Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
(Mark
one)
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended December 31, 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 No. 001-13937
ANTHRACITE
CAPITAL, INC.
(Exact
name of registrant as specified in its charter)
Maryland
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13-3978906
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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|
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40
East 52nd Street
New
York, New York
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10022
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(Address
of principal executive office)
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(Zip
Code)
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(212)
810-3333
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(Registrant’s
telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the Act:
COMMON
STOCK, $0.001 PAR VALUE
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NEW
YORK STOCK EXCHANGE
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9.375%
SERIES C CUMULATIVE REDEEMABLE
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NEW
YORK STOCK EXCHANGE
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PREFERRED
STOCK, $0.001 PAR VALUE
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|
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8.25%
SERIES D CUMULATIVE REDEEMABLE
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NEW
YORK STOCK EXCHANGE
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PREFERRED
STOCK, $0.001 PAR VALUE
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(Title
of each class)
|
(Name
of each exchange on which
registered)
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Securities
registered pursuant to Section 12(g) of the Act: Not
Applicable
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes ¨
No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a smaller reporting company. (See definitions of “large
accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act).
Large
accelerated filer x
Accelerated filer ¨
Non-accelerated filer o Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No
x
The
aggregate market value of the registrant’s common stock, $0.001 par value, held
by non-affiliates of the registrant, computed by reference to the closing sale
price of $7.04 as reported on the New York Stock Exchange on June 30, 2008, was
$503,037,033. All executive officers and directors of the registrant and the
manager of the registrant have been deemed, solely for the purpose of the
foregoing calculation, to be affiliates of the registrant.
The
number of shares of the registrant’s common stock, $0.001 par value, outstanding
as of February 28, 2009 was 78,371,715 shares.
Documents
Incorporated by Reference: Portions of the registrant’s Definitive Proxy
Statement for the 2009 Annual Meeting of Stockholders are incorporated by
reference into Part III.
ANTHRACITE
CAPITAL, INC. AND SUBSIDIARIES
2008 FORM
10-K ANNUAL REPORT
TABLE OF
CONTENTS
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PAGE
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PART
I
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Item
1.
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Business
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4
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Item
1A.
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Risk
Factors
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24
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Item
1B.
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Unresolved
Staff Comments
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40
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Item
2.
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Properties
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40
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Item
3.
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Legal
Proceedings
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40
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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40
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder
Matters
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and
Issuer Purchases of Equity Securities
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41
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Item
6.
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Selected
Financial Data
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45
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Item
7.
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Management’s
Discussion and Analysis of
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Financial
Condition and Results of Operations
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47
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Item
7A.
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Quantitative
and Qualitative Disclosures About
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Market
Risk
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96
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Item
8.
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Financial
Statements and Supplementary Data
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100
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Item
9.
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Changes
in and Disagreements with Accountants
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on
Accounting and Financial Disclosure
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164
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Item
9A.
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Controls
and Procedures
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164
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Item
9B.
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Other
Information
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165
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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166
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Item
11.
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Executive
Compensation
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166
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Item
12.
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Security
Ownership of Certain Beneficial
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Owners
and Management and Related Stockholder Matters
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166
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Item
13.
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Certain
Relationships, and Related Transactions, and Director
Independence
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166
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Item
14.
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Principal
Accounting Fees and Services
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166
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedule
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167
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Signatures
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172
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain
statements contained herein constitute “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
future financial or business performance, strategies or
expectations. Forward-looking statements are typically identified by
words or phrases such as “trend,” “opportunity,” “pipeline,” “believe,”
“comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,”
“position,” “assume,” “potential,” “outlook,” “continue,” “remain,” “maintain,”
“sustain,” “seek,” “achieve” and similar expressions, or future or conditional
verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions.
Anthracite Capital, Inc. (the “Company”) cautions that forward-looking
statements are subject to numerous assumptions, risks and uncertainties, which
change over time. Forward-looking statements speak only as of the date they are
made, and the Company assumes no duty to and does not undertake to update
forward-looking statements. Actual results could differ materially from those
anticipated in forward-looking statements and future results could differ
materially from historical performance.
Factors
that could cause actual results to differ materially from forward-looking
statements or historical performance include, without limitation:
(1) the
introduction, withdrawal, success and timing of business initiatives and
strategies;
(2)
changes in political, economic or industry conditions, the interest rate
environment, financial and capital markets or otherwise, which could result in
changes in the value of the Company’s assets and liabilities, including net
realized and unrealized gains or losses, and could adversely affect the
Company’s operating results;
(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 its existing facilities or
obtain replacement financing, to meet margin calls and amortization payments
under the facilities, to service debt and to pay dividends on its capital
stock;
(5) the
Company’s ability to obtain amendments and waivers in the event that a lender
terminates a facility before the maturity date or debt obligations are
accelerated due to a covenant breach or otherwise;
(6) the
relative and absolute investment performance and operations of BlackRock
Financial Management, Inc. (the “Manager”), the Company’s Manager;
(7) the
impact of increased competition;
(8) the
impact of future acquisitions or divestitures;
(9) the
unfavorable resolution of legal proceedings;
(10) the
impact of legislative and regulatory actions and reforms and regulatory,
supervisory or enforcement actions of government agencies relating to the
Company or the Manager;
(11)
terrorist activities and international hostilities, which may adversely affect
the general economy, domestic and global financial and capital markets, specific
industries, and the Company;
(12) the
ability of the Manager to attract and retain highly talented
professionals;
(13)
fluctuations in foreign currency exchange rates;
(14) the
impact of changes to tax legislation and, generally, the tax position of the
Company; and
(15) the
Company's independent registered public accounting firm’s opinion on the
Company's consolidated financial statements that states that as a result of its
liquidity position, current market conditions and the uncertainty relating to
the outcome of its ongoing negotiations with its lenders substantial doubt has
been raised about the Company’s ability to continue as a going
concern.
Additional
factors are set forth in the Company’s filings with the Securities and Exchange
Commission (the “SEC”), including this Annual Report on Form 10-K, accessible on
the SEC’s website at www.sec.gov.
PART
I
ITEM
1. BUSINESS
All
currency figures expressed herein are expressed in thousands, except share or
per share amounts.
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 and conducts its operations in a manner intended
to qualify as a real estate investment trust (“REIT”) for federal income tax
purposes. 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 seeks to combine
traditional real estate underwriting and capital markets expertise to maximize
the opportunities arising from the continuing integration of these two
disciplines. The Company focuses on acquiring pools of performing
loans in the form of commercial mortgage-backed securities (“CMBS”), issuing
secured debt backed by CMBS and providing strategic capital for the commercial
real estate industry in the form of mezzanine loan financing and
equity.
The
Company’s primary investment activities are conducted on a global basis in three
investment sectors:
1) Commercial
Real Estate Debt Securities
2) Commercial
Real Estate Loans
3) Commercial
Real Estate Equity
The
commercial real estate debt 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). Investments in
commercial real estate loans and equity seek to provide attractive risk adjusted
returns over shorter periods of time through strategic investments in specific
property types or regions.
The
Company’s common stock, par value $0.001 per share (“Common Stock”), is traded
on the New York Stock Exchange (“NYSE”) under the symbol “AHR”. The
Company’s primary long-term objective is to generate sufficient earnings to
support a dividend at a level which provides an attractive return to
stockholders. However, due to current market conditions and the
Company’s current liquidity position, the Company’s Board of Directors (the
“Board of Directors”) anticipates that the Company will pay cash dividends on
its stock only to the extent necessary to maintain its REIT status for the
foreseeable future. See Part II, Item 5, “Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities” for
additional discussion on dividends.
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 $1.30 trillion of assets under management at December 31,
2008. The Manager provides an operating platform that incorporates
significant asset origination, risk management, and operational
capabilities.
Effect
of Market Conditions on the Company’s Business & Recent
Developments
During
2008 and particularly in the fourth quarter, global economic conditions
continued to worsen, resulting in ongoing disruptions in the credit and capital
markets, significant devaluations of assets and a severe economic downturn
globally. Assets linked to the U.S. commercial real estate finance
market have been particularly affected as demand for such assets has sharply
declined and defaults have risen, including for CMBS and commercial real estate
loans. Available liquidity, which began to decline during the second
half of 2007, became scarce in 2008 and remains depressed into
2009. Under normal market conditions, the Company relies on the
credit and equity markets for capital to finance its investments and grow its
business. However, in the current environment, the Company is focused
principally on managing its liquidity.
The
recessionary economic conditions and ongoing market disruptions have had, and
the Company expects will continue to have, an adverse effect on the Company and
the commercial real estate and other assets in which the Company has
invested. These effects include:
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·
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Negative
operating results. The Company incurred net income (loss)
available to common stockholders of $(210,878) for the year ended December
31, 2008 compared with $72,320 for the year ended December 31, 2007,
driven primarily by significant net realized and unrealized losses, the
incurrence of sizable provisions for loan losses (including the
establishment of a general reserve) and a loss from equity investments
compared with earnings in the prior year. The establishment of
a general reserve for loan losses was deemed necessary given the dramatic
change in the prospects for loan performance as a result of significant
property value declines in the fourth quarter. See Note 2 of the
consolidated financial statements, “Significant Accounting Policies -
Allowance for Loan Losses” for a discussion of the methodology used to
calculate the general reserve.
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·
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Adverse
impact on liquidity and access to capital. The Company’s cash
and cash equivalents sharply decreased to $9,686 at December 31, 2008 from
$91,547 at December 31, 2007 due to, among other things, an increase in
the receipt and funding of margin calls and amortization payments under
the Company’s secured credit facilities and reduced cash flow from
investments. In order to secure the amendment and
extension of its secured credit facilities (including repurchase
agreements) in 2008 with Bank of America, Deutsche Bank and Morgan
Stanley, the Company agreed not to request new borrowings under the
facilities. Financings through collateralized debt obligations
(“CDOs”), which the Company historically utilized, are no longer
available, and the Company does not expect to be able to finance
investments through CDOs for the foreseeable
future.
