in the financial markets have adversely affected the Company's
financial condition, results of operation and business, and market conditions
may not improve in the near future.
The
capital and credit markets have been experiencing extreme volatility and
disruption for more than a year. In recent weeks, the volatility and disruption
have reached unprecedented levels. In response to the financial crises, on
October 3, 2008, President Bush signed the Emergency Economic Stabilization
Act
of 2008 (EESA) into law. Pursuant to the EESA, the U.S. Treasury has the
authority to, among other things, purchase up to $700 billion of mortgage-backed
and other securities from financial institutions under the Troubled Assets
Relief Program (TARP) for the purpose of stabilizing the financial markets.
The
Federal Government, Federal Reserve and other governmental and regulatory bodies
have taken or are considering taking other actions to address the financial
crisis. Despite substantial efforts by the U.S. and other governments to restore
confidence and reopen sources of credit, it still remains unknown whether
conditions will improve in the near future or the extent to which such
government actions will affect the Company.
The
Company does not currently know the full extent to which this market disruption
will affect it or the market in which it operates, and it is unable to predict
the length or ultimate severity of the financial crisis. If the challenging
conditions continue, the Company may experience further tightening of liquidity,
additional impairments, increased margin calls and additional challenges in
raising capital and obtaining investment financing. Moreover, if current market
conditions continue or deteriorate further, the Company could experience a
rapid
and significant deterioration of its business and its results of operation
and
its financial condition could be materially adversely affected. A prolonged
economic slowdown could also impair the performance of the Company's investments
and harm its financial condition, increase its funding costs, limit its access
to the capital markets or result in a decision by lenders not to extend credit
to the Company. As a result, investors in the Company's securities could lose
some or all of their investment in the Company.
Some
of the Company's investments may be recorded at fair value as determined in
good
faith by the Manager and, as a result, there will be uncertainty as to the
value
of these investments.
Some
of
the Company's portfolio investments may be in the form of assets that are not
actively traded. The fair value of securities and other investments that are
not
actively traded may not be readily determinable. The Company values these
investments at least quarterly at fair value as determined in good faith by
the
Manager, and the unrealized gains or losses are recorded in earnings. Because
such valuations by the Company are inherently uncertain, may fluctuate over
short periods of time, and may be based on estimates, the Company's
determinations of fair value of its investments may differ materially from
the
values that the Company ultimately realizes upon their disposal.
A
decline
in the market value of the Company's assets may adversely affect the Company
in
instances in which the Company has borrowed money based on the market value
of
those assets. If the market value of those assets declines (in certain cases
with respect to illiquid securities, in the sole determination of the lender),
the lender may require the Company to post additional collateral to support
the
loan. For a discussion of the risk related to margin calls, see"—An increase in
the amount of margin calls may negatively affect the Company's financial
condition, results of operations and business. If the Company were unable to
fund margin calls in a timely manner, its business would be materially adversely
affected" above.
The
Company's investments may be illiquid and their value may decrease, which could
adversely affect the Company's business.
Many
of
the Company's assets are illiquid. Illiquidity may result from the absence
of an
established market for the investments as well as the legal or contractual
restrictions on their resale. It may also result from the decline in value
of
properties or assets securing these investments. Illiquid investments typically
experience greater price volatility, as a ready market does not exist, and
can
be more difficult to value. Many of the Company's assets, which have little,
if
any, current market activity, have been valued based primarily on broker quotes.
Such third-party pricing for illiquid investments may be more subjective than
for more liquid investments. The ongoing dislocation in the trading markets
has
made it extremely difficult for the Company to sell many of its assets. If
the
Company is required to liquidate all or a portion of its illiquid investments
quickly, it may realize significant losses or may not be able to sell some
or
all of such investments at all. As a result, the Company's ability to vary
its
portfolio in response to changes in economic and other conditions may be
relatively limited, and its results of operation, financial condition and
business could be materially adversely affected.
Conflicts
of interest of the Manager may result in decisions that do not fully reflect
stockholders' best interests.
The
Company and the Manager have some common officers and directors, which may
present conflicts of interest in the Company's dealings with the Manager and
its
affiliates, including the Company's purchase of assets originated by such
affiliates.
The
Manager and its employees may engage in other business activities that could
reduce the time and effort spent on the management of the Company. The Manager
also provides services to REITs not affiliated with the Company. As a result,
there may be a conflict of interest between the operations of the Manager and
its affiliates in the acquisition and disposition of commercial real estate
assets. In addition, the Manager and its affiliates may from time to time
purchase commercial real estate assets for their own account and may purchase
or
sell assets from or to the Company. For example, BlackRock Realty Advisors,
Inc., a subsidiary of the Manager, provides real estate equity and other real
estate related products and services in a variety of strategies to its
institutional investor client base. In doing so, it purchases real estate on
behalf of its clients that may underlie the real estate loans and securities
the
Company acquires, and consequently depending on the factual circumstances
involved, there may be conflicts between the Company and those clients. Such
conflicts may result in decisions and allocations of commercial real estate
assets by the Manager, or decisions by the Manager's affiliates, that are not
in
the Company's best interests.
Although
the Company has adopted investment guidelines, these guidelines give the Manager
significant discretion in investing. The Company's investment and operating
policies and the strategies that the Manager uses to implement those policies
may be changed at any time without the consent of stockholders.