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·
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Change
in business objectives and dividend policy. The Company is
currently focused on managing its liquidity and, unless its liquidity
position and market conditions significantly improve, anticipates no new
investment activity in 2009. In addition, the Company’s Board
of Directors anticipates that the Company will only pay cash dividends on
its preferred and common stock to the extent necessary to maintain its
REIT status until the Company’s liquidity position has
improved.
|
These
effects have led to the following adverse consequences for the
Company:
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·
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Substantial
doubt about the ability to continue as a going concern. The
Company’s independent registered public accounting firm has issued an
opinion on the Company’s consolidated financial statements that states the
consolidated financial statements have been prepared assuming the Company
will continue as a going concern and further states that the Company’s
liquidity position, current market conditions and the uncertainty relating
to the outcome of the Company’s ongoing negotiations with its lenders have
raised substantial doubt about the Company’s ability to continue as a
going concern. The Company obtained agreements from its secured
credit facility lenders on March 17, 2009 that the going concern reference
in the independent registered public accounting firm’s opinion to the
consolidated financial statements is waived or does not constitute an
event of default and/or covenant breach under the applicable
facility.
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·
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Breach
of covenants. Financial covenants in certain of the Company’s
secured credit facilities include, without limitation, a covenant that the
Company’s net income (as defined in the applicable credit facility) will
not be less than $1.00 for any period of two consecutive quarters and
covenants that on any date the Company’s tangible net worth (as defined in
the applicable credit facility) will not have decreased by twenty percent
or more from the Company’s tangible net worth as of the last business day
in the third month preceding such date. The Company’s
significant net loss for the three months ended December 31, 2008 resulted
in the Company not being in compliance with these covenants. On
March 17, 2009, the secured credit facility lenders waived this covenant
breach until April 1, 2009. In addition, the Company’s secured
credit facility with BlackRock Holdco 2, Inc. (“Holdco 2”) requires the
Company to immediately repay outstanding borrowings under the facility to
the extent outstanding borrowings exceed 60% of the fair market value (as
determined by the Company’s manager) of the shares of common stock of
Carbon Capital II, Inc. (“Carbon II”) securing such
facility. As of February 28, 2009, 60% of the fair market value
of such shares declined to approximately $24,840 and outstanding
borrowings under the facility were $33,450. On March 17, 2009,
Holdco 2 waived this breach until April 1, 2009. Additionally,
in the first quarter of 2009, Anthracite Euro CRE CDO 2006-1 plc (“Euro
CDO”) failed to satisfy its Class E overcollateralization and interest
reinvestment tests. As a result of Euro CDO’s failure to
satisfy these tests, half of each interest payment due to the Company, as
the Euro CDO’s preferred shareholder, will remain in the CDO as
reinvestable cash until the tests are cured. However, since the
Euro CDO’s preferred shares were pledged to one of the Company’s secured
lenders in December 2008, the cash flow was already being diverted to pay
down that lender’s outstanding
balance.
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·
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Inability
to satisfy margin call. During the first quarter of 2009, the
Company received a margin call of $46,300 and C$5,300 from one of its
secured credit facility lenders. As part of the Company’s
ongoing discussions with this lender and the other secured credit facility
lenders, the Company has been negotiating to have the margin call waived
in consideration of certain agreements to be made by the
Company. On March 17, 2009, the lender waived this event of
default until April 1, 2009.
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|
·
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Reduction
or elimination of dividends. Due to current market conditions
and the Company’s current liquidity position, the Company’s Board of
Directors anticipates that the Company will pay cash dividends on its
stock only to the extent necessary to maintain its REIT status until the
Company’s liquidity position has improved and market values of commercial
real estate debt show signs of stability. The Board of
Directors did not declare a dividend on the Common Stock for the fourth
quarter of 2008 since the Company’s 2008 net taxable income distribution
requirements under REIT rules were satisfied by distributions made for the
first three quarters of 2008. The Board of Directors also did
not declare a dividend on the Common Stock and the Company’s preferred
stock for the first quarter of 2009. To the extent the Company
is required to make distributions to maintain its qualification as a REIT
in 2009, the Company anticipates it will rely upon temporary guidance that
was recently issued by the Internal Revenue Service (“IRS”), which allows
certain publicly traded REITs to satisfy their net taxable income
distribution requirements during 2009 by distributing up to 90% in stock,
with the remainder distributed in cash. The terms of the
Company’s preferred stock prohibit the Company from declaring or paying
cash dividends on the Common Stock unless full cumulative dividends have
been declared and paid on the preferred
stock.
|
As
discussed and for the reasons stated above, if the Company were unable to obtain
permanent waivers or extensions of the waivers from its secured credit facility
lenders on or before April 1, 2009, an event of default will immediately or with
the passage of time occur under the applicable respective facility. An event of
default under any of the Company’s facilities, absent a waiver, would trigger
cross-default and cross-acceleration provisions in all of the Company’s other
facilities and, if such debt were accelerated, would trigger a
cross-acceleration provision in one of the Company’s indentures. In
such an event, the Company would be required to repay all outstanding
indebtedness under its secured credit facilities and the one indenture
immediately. The Company would not have sufficient liquid assets
available to repay such indebtedness and, unless the Company were able to obtain
additional capital resources or waivers, the Company would be unable to continue
to fund its operations or continue its business.
Secured
credit facilities waivers
On March
17, 2009, the Company received waivers concerning covenant breaches from its
secured credit facility lenders as described above. In addition, the
Company's secured credit facility lenders agreed to permanently waive minimum
liquidity covenants in the facilities. In connection with the waivers, the
Company has agreed to pay $6 million to each of Morgan Stanley and Bank of
America and $3 million to Deutsche Bank.
CDO
tests
In
addition to the covenants under the Company’s secured credit facilities, four of
the seven CDOs issued by the Company contain compliance tests which, if
violated, could trigger a diversion of cash flows from the Company to
bondholders of the CDOs. The Company’s three CDOs designated as its HY series do
not have any compliance tests.
Interest
Coverage and Overcollateralization Tests (“Cash Flow Triggers”)
Four of
the seven CDOs issued by the Company contain tests that measure the amount of
overcollateralization and excess interest in the transaction. Failure to satisfy
these tests would cause the principal and/or interest cash flow that would
otherwise be distributed to more junior classes of securities (including those
held by the Company) to be redirected to pay down the most senior class of
securities outstanding until the tests are satisfied. Therefore,
failure to satisfy the coverage tests could adversely affect cash flows received
by the Company from the CDOs and thereby the Company’s liquidity and operating
results. The trigger percentages in the chart below represent the first
threshold at which cash flows would be redirected.
Generally,
the overcollateralization test measures the principal balance of the specified
pool of assets in a CDO against the corresponding liabilities issued by the CDO.
However, based on ratings downgrades, the principal balance of an asset or of a
specified percentage of assets in a CDO may be deemed reduced below their
current balance to levels set forth in the related CDO documents for purposes of
calculating the overcollateralization test. As a result, ratings downgrades can
reduce the principal balance of the assets used in the overcollateralization
test relative to the corresponding liabilities in the test, thereby reducing the
overcollateralization percentage. In addition, actual defaults of an asset would
also negatively impact compliance with the overcollateralization tests. A
failure to satisfy an overcollateralization test on a payment date could result
in the redirection of cash flows.
Weighted
Average Life, Minimum Weighted Average Recovery Rate, and the Weighted Average
Rating Factor (“Collateral Quality Tests”)
The
ability of EURO CDO to trade securities within its portfolio is dependent on
passing the collateral quality tests. Collateral quality tests limit
the ability of the Company’s CDOs to trade securities within its
portfolio. These tests apply to the Euro CDO, which is actively
managed. If one of these tests fails, then any subsequent trade will
either have to maintain or improve the result of the test or the trade cannot be
executed.
The Euro
CDO’s most significant test is the weighted average rating test which is
impacted when credit rating agencies downgrade the underlying CDO
collateral. Ratings downgrades of assets in the Company’s CDOs can
negatively impact compliance with the over collateralization tests when an asset
is downgraded to Caa3 or below. The Company is permitted to actively manage the
Euro CDO collateral pool to facilitate compliance with this test through end of
February 2012, the reinvestment period. After the reinvestment
period, there are limited circumstances under which trades can be executed.
However, the Company’s ability to remain in compliance is limited by the
amount of securities held outside of the Euro CDO and also by the Company’s
inability to purchase new assets given its liquidity
position.
The chart
below is a summary of the Company’s CDO compliance tests as of December 31,
2008. During the first quarter of 2009, Anthracite Euro CRE CDO
2006-1 plc (“Euro CDO”) failed to satisfy its Class E overcollateralization and
interest reinvestment tests.
Cash
Flow Triggers
|
|
CDO
I
|
|
|
CDO
II
|
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|
CDO
III
|
|
|
CDO Euro
|
|
Overcollateralization
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
125.1 |
% |
|
|
123.5 |
% |
|
|
116.7 |
% |
|
|
116.4 |
% |
Trigger
|
|
|
115.6 |
% |
|
|
113.2 |
% |
|
|
108.9 |
% |
|
|
116.4 |
% |
Pass/Fail
|
|
Pass
|
|
|
Pass
|
|
|
Pass
|
|
|
Pass
|
|
Interest
Coverage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
175.4 |
% |
|
|
196.7 |
% |
|
|
254.0 |
% |
|
|
116.4
|
% |
Trigger
|
|
|
108.0
|
% |
|
|
117.0 |
% |
|
|
111.0 |
% |
|
|
116.4
|
% |
Pass/Fail
|
|
Pass
|
|
|
Pass
|
|
|
Pass
|
|
|
Pass
|
|
Collateral
Quality Tests
|
|
CDO
I
|
|
|
CDO
II
|
|
|
CDO
III
|
|
|
CDO Euro
|
|
Weighted
Average Life Test
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
3.93 |
|
Trigger
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
8.00 |
|
Pass/Fail
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
Pass
|
|
Minimum
Weighted Average Recovery Rate Test
|
|
|
|
|
|
|
Moody’s
|
|
Current
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
22.4 |
% |
Trigger
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
18.0 |
% |
Pass/Fail
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
Pass
|
|
Weighted
Average Rating Factor Test
|
|
|
|
|
|
|
Moody’s
|
|
Current
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
2721
|
|
Trigger
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
2740 |
|
Pass/Fail
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
Pass
|
|
Commercial
Real Estate Debt Securities
The
following table indicates the amounts of each category of commercial real estate
securities the Company owned at December 31, 2008.
Commercial Real Estate Securities
|
|
Par(2)
|
|
|
Estimated
Fair
Value(3)
|
|
|
Dollar
Price(4)
|
|
|
Adjusted
Purchase
Price(5)
|
|
|
Dollar
Price(4)
|
|
|
Loss
Adjusted
Yield(6)
|
|
U.S.
Dollar Denominated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controlling
Class CMBS
|
|
$ |
1,485,173 |
|
|
$ |
140,472 |
|
|
$ |
9.46 |
|
|
$ |
477,802 |
|
|
$ |
32.17 |
|
|
|
18.25 |
% |
Other
below investment grade CMBS
|
|
|
60,703 |
|
|
|
25,208 |
|
|
|
41.53 |
|
|
|
53,808 |
|
|
|
88.64 |
|
|
|
9.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDO
investments
|
|
|
329,125 |
|
|
|
26,096 |
|
|
|
7.93 |
|
|
|
19,124 |
|
|
|
5.81 |
|
|
|
44.65 |
% |
Investment grade
commercial real estate securities(1)
|
|
|
977,187 |
|
|
|
609,712 |
|
|
|
62.39 |
|
|
|
916,126 |
|
|
|
93.75 |
|
|
|
7.35 |
% |
CMBS
interest only securities (“CMBS IOs”)
|
|
|
82,840 |
|
|
|
4,085 |
|
|
|
4.93 |
|
|
|
1,773 |
|
|
|
2.14 |
|
|
|
35.15 |
% |
|
|
|
2,935,028 |
|
|
|
805,573 |
|
|
|
27.45 |
|
|
|
1,468,633 |
|
|
|
50.04 |
|
|
|
11.49 |
% |
Non-U.S.
Dollar Denominated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controlling
Class CMBS
|
|
|
58,394 |
|
|
|
21,777 |
|
|
|
37.29 |
|
|
|
31,269 |
|
|
|
53.55 |
|
|
|
13.96 |
% |
Other
below investment grade CMBS
|
|
|
230,732 |
|
|
|
46,349 |
|
|
|
20.09 |
|
|
|
204,370 |
|
|
|
88.57 |
|
|
|
10.22 |
% |
Investment
grade commercial real estate securities
|
|
|
175,154 |
|
|
|
62,264 |
|
|
|
35.55 |
|
|
|
176,657 |
|
|
|
100.86 |
|
|
|
7.44 |
% |
|
|
|
464,280 |
|
|
|
130,390 |
|
|
|
28.08 |
|
|
|
412,296 |
|
|
|
88.80 |
|
|
|
9.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,399,308 |
|
|
$ |
935,963 |
|
|
$ |
27.53 |
|
|
$ |
1,880,929 |
|
|
$ |
55.33 |
|
|
|
11.01 |
% |
|
(1)
|
Includes
the carrying value of Company’s investment in Anthracite JV LLC (“AHR JV”)
of $448 at December 31, 2008.
|
|
(2)
|
Represents
the principal amount required to be repaid to the security owner during
the life of the security or at
maturity.
|
|
(3)
|
Represents
the estimated price that would be received to sell a security in an
orderly transaction between market participants at the measurement date
(December 31, 2008).
|
|
(4)
|
Represents
the estimated fair value or adjusted purchase price, as applicable, of a
security divided by its par value multiplied by
100.
|
|
(5)
|
Represents
the price paid by the Company to acquire the security. If the security is
purchased at a discount or premium, the purchase price is adjusted to
reflect the amortization of the discount or
premium.
|
|
(6)
|
Represents
the interest rate the Company expects to earn on its securities based on
the adjusted purchase price of the securities. The interest rate has been
adjusted to reflect possible future losses on the underlying collateral
for the security.
|
The
Company views its below investment grade CMBS investment activity as two
portfolios: Controlling Class CMBS and other below investment grade
CMBS. The Company considers the CMBS where it maintains the right to
control the foreclosure/workout process on the underlying pool of loans as
controlling class CMBS (“Controlling Class”).
Controlling
Class CMBS
The
Company’s principal activity is to underwrite and acquire high yield CMBS that
are rated below investment grade (BB+ or lower). The Company’s CMBS
are securities backed by pools of loans secured by first mortgages on commercial
real estate in the United States, Canada, Europe and Asia. The
commercial real estate securing the first mortgages consists of income-producing
properties including office buildings, retail centers, apartment buildings,
hotels and other types of commercial real estate. The terms of a
typical loan include a fixed rate of interest, thirty-year amortization, some
form of prepayment protection, and an interest rate increase if not paid off at
the ten-year maturity. The loans are originated by various lenders
and pooled together in trusts which issue securities in the form of various
classes of fixed rate debt supported by the cash flows from the pooled
loans. Classes differ in priority of payment and are rated by one or
more credit rating agencies from AAA down to CCC. The class of
securities that is affected first by loan losses is not rated. The
aggregate principal amount of the pools of loans varies.
The
Company focuses on acquiring the securities rated below investment
grade. The most subordinated CMBS classes are the first to absorb
realized losses in the loan pools. To the extent there are losses in
excess of the most subordinated class’ stated entitlement to principal and
interest, then the remaining CMBS classes will bear such losses in order of
their relative subordination. If a loss of face value, or par, is
experienced in the pooled loans, a corresponding reduction in the par of the
lowest rated security occurs, reducing the cash flow entitlement. The
majority owner of the first loss position has the right to influence the workout
process and therefore to designate the trust’s special servicer. The
Company will generally seek to influence the workout process in each of its CMBS
transactions by purchasing the majority of the trust’s non-rated securities and
sequentially higher rated securities as high as BBB+. Typically, the
par amount of these below investment grade (including non-rated) classes has
represented 2.0% to 5.0% of the principal of the underlying pool of
loans. This is known as the subordination level because 2.0% to 5.0%
of the collateral balance is subordinated to the senior, investment grade rated
securities.
By owning
commercial real estate loans in these forms, the Company seeks to earn
loss-adjusted returns over a period of time while achieving significant
diversification across geographic areas and property types.
At
December 31, 2008, the Company owned Controlling Class securities of 39 trusts
in which the Company through its investment in subordinated CMBS of such trusts
is in the first loss position. As a result of this investment position, the
Company influences the workout process on $57,048,888 of underlying
loans. The total par amount owned of these subordinated Controlling
Class securities is $1,543,567.
Prior to
acquiring Controlling Class securities, the Company performs due diligence on
the underlying loans to ensure their risk profiles meet the Company’s
criteria. Loans that do not meet the Company’s criteria are either
removed from the pool or the Company requires price adjustments. The
debt service coverage and loan to value ratios are evaluated to determine if
they are appropriate for each asset class.
As part
of its underwriting process, the Company assumes that 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 $1,046,949 related to principal of the underlying loans will not be
recoverable, of which $453,342 is expected to occur over the next five
years. The total loss estimate of $1,046,949, 1.8% of the total
underlying loan pools at December 31, 2008, increased from $779,338, 1.3% of the
total underlying loan pools at December 31, 2007. The Company reviews
its loss assumptions every quarter using updated payment and debt service
coverage information on each loan in the context of economic trends on both a
national and regional level.
Once
acquired, the Company uses a performance monitoring system to track the credit
experience of the mortgages in the pools securing both the Controlling Class and
the other below investment grade CMBS. The Company receives
remittance reports monthly from the trustees and monitors any delinquent loans
or other issues that may affect the performance of the loans. The
special servicer of a loan pool also assists in this process.
Each
trust has a designated special servicer. Special servicers are
responsible for carrying out loan loss mitigation strategies. In
addition, a special servicer will advance funds to a trust to maintain principal
and interest cash flows on the trust’s securities provided it believes there is
a significant probability of recovering those advances from the underlying
borrowers. The special servicer is paid interest on advanced funds
and a fee for its efforts in carrying out loss mitigation
strategies. For the Company’s 39 Controlling Class trusts, Midland
Loan Services, Inc. is the special servicer for 33 trusts, Capmark Finance Inc.,
is the special servicer for 2 trusts, Global Servicing Solutions Canada Corp. is
the special servicer for 1 trust, First National Bank is the servicer for 1
trust and the special servicer for the remaining 2 trusts is Lennar Partners,
Inc. Midland Loan Services, Inc. is a related party of the
Manager. See Part II, Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Transactions with the Manager
and Certain Other Parties,” for additional information on Midland Loan Services,
Inc.
The
Company’s anticipated yields on its investments are based upon a number of
assumptions that are subject to certain business and economic uncertainties and
contingencies. Examples of such contingencies include, among other
things, the timing and severity of expected credit losses, the rate and timing
of principal payments (including prepayments, repurchases, defaults,
liquidations, special servicer fees, and other related expenses), the
pass-through or coupon rate, and interest rate
fluctuations. Additional factors that may affect the Company’s
anticipated yields on its Controlling Class CMBS include interest payment
shortfalls due to delinquencies on the underlying mortgage loans, the timing and
magnitude of credit losses on the mortgage loans underlying the Controlling
Class CMBS that are a result of the general condition of the real estate market
(including competition for tenants and their related credit quality) and changes
in market rental rates. As these uncertainties and contingencies are
difficult to predict and are subject to future events which may alter these
assumptions, no assurance can be given that the Company’s anticipated yields to
maturity will be maintained.
The
weighted average loss adjusted yield for all subordinated Controlling Class
securities at December 31, 2008 was 17.99%. If the loss assumptions
prove to be consistent with actual loss experience, the Company will maintain
that level of income for the life of the security. As actual losses
differ from the original loss assumptions, yields are adjusted to reflect the
updated assumptions. In addition, a write-down of the adjusted
purchase price of the security may be required. See Part II, Item 7A,
“Quantitative and Qualitative Disclosures about Market Risk” for more
information on the sensitivity of the Company’s income and adjusted purchase
price to changes in credit experience.
Other
Below Investment Grade CMBS
The
Company does not typically purchase a BB- or lower rated security unless the
Company is involved in the new issue due diligence process and has a clear pari
passu alignment of interest with the special servicer, or can appoint the
special servicer. The Company purchases BB+ and BB rated securities
at their original issue or in the secondary market without necessarily having
influence over the workout process. BB+ and BB rated CMBS do not
absorb losses until the BB- and lower rated (including non-rated) securities
have experienced losses of their entire principal amounts. The
Company believes the subordination levels of these securities provide additional
credit protection and diversification with an attractive risk return
profile.