Conflicts
of interest could also arise in transactions where the Company borrows from
affiliates of the Manager. In March 2008, the Company entered into a revolving
credit loan facility (the "BlackRock Facility") with a wholly owned subsidiary
of BlackRock, Inc., the parent of the Manager. The BlackRock Facility is
collateralized by a pledge of equity shares that the Company holds in Carbon
Capital II, Inc., a private commercial real estate income opportunity fund
managed by the Manager. As of September 30, 2008, the Company had $30,000
outstanding under the BlackRock Facility.
See
also
the risk factors set forth in Part I, “Item 1A. Risk Factors” in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2007, filed with
the
SEC on March 16, 2008.
ITEM
2. |
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
(a)
During the nine months ended September 30, 2008, the Company issued
1,403,394 unregistered shares of Common Stock with an aggregate value of
$9,261 as follows:
|
·
|
On
March 28, 2008, 316,320 unregistered shares of 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 "2007 Management
Agreement") requiring the Company to grant to the Manager a number
of
shares of 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 2007 Management Agreement is in effect;
|
|
·
|
On
June 3, 2008, 424,425 unregistered shares of Common Stock with
an aggregate value of $3,163 were issued to the Manager under the
Anthracite Capital, Inc. 2008 Manager Equity Plan and pursuant to
the 2007
Management Agreement providing that 30% of the Manager's incentive
fees
earned under the 2007 Management Agreement shall be paid in shares
of the
Common Stock subject to certain provisions under the Management Agreement
and the Plan and pursuant to a consent of the Nominating and Corporate
Governance Committee; and
|
|
·
|
On
August 25, 2008, 641,393 unregistered shares of Common Stock with an
aggregate value of $3,854 were issued to the Manager under the Anthracite
Capital, Inc. 2008 Manager Equity Plan as quarterly payments in shares
of
Common Stock of the base management fee and incentive fee to the
Manager
under the Amended and Restated Investment Advisory Agreement, dated
as of
March 31, 2008, between the Company and the Manager (the "Management
Agreement"). For the full one-year term of the Management Agreement,
the
Manager has agreed that 100% of the base management fee and incentive
fee
earned shall be payable in shares of Common Stock.
|
|
·
|
On
August 25, 2008, 21,256 unregistered shares of Common Stock with an
aggregate value of $128 were issued to directors of the Company not
employed by the manager under the Plan as quarterly payment of an
annual
retainer.
|
The
issuances of Common Stock described above were made in reliance upon the
exemption from registration under Section 4(2) of the Securities
Act.
ITEM
5.
Other Information
Departure
of Director
The
Company previously disclosed under Item 5.02 of the Current Report on Form
8-K
filed by the Company on September 16, 2008 Jeffrey C. Keil’s intention to retire
from the Company’s board of directors effective December 11, 2008. On November
9, 2008, Mr. Keil informed the Company that his retirement will be effective
November 14, 2008. Mr. Keil’s retirement and the effective date of his
retirement did not result from a disagreement with the Company on any matter
relating to the Company’s operations, policies or practices. Mr. Keil is the
Chairman of the Company’s Audit Committee and a member of the Company’s
Compensation Committee.
ITEM
6.
Exhibits
Exhibit
No.
|
|
Description
|
|
|
|
10.1
|
|
Amendment
No. 2, dated as of July 8, 2008, to Guaranty, dated as of December
23,
2004 and amended as of February 27, 2007, between the Company, as
guarantor, and Deutsche Bank AG, Cayman Islands Branch, as buyer
(incorporated by reference to Exhibit 10.1 to the Company's Current
Report
on Form 8-K, filed on July 14, 2008)
|
10.2
|
|
Amendment
No. 2, dated as of July 8, 2008, to Master Repurchase Agreement and
Annex
I to Master Repurchase Agreement Supplemental Terms and Conditions,
dated
as of December 23, 2004, between Anthracite Funding, LLC, as seller,
and
Deutsche Bank AG, Cayman Islands Branch, as buyer (incorporated by
reference to Exhibit 10.2 to the Company's Current Report on Form
8-K,
filed on July 14, 2008)
|
10.3
|
|
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 (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2008,
filed
on August 11, 2008)
|
10.4
|
|
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 (incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2008,
filed
on August 11, 2008)
|
10.5
|
|
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 (incorporated by reference to Exhibit 10.3 to
the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30,
2008, filed on August 11, 2008)
|
10.6
|
|
Amended
and Restated Parent Guaranty, dated as of August 7, 2008, by Anthracite
Capital, Inc. in favor of Bank of America, N.A. (incorporated by
reference
to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2008, filed on August 11,
2008)
|
10.7
|
|
First
Amendment, dated as of September 10, 2008, to Sales Agreement, dated
as of
June 4, 2008, among Brinson Patrick Securities Corporation, Anthracite
Capital, Inc. and BlackRock Financial Management, Inc. as to Sections
1.2
and 4.1(g) only (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K, filed on September 16,
2008)
|
12
|
|
Computation
of Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends
|
31.1
|
|
Exchange
Act Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
31.2
|
|
Exchange
Act Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
ANTHRACITE
CAPITAL, INC.
|
|
|
Dated:
November 10, 2008
|
By:
|
/s/
Christopher A. Milner
|
|
Name:
Christopher A. Milner
|
|
Title:
Chief Executive Officer
|
|
|
Dated:
November 10, 2008
|
By:
|
/s/
James J. Lillis
|
|
Name:
James J. Lillis
|
|
Title:
Chief Financial Officer
|