Securitizations
From time
to time in the past the Company issued secured term debt through its CDO
offerings. This entails creating a special purpose entity that holds
assets used to secure the payments required of the debt issued. For
those that qualify as a sale under Statement of Financial Accounting Standards
(“SFAS”) No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (“FAS
140”), the Company records the transaction as a sale and carries any retained
bonds as a component of securities held-for-trading on its consolidated
statements of financial condition. At December 31, 2008 and 2007, the
Company had retained bonds with an estimated fair value of $16,176 and $35,055,
respectively, on its consolidated statements of financial condition related to
Anthracite 2004-HY1 Ltd. (“CDO HY1”) and Anthracite 2005-HY2 Ltd. (“CDO
HY2”). The Company also purchased and owns all the preferred equity
securities and a debt security of LEAFs CMBS I Ltd, a CDO
(“Leaf”). At December 31, 2008 and 2007, the estimated fair
value of Leaf on the Company’s consolidated statements of financial condition
was $9,920 and $14,576, respectively.
Investment
Grade Commercial Real Estate Related Securities
The
Company invests in investment grade commercial real estate related securities in
the form of CMBS and unsecured debt of commercial real estate
companies. The addition of these higher rated securities is intended
to add greater stability to the long-term performance of the Company’s portfolio
as a whole and to provide greater diversification to optimize secured financing
alternatives. The Company seeks to assemble a portfolio of high
quality issues that will maintain consistent performance over the life of the
security.
CMBS
IOs
The
Company invests in CMBS IOs. These securities represent a portion of
the interest coupons paid by the underlying loans. The Company views
this portfolio as possessing attractive relative value versus other
alternatives. These securities do not have significant prepayment
risk because the underlying loans generally have prepayment restrictions for
certain periods of time. Furthermore, the credit risk is also
mitigated because the CMBS IO represents a portion of all underlying loans, not
solely the first loss.
Commercial
Real Estate Loans
The
Company’s loan activity is focused on providing mezzanine capital to the
commercial real estate industry. The Company targets real estate
operators with strong track records and business plans that are designed to
enhance the value of their real estate. These loans generally are
subordinated to a senior lender or first mortgage and are priced to reflect a
higher return. The Company has significant experience in closing
large, complex loan transactions and believes it can deliver timely and
competitive financing.
The types
of commercial real estate loans made by the Company include subordinated
participations in first mortgages, loans secured by partnership interests and
loans secured by second mortgages. The weighted average life of these
loans is generally two to three years and the loans have fixed or floating rate
coupons.
The
Company performs significant due diligence to evaluate risks and opportunities
in this sector before making investments. The Company generally
focuses on strong sponsorship, attractive real estate fundamentals, and pricing
and structural characteristics that provide significant influence over the
underlying asset.
The
Company has also conducted its activities in commercial real estate loans
through Carbon Capital, Inc. (“Carbon I”) and Carbon Capital II, Inc. (“Carbon
II”, and collectively with Carbon I, the “Carbon Funds”). The Carbon Funds are
private commercial real estate income funds managed by the Company’s
Manager. The Company believes the use of the Carbon Funds allows it
to invest in larger institutional quality assets with greater
diversification. The Company’s consolidated financial statements
include its share of the net assets and income (loss) of the Carbon
Funds. At December 31, 2008, the Company owned approximately 20% of
Carbon I as well as approximately 26% of Carbon II. The carrying
value of the Company’s investment in the Carbon Funds at December 31, 2008 was
$40,871, compared with $99,398 at December 31, 2007.
As of
December 31, 2008, the carrying value of the Company’s investment in RECP
Anthracite International JV Limited (“AHR International JV”) was
$28,199. AHR International JV invests in investments backed by
non-U.S. real estate assets and is managed by the Manager. The other
shareholder in AHR International JV, RECP IV Cite CMBS Equity, L.P. (“RECP”) is
managed by, or otherwise associated with an affiliate of Credit
Suisse. RECP holds the Company’s 12% Series E Cumulative Convertible
Redeemable Preferred Stock. Moreover, one of the Company’s directors, Andrew
Rifkin, was appointed by RECP.
In January 2009, in connection with the amendment and
extension of the Company’s credit facility with Morgan Stanley, the Company
transferred its entire interest in Anthracite International JV’s sole
investment, an investment in a non-U.S. commercial mortgage loan, to AHR Capital
MS Limited, a wholly owned subsidiary of the Company, (“AHR MS”) which then
posted the asset as additional collateral under the facility.
Commercial
Real Estate Equity
BlackRock
Diamond Property Fund, Inc. (“BlackRock Diamond”) is a REIT managed by BlackRock
Realty Advisors, Inc., a subsidiary of the Company’s Manager. The
Company invested $100,000 in BlackRock Diamond. The Company redeemed
$25,000 of its investment on June 30, 2007 and redeemed the remaining $75,000
and accumulated earnings on September 30, 2007. Over the life of this
investment, the Company recognized a cumulative profit of $34,853, an annualized
return of 20.8%.
RMBS
As of
December 31, 2008, the Company had minimal investments in residential
mortgage-backed securities (“RMBS”). The Company may in the future
invest in RMBS depending upon market conditions and its liquidity
position.
Geographic
Regions
Financial
information concerning the Company and geographic regions in which the Company
invests for each of 2008, 2007 and 2006 is set forth in “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and the
consolidated financial statements and the notes thereto, which are in Part II,
Items 7 and 8 of this Annual Report on Form 10-K.
Financing
and Leverage
The
Company has historically financed its purchases of assets with the net proceeds
of Common Stock and preferred stock issuances, long-term secured and unsecured
borrowings, short-term borrowings under reverse repurchase agreements and the
credit facilities discussed below. In the future, asset purchases may
be financed in similar ways; however, the ongoing economic downturn, among other
things, has adversely affected and may continue to adversely affect the
Company’s access to capital. See Part I, Item 1A, “Risk Factors —
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 foreseeable future.”
The
Company’s governing documents do not explicitly limit the amount of leverage
that the Company may employ. Instead, the Board of Directors has
adopted an indebtedness policy for the Company that limits its recourse debt to
equity ratio to a maximum of 3.0 to 1.0, which is generally consistent with
financial covenants in certain of the Company’s credit facilities (see
discussion of credit facilities in “Credit Facilities and Reverse Repurchase
Agreements”). The Board of Directors may change the Company’s
indebtedness policy at any time.
Credit
Facilities and Reverse Repurchase Agreements
Reverse
repurchase agreements are secured loans generally with a term of 30 to 90
days. The reverse repurchase agreements bear interest at rates that
historically have moved in close relationship to the London Interbank Offered
Rate for U.S. dollar deposits (“LIBOR”). After the initial period
expires, there is no obligation for the lender to extend credit for an
additional period. This type of financing generally is available only
for more liquid securities. The interest rate charged on reverse
repurchase agreements is usually lower compared with interest rates charged on
alternatives due to the lower risk inherent in reverse repurchase
transactions.
The
Company’s credit facilities (which include master repurchase agreements)
represent multi-year agreements to provide secured financing for a specific
asset class. (In this report, the term “credit facilities” refers to
both credit facilities and master repurchase agreements unless the context
otherwise requires.) These facilities include a mark-to-market
provision requiring the Company to repay borrowings if the value of the pledged
asset declines in excess of a threshold amount and bear interest at a variable
rate. A significant difference between committed financing facilities
and reverse repurchase agreements is the term of the financing. A
committed facility provider generally is required to provide financing for the
full term of the agreement, rather than for thirty or ninety days as is
customary in reverse repurchase transactions. This longer term makes
the financing of less liquid assets viable.
Under the
credit facilities and the reverse repurchase agreements, the respective lenders
retain the right to mark the underlying collateral to estimated fair
value. A reduction in the value of pledged assets will require the
Company to provide additional collateral or fund cash margin
calls. Recently, the Company has been required to provide such
additional collateral or fund margin calls. The Company received and
funded margin calls and amortization payments totaling $216,969 and $82,570 in
2008 and 2007, respectively. Since January 1, 2009, the Company has
further reduced mark-to-market debt by funding $17,056 in margin calls and
amortization payments.
The below
chart provides information with respect to borrowings under the Company’s credit
facilities at December 31, 2008 by the asset class securing such
borrowings:
|
|
Credit Facilities
|
|
Commercial
Real Estate Securities
|
|
|
|
Outstanding
borrowings
|
|
$ |
278,123 |
|
Weighted
average borrowing rate
|
|
|
5.2 |
% |
Weighted
average remaining maturity
|
|
1.2
years
|
|
Estimated
fair value of assets pledged
|
|
$ |
149,858 |
|
|
|
|
|
|
Commercial
Real Estate Loans
|
|
|
|
|
Outstanding
borrowings
|
|
$ |
167,625 |
|
Weighted
average borrowing rate
|
|
|
4.8 |
% |
Weighted
average remaining maturity
|
|
1.3
years
|
|
Estimated
fair value of assets pledged
|
|
$ |
210,328 |
|
|
|
|
|
|
Carbon
II
|
|
|
|
|
Outstanding
borrowings
|
|
$ |
30,000 |
|
Weighted
average borrowing rate
|
|
|
5.8 |
% |
Weighted
average remaining maturity
|
|
1.2
years
|
|
Estimated
fair value of asset pledged
|
|
$ |
65,594 |
|
|
|
|
|
|
Commercial
Mortgage Loan Pools
|
|
|
|
|
Outstanding
borrowings(1)
|
|
$ |
4,584 |
|
Weighted
average borrowing rate
|
|
|
4.7 |
% |
Weighted
average remaining maturity
|
|
1.7
years
|
|
Estimated
fair value of assets pledged
|
|
$ |
9,958 |
|
(1) Included in borrowings
secured by commercial mortgage loan pools on the consolidated statements of
financial condition.
The below
chart provides information with respect to borrowings under the Company’s credit
facilities at December 31, 2007 by the asset class securing such
borrowings:
|
|
Credit Facilities
|
|
|
Reverse
Repurchase
Agreements
|
|
Commercial
Real Estate Securities
|
|
|
|
|
|
|
Outstanding
borrowings
|
|
$ |
405,568 |
|
|
$ |
71,161 |
|
Weighted
average borrowing rate
|
|
|
5.6 |
% |
|
|
5.5 |
% |
Weighted
average remaining maturity
|
|
1.
1 years
|
|
|
7
days
|
|
Estimated
fair value of assets pledged
|
|
$ |
590,031 |
|
|
$ |
83,990 |
|
|
|
|
|
|
|
|
|
|
Commercial
Real Estate Loans
|
|
|
|
|
|
|
|
|
Outstanding
borrowings
|
|
$ |
259,905 |
|
|
|
- |
|
Weighted
average borrowing rate
|
|
|
5.8 |
% |
|
|
- |
|
Weighted
average remaining maturity
|
|
233 days
|
|
|
|
- |
|
Estimated
fair value of assets pledged
|
|
$ |
368,762 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Agency
Residential Mortgage-Backed Securities
|
|
|
|
|
|
|
|
|
Outstanding
borrowings
|
|
|
- |
|
|
$ |
8,958 |
|
Weighted
average borrowing rate
|
|
|
- |
|
|
|
5.2 |
% |
Weighted
average remaining maturity
|
|
|
- |
|
|
10
days
|
|
Estimated
fair value of assets pledged
|
|
|
- |
|
|
$ |
9,126 |
|
|
|
|
|
|
|
|
|
|
Commercial
Mortgage Loan Pools
|
|
|
|
|
|
|
|
|
Outstanding
borrowings(1)
|
|
$ |
6,128 |
|
|
|
- |
|
Weighted
average borrowing rate
|
|
|
5.9 |
% |
|
|
- |
|
Weighted
average remaining maturity
|
|
1.7
years
|
|
|
|
- |
|
Estimated
fair value of assets pledged
|
|
$ |
10,346 |
|
|
|
- |
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( 1) Included in borrowings
secured by commercial mortgage loan pools on the consolidated statements of
financial condition.
CDOs
The
Company has historically financed the majority of its commercial real estate
assets with match funded, secured term debt through CDO offerings. To
accomplish this, the Company forms special purpose entities (each an “SPE”) and
contributes a portfolio consisting of below investment grade CMBS, investment
grade CMBS, unsecured debt of commercial real estate companies and commercial
real estate loans in exchange for the preferred equity interest in the
SPE. With the exceptions of CDO HY1 and CDO HY2, these transactions
are financings and the SPEs are fully consolidated on the Company’s consolidated
financial statements. The SPE then will issue fixed and floating rate
debt secured by the cash flows of the securities in its
portfolio. The SPE will enter into an interest rate swap agreement to
convert the floating rate debt issued to a fixed interest rate, thus matching
the cash flow profile of the underlying portfolio. For the CDO not
denominated in U.S. dollars, the SPE will also enter into currency swap
agreements to minimize any currency exposure. The debt issued by the
SPE generally is rated AAA down to BB. Due to its preferred equity
interest, the Company continues to manage the credit risk of the underlying
portfolio as it did prior to the assets being contributed to the
CDO.
CDO debt
is the Company’s preferred capital structure to maximize returns on these types
of portfolios on a non-recourse basis. There is no mark-to-market
requirement in this structure and the debt cannot be called or terminated by the
bondholders. Furthermore, since the debt issued is non-recourse to
the issuer, permanent reductions in asset value do not affect the liquidity of
the Company. However, since the Company expects to earn a positive
spread between the income generated by the assets and the expense of the debt
issued, a permanent impairment of any of the assets would negatively affect the
spread over time.
The terms
of five of the seven CDOs issued by the Company include coverage tests,
including over-collateralization tests, used primarily to determine whether and
to what extent principal and interest proceeds on the underlying collateral debt
securities and other assets may be used to pay principal of and interest on the
subordinate classes of bonds in the applicable CDO. In the event the coverage
tests are not satisfied, interest and principal that would otherwise be payable
on the subordinate classes may be re-directed to pay principal on the senior
bond classes. Therefore, failure to satisfy the coverage tests could adversely
affect cash flows received by the Company from the CDOs and thereby the
Company’s liquidity and operating results.
In the
first quarter of 2009, Euro CDO failed to satisfy its Class E
overcollateralization and interest reinvestment test. As results of
Euro CDO’s failure to satisfy these tests, half of each interest payment due to
its preferred shareholder will remain in the CDO as reinvestable cash until the
test is cured. However, since the Euro CDO’s preferred shares were
pledged to one of the Company’s secured lenders in December 2008, the cash flow
was already being diverted to pay down that lender’s outstanding
balance. As of December 31, 2008, the Company’s other applicable CDOs
met all coverage tests.
At
December 31, 2008, outstanding borrowings under the Company’s CDOs had an
adjusted purchase price of $1,743,160 with a weighted average borrowing rate of
6.8% and a weighted average maturity of 4.6 years. Estimated fair value of
assets pledged was $1,046,584 consisting of 72.7% of commercial real estate
securities and 27.3% of commercial real estate loans.
At
December 31, 2007, outstanding borrowings under the Company’s CDOs had an
adjusted purchase price of $1,823,328 with a weighted average borrowing rate of
6.1% and a weighted average maturity of 4.8 years. Estimated fair value of
assets pledged was $2,014,047, consisting of 86.1% of commercial real estate
securities and 13.9% of commercial real estate loans.
Unsecured
Recourse Borrowings
The
Company may issue senior unsecured notes, including senior unsecured notes
convertible into Common Stock, and unsecured junior subordinated notes,
including unsecured junior subordinated notes issued in connection with trust
preferred securities, from time to time as a source of unsecured long-term
capital. The Company’s outstanding unsecured notes bear interest at
fixed or floating rates and can be redeemed in whole or, with respect to certain
notes, in part at the option of the Company on specified dates at specified
prices. The outstanding senior convertible notes of the Company have
a fixed coupon and are convertible into Common Stock under certain
conditions.
Preferred
and Common Stock Issuances
The
Company may issue preferred stock from time to time as a source of long-term or
permanent capital. Preferred stock generally has a fixed coupon and
may have a fixed term in the form of a maturity date or other redemption or
conversion features. The preferred stockholder typically has the
right to a preferential distribution for dividends and any liquidation
proceeds.
Another
source of permanent capital is the issuance of Common Stock through a follow-on
offering. In some cases, investors may purchase a large block of
Common Stock in one transaction. A Common Stock issuance can be
accretive to the Company’s book value per share if the issue price per share
exceeds the Company’s book value per share. It also can be accretive
to earnings per share if the Company deploys the new capital into assets that
generate a risk adjusted return that exceeds the return of the Company’s
existing assets. Furthermore, earnings accretion also can be achieved
at reinvestment rates that are lower than the return on existing assets if
Common Stock is issued at a premium to book value.
Hedging
Activities
The
Company enters into hedging transactions to protect its investment portfolio and
related borrowings from interest rate fluctuations, foreign exchange rate and
other changes in market conditions. From time to time, the Company
may modify its exposure to market interest rates by entering into various
financial instruments that adjust portfolio duration, as well as short-term and
foreign exchange rate exposure. These financial instruments are
intended to mitigate the effect of changes in interest and foreign exchange
rates on the value of the Company’s assets and the cost of
borrowing. These transactions may include interest rate swaps,
currency forwards and swaps, the purchase or sale of interest rate collars, caps
or floors, options, and other hedging instruments. These instruments
may be used to hedge as much of the interest rate risk as the Manager determines
is in the best interest of the Company’s stockholders, given the cost of such
hedges. The Manager may elect to have the Company bear a level of
interest rate risk that could otherwise be hedged when the Manager believes,
based on all relevant facts, that bearing such risk is advisable. The Manager
has extensive experience in hedging interest rate risks with these types of
instruments.
Hedging
instruments often are not traded on regulated exchanges, guaranteed by an
exchange or its clearinghouse, or regulated by any U.S. or foreign governmental
authorities. The Company will enter into these transactions only with
counterparties with long-term debt rated A or better by at least one credit
rating agency. The business failure of a counterparty with which the
Company has entered into a hedging transaction most likely will result in a
default, which may result in the loss of unrealized profits. Although
the Company generally will seek to reserve for itself the right to terminate its
hedging positions, it may not always be possible to dispose of or close out a
hedging position without the consent of the counterparty, and the Company may
not be able to enter into an offsetting contract in order to cover its
risk. There can be no assurance that a liquid secondary market will
exist for hedging instruments purchased or sold, and the Company may be required
to maintain a position until exercise or expiration, which could result in
losses.
The Company’s hedging activities are
intended to address both income and capital preservation. Income
preservation refers to maintaining a stable spread between yields from mortgage
assets and the Company’s borrowing costs across a reasonable range of adverse
interest rate environments. Capital preservation refers to
maintaining a relatively steady level in the estimated fair value of the
Company’s capital across a reasonable range of adverse interest and foreign
exchange rate scenarios. However, no strategy can insulate the
Company completely from changes in interest and foreign exchange
rates.
Regulation
The
Company intends to continue to conduct its business so as not to become
regulated as an investment company under the Investment Company
Act. Under the Investment Company Act, a non-exempt entity that is an
investment company is required to register with the Securities and Exchange
Commission (the “SEC”) and is subject to extensive, restrictive and potentially
adverse regulation relating to, among other things, operating methods,
management, capital structure, dividends and transactions with related
parties. The Investment Company Act exempts entities that are
“primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate” (“Qualifying
Interests”). Under current interpretation by the staff of the SEC, to qualify
for this exemption, the Company, among other things, must maintain at least 55%
of its assets in Qualifying Interests.
A portion
of the CMBS acquired by the Company are collateralized by pools of first
mortgage loans where the terms of the CMBS owned by the Company provide the
right to monitor the performance of the underlying mortgage loans through loan
management and servicing rights and the right to control workout/foreclosure
rights in the event of default on the underlying mortgage loans. When
such rights exist, the Company believes that the related Controlling Class CMBS
constitute Qualifying Interests for purposes of the Investment Company
Act. Therefore, the Company believes that it should not be required
to register as an “investment company” under the Investment Company Act as long
as it continues to invest in a sufficient amount of such Controlling Class CMBS
and/or in other Qualifying Interests.
If the
SEC or its staff were to take a different position with respect to whether the
Company’s Controlling Class CMBS constitute Qualifying Interests, the Company
could be required to modify its business plan so that either (i) it would not be
required to register as an investment company or (ii) it would register as an
investment company under the Investment Company Act. Modification of
the Company’s business plan so that it would not be required to register as an
investment company might entail a disposition of a significant portion of the
Company’s Controlling Class CMBS or the acquisition of significant additional
assets, such as agency pass-through and other mortgage-backed securities, which
are Qualifying Interests. Modification of the Company’s business plan
to register as an investment company could result in increased operating
expenses and could entail reducing the Company’s indebtedness, which also could
require the Company to sell a significant portion of its assets. No
assurances can be given that any such dispositions or acquisitions of assets, or
de-leveraging, could be accomplished on favorable
terms. Consequently, any such modification of the Company’s business
plan could have a material adverse effect on the Company. Further, if
it were established that the Company were operating as an unregistered
investment company, there would be a risk that the Company would be subject to
monetary penalties and injunctive relief in an action brought by the SEC, that
the Company would be unable to enforce contracts with third parties, and that
third parties could seek to obtain rescission of transactions undertaken during
the period it was established that the Company was an unregistered investment
company. Any such result would likely have a material adverse effect
on the Company.
Competition
The
Company’s net income depends, in large part, on the Company’s ability to acquire
commercial real estate assets at favorable spreads over the Company’s borrowing
costs. In acquiring commercial real estate assets, the Company
competes with other mortgage REITs, specialty finance companies, savings and
loan associations, banks, mortgage bankers, insurance companies, mutual funds,
institutional investors, investment banking firms, other lenders, governmental
bodies and other entities. In addition, there are numerous mortgage
REITs with asset acquisition objectives similar to the Company’s, and others may
be organized in the future. The effect of the existence of additional REITs may
be to increase competition for the available supply of commercial real estate
assets suitable for purchase by the Company. Some of the Company’s
competitors are significantly larger than the Company, have access to greater
capital and other resources and may have other advantages over the
Company. In addition to existing companies, other companies may be
organized for purposes similar to that of the Company, including companies
organized as REITs focused on purchasing commercial real estate
assets. A proliferation of such companies may increase the
competition for equity capital and thereby adversely affect the market price of
the Common Stock.
Employees
The
Company does not have any employees. The Company’s officers, each of
whom is a full-time employee of the Manager or its affiliates, perform the
duties required pursuant to the Management Agreement (as defined below) with the
Manager and the Company’s bylaws.
The
Manager
The
Company is managed by the Manager, a subsidiary of BlackRock, Inc., a publicly
traded asset management company with more than $1.30 trillion of assets under
management at December 31, 2008. The Manager provides an operating
platform that incorporates significant asset origination, risk management, and
operational capabilities.
The
Company has entered into the Management Agreement, an administration services
agreement and an accounting services agreement with the Manager, 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.
The
Manager primarily engages in four investment activities in its capacity as
Manager on behalf of the Company:
|
i) acquiring
and originating commercial real estate loans and other real estate related
assets;
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ii) asset/liability
and risk management, hedging of floating rate liabilities, and financing,
management and disposition of assets, including credit and prepayment risk
management;
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iii)
surveillance and restructuring of real estate loans;
and
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iv) capital
management, structuring, analysis, capital raising, and investor relations
activities. At all times, the Manager and the Company’s
officers are subject to the direction and oversight of the Company’s Board
of Directors.
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The
Management Agreement
Pursuant
to the Management Agreement and these other agreements, the Manager and the
Company’s officers (i) formulate investment strategies, (ii) arrange for the
acquisition of assets, (iii) arrange for financing, (iv) monitor the performance
of the Company’s assets and provide certain other advisory, (v) administrative
and (iv) managerial services in connection with the operations of the
Company.
Base
Fee
The
Manager is entitled to receive a base management fee equal to:
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·
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0.375% for the first $400
million in average total stockholders’
equity;
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·
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0.3125%
for the next $400 million of average total stockholders’ equity;
and
|
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·
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0.25%
for the average total stockholders’ equity in excess of $800 million for
the applicable quarter.
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Incentive
Fee
The
Manager is entitled to receive a quarterly incentive fee equal to:
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·
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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
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·
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realized
gains, net foreign currency gains and decreases in expense associated with
reversals of credit impairments on commercial mortgage loans;
less
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·
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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 Common Stock ($10.55 per common share
at December 31, 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 Common Stock outstanding during
the applicable quarterly period.
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The
Management Agreement provides that the incentive fee payable to the Manager will
be subject to a rolling four-quarter high watermark.
Payment
of Management Fees
On March
11, 2009, the Company’s unaffiliated directors approved the First Amendment and
Extension to the Amended and Restated Investment Advisory Agreement, dated as of
March 31, 2008, between the Company and the Manager (as amended, the “2008
Management Agreement”), and the parties entered into the First Amendment and
Extension as of such date.
For the
full one-year term of the renewed contract, the Manager has agreed to receive
all management fees and any incentive fees in Common Stock subject to (i) the
Common Stock continuing to be listed on the NYSE and (ii)
if stockholder approval is required for any issuance of the Common Stock, such
required stockholder approval has been obtained. If the Common Stock is
at any time not listed on the NYSE or if
stockholder approval is required for any issuance of the Common Stock and such
required stockholder approval has not been obtained, such fees will be
payable in cash. The Company’s unaffiliated directors and the Manager
may also mutually agree to defer the payment of any management fee and incentive
fee, in whole or in part. Such deferred fees will be payable in cash
unless the Company’s unaffiliated directors and the Manager mutually agree
otherwise.
The
Common Stock issued and to be issued to the Manager has not been registered
under the Securities Act of 1933, as amended (the “Securities Act”), and may not
be sold by the Manager except pursuant to an effective registration statement or
an exemption from registration. For example, the Manager may sell
such shares pursuant to Rule 144 under the Securities Act subject to compliance
with the terms of such rule, including the six-month holding
period.
Termination
of Management Agreement
The
Company may terminate, or decline to renew the term of, the Management Agreement
without cause at any time upon 60 days’ written notice by a majority vote of the
unaffiliated directors. Although no termination fee is payable in
connection with a termination for cause, in connection with a termination
without cause, the Company must pay the Manager a termination fee and other
payments, which could be substantial. The amount of the termination
fee will be determined by independent appraisal of the value of the Management
Agreement. Such appraisal is to be conducted by a
nationally-recognized appraisal firm mutually agreed upon by the Company and the
Manager. The other agreements the Company has with the Manager also
may be terminated by the Company; in the case of the administration agreement,
at any time upon 60 days’ written notice, and in the case of the accounting
services agreement, following the 24 month anniversary thereof, on 60 days’
written notice prior to the 12 month anniversary thereof, or upon 60 days’
written notice following the termination of the Management
Agreement.
In
addition, the Company has the right at any time during the term of the
Management Agreement to terminate the Management Agreement without the payment
of any termination fee upon, among other things, a material breach by the
Manager of any provision contained in the Management Agreement that remains
uncured at the end of the applicable cure period.
Taxation
of the Company
The
Company has adopted compliance guidelines, including restrictions on acquiring,
holding, and selling assets, to help ensure that the Company meets the
requirements for qualification as a REIT under the United States Internal
Revenue Code of 1986, as amended (the “Code”), and is excluded from regulation
as an investment company under the Investment Company Act of 1940, as amended
(the “Investment Company Act”). Before acquiring any asset, the
Manager determines whether such asset would constitute a “Real Estate Asset”
under the REIT provisions of the Code. The Company regularly monitors
purchases of commercial real estate assets and the income generated from such
assets, including income from its hedging activities, in an effort to ensure
that at all times the Company’s assets and income meet the requirements for
qualification as a REIT and exclusion under the Investment Company
Act.
In order
to maintain the Company’s REIT status, the Company generally intends to
distribute to its stockholders aggregate dividends equaling at least 90% of its
taxable income each year. The Code permits the Company to fulfill
this distribution requirement by the end of the year following the year in which
the taxable income was earned.
Due to
current market conditions and the Company’s current liquidity position, the
Company’s Board of Directors anticipates that the Company will pay cash
dividends on its stock only to the extent necessary to maintain its REIT status
until the Company’s liquidity position has improved and market values of
commercial real estate debt show signs of stability. The Board of
Directors did not declare a dividend on the Common Stock for the fourth quarter
of 2008 since the Company’s 2008 net taxable income distribution requirements
were satisfied by distributions made for the first three quarters of
2008. The Board of Directors also did not declare a dividend on the
Common Stock and the Company’s preferred stock for the first quarter of
2009. To the extent the Company is required to make distributions to
maintain its qualification as a REIT in 2009, the Company anticipates it will
rely upon temporary guidance that was recently issued by the IRS, which allows
certain publicly traded REITs to satisfy their net taxable income distribution
requirements by distributing up in 90% stock, with the remainder distributed in
cash. Furthermore, the terms of the Company’s preferred stock
prohibit the Company from declaring or paying cash dividends on the Common Stock
unless full cumulative dividends have been declared and paid on the preferred
stock.
The
Company and its stockholders may be subject to foreign, state, and local
taxation in various foreign, state and local jurisdictions, including those in
which it or they transact business or reside. The state and local tax
treatment of the Company and its stockholders may not conform to the Company’s
federal income tax treatment.
Available
Information
The
Company’s website address is www.anthracitecapital.com. The Company
makes available free of charge through its website its Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all
amendments to those reports and other filings as soon as reasonably practicable
after such material is electronically filed with or furnished to the SEC, and
also makes available on its website the charters for the Audit, Compensation,
and Nominating and Corporate Governance Committees of the Board of Directors and
its Codes of Business Conduct and Ethics, as well as its corporate governance
guidelines. Copies in print of these documents are available upon
request to the Secretary of the Company at the address indicated on the cover of
this report.
The
Company intends to post on its website any amendment to, or waiver of, a
provision of its Code of Business Conduct and Ethics that applies to its Chief
Executive Officer, Chief Financial Officer and Controller or persons performing
similar functions and that relates to any element of the code of ethics
definition set forth in Item 406 of Regulation S-K of the Securities Act of
1933, as amended.
To
communicate with the Board of Directors electronically, the Company has
established an e-mail address, [email protected], to which
stockholders may send correspondence to the Board of Directors or any such
individual directors or group or committee of directors.
The
Company has included as exhibits to this report the Sarbanes-Oxley Act Section
302 certifications of the Chief Executive Officer and Chief Financial Officer of
the Company regarding the quality of the Company’s public
disclosure. The Company has submitted to the NYSE a certification of
the Chief Executive Officer of the Company certifying that he was not aware of
any violation by the Company of NYSE corporate governance listing standards as
of the date of that certification (May 28, 2008).
ITEM
1A. RISK
FACTORS
Risks
The
Company’s business is subject to many risks. In addition to the other
information in this document, you should consider carefully the following risk
factors. Additional risk factors may impair the Company’s business, financial
condition or results of operations.
Risks
related to the Company’s business
The
Company's independent registered public accounting firm has issued an opinion on
the Company's consolidated financial statements that states that as a result of
its liquidity position, current market conditions and the uncertainty relating
to the outcome of its ongoing negotiations with its lenders substantial doubt
has been raised about the Company’s ability to continue as a going
concern.
The
Company's independent registered public accounting firm has issued an opinion on
the Company's consolidated financial statements that states that the
consolidated financial statements have been prepared assuming the Company will
continue as a going concern and further states that as a result of its liquidity
position, current market conditions and the uncertainty relating to the outcome
of the Company’s ongoing negotiations with its lenders these matters have raised
substantial doubt about the Company’s ability to continue as a going
concern. The NYSE may consider delisting a company if the company
receives an opinion from its independent registered public accounting firm that
contains a going concern emphasis.
The
Company currently has no committed sources of capital and does not know whether
additional financing will be available when needed on terms that are acceptable.
The addition of this going concern language may make capital raising activity
more difficult. The failure of the Company to satisfy its capital requirements
will adversely affect its business, financial condition, results of operations
and prospects. Unless the Company raises additional funds, the
Company will not have sufficient funds to continue operations. Even
if the Company raises more capital, such actions may be insufficient to allow
the Company to continue as a going concern.
If
the Company were to breach a financial covenant or fail to satisfy a margin call
under any of its secured credit facilities and were not able to obtain a waiver
from the applicable lenders, it would be unable to continue as a going
concern.
The
Company's secured credit facilities contain various financial covenants that if
breached could, after the applicable grace periods, result in the
acceleration of all the debt under these facilities. If the Company
were unable to obtain waivers of these breaches from its secured lenders, these
breaches would constitute events of default under their respective
facility. Furthermore, the Company's credit facilities allow the
lender, to varying degrees, to revalue the collateral to values that the lender
considers to reflect market value. If a 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. If the
Company were unable to satisfy a margin call within the timeframes required by
the applicable lender or obtain a waiver from the lender, it would be in default
under such facility.
Financial
covenants in the Company’s secured credit facilities include, without
limitation, a covenant that the Company’s net income will not be less than $1.00
for any period of two consecutive quarters and covenants that on any date the
Company’s tangible net worth will not have decreased by twenty percent or more
from the Company’s tangible net worth as of the last business day in the third
month preceding such date. The Company’s significant net loss for the three
months ended December 31, 2008 resulted in the Company not being in compliance
with these covenants. On March 17, 2009, the secured credit facility lenders
waived this covenant breach until April 1, 2009. In addition, the Company’s
secured credit facility with Holdco 2 requires the Company to immediately repay
outstanding borrowings under the facility to the extent outstanding borrowings
exceed 60% of the fair market value (as determined by the Company’s manager) of
the shares of common stock of Carbon Capital II, Inc. Carbon II securing such
facility. As of February 28, 2009, 60% of the fair market value of such shares
declined to approximately $24,840 and outstanding borrowings under the facility
were $33,450. On March 17, 2009, Holdco 2 waived this breach until April 1,
2009.
During
the first quarter of 2009, the Company received a margin call of $46,300 and
C$5,300 from one of its secured credit facility lenders. As part of the
Company’s ongoing negotiation with this lender and the other secured credit
facility lenders, the Company has been negotiating to have the margin call
waived in consideration of certain agreements to be made by the Company. On
March 17, 2009, the lender waived this event of default until April 1,
2009.
The
Company continues to negotiate with its secured credit facility lenders to
obtain permanent waivers or extensions of waivers of the aforementioned events
of default and covenant breaches and to obtain amendments of the facility
documents in order to position the Company to have sufficient liquidity to fund
operations or continue its business. Such amendments may include forbearance of
lenders’ rights to make margin calls and elimination or waiver of certain
financial covenants. There, however, can be no assurance that the Company will
successfully reach agreement with its lenders on such waivers and amendments. If
the Company were unable to obtain permanent waivers or extensions of the waivers
from its secured credit facility lenders on or before April 1, 2009, an event of
default will immediately or with the passage of time occur under the applicable
respective facility.
An event
of default under any of the Company’s facilities, absent a waiver, would trigger
cross-default and cross-acceleration provisions in all of the Company’s other
facilities and, if such debt were accelerated, would trigger a
cross-acceleration provision in one of the Company’s indentures. In such an
event, the Company would be required to repay all outstanding indebtedness under
its secured credit facilities and the one indenture immediately. The Company
would not have sufficient liquid assets available to repay such indebtedness
and, unless the Company were able to obtain additional capital resources or
waivers, the Company would be unable to continue to fund its operations or
continue its business.
If
the Company is unable to obtain additional sources of financing, the Company may
not be able to continue to fund its business.
Amendments
to the terms of the Company’s credit facilities with Bank of America, Deutsche
Bank and Morgan Stanley in 2008 prohibit the Company from making new borrowings
under these credit facilities. In addition, in connection with recent
extensions of these facilities, the Company posted additional assets as
collateral under certain of these facilities and agreed that all cash flows from
collateral under such facilities will be used to make amortization or other
payments to such facilities’ lenders until the amounts owed under such
facilities have been repaid. The Company’s principal uses of
liquidity are for interest and principal payments on debt, dividend payments to
holders of shares of Common Stock and its preferred stock, funding of margin
calls, operating expenses and investments in real estate securities and
loans.
In order
to continue to meet its liquidity needs, the Company likely will be required to
obtain additional sources of financing. Additional sources of
financing may be more expensive, contain more onerous terms or simply may not be
available. If the Company fails to obtain additional sources of
financing, it may not be able to continue to fund its operations or continue its
business.
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 foreseeable future.
The
capital and credit markets have been experiencing extreme volatility and
disruption for more than a year. In recent months, the volatility and disruption
have reached unprecedented levels. In response to the financial crises, there
have been numerous regulatory and governmental actions to address the current
recessionary economic conditions and adverse developments in the credit markets.
In early 2009, the American Recovery and Reinvestment Act of 2009 was enacted to
provide further stimulus to institutions that have received or will receive
financial assistance under Troubled Assets Relief Program. 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 if or when
conditions will improve in the foreseeable future or the extent to which such
government actions will affect the Company. If the actions assist the
Company’s competitors and not itself, its business would be adversely
affected.
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 also could impair the performance of the Company’s investments
and harm its financial condition, decrease its cash flows, 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.
Adverse
changes in general economic conditions can adversely affect the Company’s
business.
The
Company’s financial condition, results of operation and business have been
adversely affected by the general unprecedented global financial crisis and
economic downturn. Disruptions in the housing and credit markets led
to a rapid deterioration in the financial markets and a general economic
downturn that have resulted in an increased number of delinquent, defaulting and
non-performing loans in the Company’s portfolio. The Company’s loan loss reserve
for the year ended December 31, 2008 was $165,928. The problems in
the financial markets and the economy have also led to a general decline in the
value of many of the commercial real estate assets in the Company’s portfolio,
even for those assets not affected by increased rates of delinquency or
probabilities of default. As a result, the Company has incurred and
may continue to incur significant losses. The Company cannot predict
how long the economic downturn will last or the effect it will have on its
business, results of operations or financial condition. Furthermore,
adverse changes in national economic conditions or in the economic conditions of
the regions in which it conducts substantial business likely would have an
adverse effect on real estate values and, accordingly, the Company’s financial
performance, the market prices of its securities and its ability to pay
dividends.
In a
recession or under other adverse economic conditions, non-earning assets and
write-downs are likely to increase as debtors fail to meet their payment
obligations. Although the Company maintains reserves for loan losses in amounts
that it believe are sufficient to provide adequate protection against potential
write-downs in its portfolio, these amounts could prove to be
insufficient.
The
Company’s ability to pay dividends depends on its ability to obtain external
financing. If the Company is not able to obtain additional financing,
it may not be able to pay dividends.
To
qualify for taxation as a REIT, the Company, among other requirements, must
distribute annually to its stockholders at least 90% of its REIT taxable income,
including taxable income that is accrued by the Company without a corresponding
receipt of cash, which thereby limits the amounts of capital it can retain.
Pursuant to temporary guidance that was recently issued by the IRS, with respect
to taxable years ending on or before December 31, 2009, up to 90% of the
Company’s REIT distribution requirement may be satisfied by distributing stock
of the Company, with the remainder distributed in cash, provided that certain
requirements are satisfied (including, that the Company’s stock continues to be
publicly traded on an established securities market in the United States). The Company historically
has obtained the cash required for its operations through, among other
things, the issuance of equity, senior debt (including convertible debt)
and subordinated debt, and by borrowing money through credit facilities,
securitization transactions and repurchase agreements. The Company’s continued
access to these and other types of external capital depends upon a number of
factors, including general market conditions, the market’s perception of its
growth potential, its current and potential future earnings, cash distributions,
and the market price of its Common Stock. Global recessionary
economic conditions and adverse developments in the credit markets have
substantially reduced or eliminated the availability of financing for the
commercial real estate sector in which the Company operates. Currently,
the Company is ineligible to use a "short-form" registration statement and,
while it is ineligible, the Company’s ability to raise capital may be more
difficult, more expensive and subject to delays. Furthermore,
the terms of the Company’s preferred stock prohibit the Company from declaring
or paying cash dividends on the Common Stock unless full cumulative dividends
have been declared and paid on the preferred stock. The Company
cannot assure investors that sufficient funding or capital will be available to
it in the future on terms that are acceptable to the Company. If the Company
cannot obtain sufficient funding on acceptable terms, there may be a negative
impact on the market price of its Common Stock and its ability to pay dividends
to its stockholders.
Leveraging
the Company’s investments may increase the Company’s exposure to
loss.
The
Company leverages its investments and thereby increases the volatility of its
operating results and net asset value that may result in operating or capital
losses. If borrowing costs increase, or if the cash flow generated by the
Company’s assets decreases, the Company’s use of leverage will increase the
likelihood that the Company will experience reduced or negative cash flow and
reduced liquidity.
Many
of the Company’s investments are illiquid and therefore are difficult for the
Company to value or to sell in a short period of time without experiencing
significant losses.
Many of
the Company’s investments are illiquid. The illiquidity of such investments may
result from the decline in the actual or perceived value of properties or assets
securing these investments, the absence of a market for these investments, or
legal or contractual restrictions on the resale of 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.
Furthermore,
the ongoing dislocation in the trading markets may make it extremely difficult
for the Company to sell many of its assets on terms that are acceptable to the
Company or at all. If the Company is required to liquidate all or a portion of
its illiquid investments in a short period of time, it may realize significant
losses or may be unable 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.
The
Company’s use of repurchase agreements to finance its investments may give its
lenders greater rights in the event that either it or a lender files for
bankruptcy.
The
Company’s U.S. dollar facility with Bank of America and multicurrency facility
with Deutsche Bank are in the form of repurchase agreements. The
Company’s borrowings under repurchase agreements may qualify for special
treatment under the U.S. Bankruptcy Code, giving its lenders the ability to
avoid the automatic stay provisions of the U.S. Bankruptcy Code and to take
possession of and liquidate the assets that the Company has pledged under its
repurchase agreements without delay in the event that the Company file for
bankruptcy. Furthermore, the special treatment of repurchase agreements under
the U.S. Bankruptcy Code may make it difficult for the Company to recover its
pledged assets in the event that a lender party to such agreement files for
bankruptcy. Therefore, the Company’s use of repurchase agreements to finance its
investments exposes its pledged assets to risk in the event of a bankruptcy
filing by either a lender or the Company.
Interest
rate fluctuations will affect the value of the Company’s commercial real estate
assets and may adversely affect the Company’s net income and the price of its
Common Stock.
Interest
rates are highly sensitive to many factors, including governmental monetary and
tax policies, domestic and international economic and political considerations
and other factors. Interest rate fluctuations can adversely affect the income
and value of the Common Stock in many ways and present a variety of risks,
including the risk of a mismatch between asset yields and borrowing rates,
variances in the yield curve, changes in prepayment rates and margin
calls.
The
Company seeks to generate income from the spread between the interest income,
gains and net operating income (net of credit losses) on its commercial real
estate assets and the interest expense from borrowings to finance its
investments. The Company funds a substantial portion of its assets
with borrowings that have interest rates that reset relatively rapidly, such as
monthly or quarterly. The Company anticipates that, in most cases, the income
from its floating-rate assets will respond more slowly to interest rate
fluctuations than the cost of borrowings, creating a potential mismatch between
asset yields and borrowing rates. Consequently, changes in interest rates,
particularly short-term interest rates, may influence the Company’s net income.
Increases in these rates tend to decrease the Company’s net income and estimated
fair value of the Company’s net assets. Interest rate fluctuations that result
in the Company’s interest expense exceeding interest income would result in the
Company incurring operating losses.
The
Company also invests in fixed-rate mortgage-backed securities. In a period of
rising interest rates, the Company’s interest payment obligations could increase
while the interest the Company earns on its fixed-rate mortgage-backed
securities would not change. This would adversely affect the Company’s
profitability and liquidity.
The
relationship between short-term and long-term interest rates often is referred
to as the “yield curve.” Ordinarily, short-term interest rates are lower than
long-term interest rates. If short-term interest rates rise disproportionately
relative to long-term interest rates (a flattening of the yield curve), the
Company’s borrowing costs may increase more rapidly than the interest income
earned on the Company’s assets. Because the Company’s borrowings primarily will
bear interest at short-term rates and the Company’s assets primarily will bear
interest at medium-term to long-term rates, a flattening of the yield curve
tends to decrease the Company’s net income and estimated fair value of the
Company’s net assets. Additionally, to the extent cash flows from long-term
assets that return scheduled and unscheduled principal are reinvested, the
spread between the yields of the new assets and available borrowing rates may
decline and also may tend to decrease the net income and estimated fair value of
the Company’s net assets. It is also possible that short-term interest rates may
adjust relative to long-term interest rates such that the level of short-term
rates exceeds the level of long-term rates (a yield curve inversion). In this
case, the Company’s borrowing costs may exceed the Company’s interest income and
operating losses could be incurred.
A portion
of the Company’s commercial real estate assets are financed under reverse
repurchase agreements and committed borrowing facilities which are subject to
mark-to-market risk. Such secured financing arrangements provide for an advance
rate based upon a percentage of the estimated fair value of the asset being
financed. Market movements that cause asset values to decline could require a
margin call or a cash payment to maintain the relationship between asset value
and amount borrowed.
The
Company’s investments may be subject to impairment charges.
The
Company periodically evaluates its investments for impairment indicators. The
judgment regarding the existence of impairment indicators is based on a variety
of factors depending on the nature of the investment and the manner in which the
income related to such investment is calculated for purposes of the Company’s
financial statements. If the Company determines that an impairment has occurred,
the Company would be required to record an impairment expense and make an
adjustment to the net carrying value of the investment, which could materially
adversely affect the Company’s results of operations in the applicable
period.
All
of the Company’s securities held-for-trading and certain long-term liabilities
are 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 financial
instruments.
Most of
the Company’s securities held-for-trading are not actively traded. The fair
value of these securities and long-term liabilities that are not actively traded
may not be readily determinable. The Company values these financial instruments
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 assets and liabilities may differ materially from the values that the
Company ultimately realizes upon their disposal.
The
Company’s assets include subordinated CMBS and similar investments which are
subordinate in right of payment to more senior securities.
The
Company’s assets include a significant amount of subordinated CMBS, which are
the most subordinate class of securities in a structure of securities secured by
a pool of loans and accordingly are the first to bear the loss upon a
restructuring or liquidation of the underlying collateral and the last to
receive payment of interest and principal. Such investments are subject to
greater risk of credit loss on principal and non-payment of interest than
investments in senior investment grade securities. The Company may not recover
the full amount or, in certain cases, any of its initial investment in such
subordinated securities.
In
general, losses on an asset securing a mortgage loan included in a
securitization will be borne first by the equity holder of the property, then by
a cash reserve fund or letter of credit, if any, and then by the class of most
junior security holders. In the event of default and the exhaustion of any
equity support, reserve fund and letter of credit, classes of junior securities
in which the Company invests may not be able to recover some or all of its
investment in the securities it purchases. In addition, if the underlying
mortgage portfolio has been overvalued by the originator, or if the values
subsequently decline and, as a result, less collateral is available to satisfy
interest and principal payments due on the related mortgage-backed securities,
the securities in which it invests may incur significant losses.
The
estimated fair values of lower credit quality CMBS and similar investments tend
to be less sensitive to interest rate changes than those of more highly rated
investments, but more sensitive to changes in economic conditions and underlying
borrower developments. The ongoing economic downturn, for example, has caused a
decline in the price of lower credit quality CMBS because the ability of
borrowers to make principal and interest payments on the mortgages underlying
the mortgage-backed securities are deemed more likely to be impaired. In such
event, existing credit support in the securitization structure may be
insufficient to protect the Company against loss of its principal on these
securities. In addition, such subordinated interests generally are not actively
traded and may not provide the Company as a holder thereof with liquidity of
investment.
The
subordinate interests in whole loans in which the Company invests may be subject
to additional risks relating to the privately negotiated structure and terms of
the transaction, which may result in losses to the Company.
A
subordinate interest in a whole loan is a mortgage loan typically (i) secured by
a whole loan on a single large commercial property or group of related
properties and (ii) subordinated to a senior interest secured by the same whole
loan on the same collateral. As a result, if a borrower defaults, there may not
be sufficient funds remaining for subordinate interest owners after payment to
the senior interest owners. Subordinate interests reflect similar credit risks
to subordinated CMBS. However, since each transaction is privately negotiated,
subordinate interests can vary in their structural characteristics and risks.
For example, the rights of holders of subordinate interests to control the
process following a borrower default may be limited in certain investments. The
Company cannot predict the terms of each subordinate investment. Further,
subordinate interests typically are secured by a single property, and so reflect
the increased risks associated with a single property compared to a pool of
properties. Subordinate interests in whole loans also are less liquid than
comparably rated CMBS; thus the Company may be unable to dispose of
underperforming or non-performing investments. The higher risks associated with
its subordinate position in these investments could subject the Company to
increased risk of losses.
The
commercial mortgage and mezzanine loans the Company originates or acquires and
the commercial mortgage loans underlying the CMBS in which the Company invests
are subject to delinquency, foreclosure and loss, which could result in losses
to the Company.
The
Company’s commercial mortgage and mezzanine loans are secured by commercial
property and are subject to risks of delinquency and foreclosure. The ability of
a borrower to repay a loan secured by an income-producing property typically is
dependent primarily upon the successful operation of the property rather than
upon the existence of independent income or assets of the borrower. If the net
operating income of the property is reduced, the borrower’s ability to repay the
loan may be impaired. Net operating income of an income-producing property can
be affected by, among other things: tenant mix, success of tenant businesses,
property management decisions, property location and condition, competition from
comparable types of properties, changes in laws that increase operating expenses
or limit rents that may be charged, any need to address environmental
contamination at the property, changes in national, regional or local economic
conditions and/or specific industry segments, declines in regional or local real
estate values and declines in regional or local rental or occupancy rates,
increases in interest rates, real estate tax rates and other operating expenses,
changes in governmental rules, regulations and fiscal policies, including
environmental legislation, and acts of God, terrorism, social unrest and civil
disturbances.
The
Company’s assets include mezzanine loans that have greater risks of loss than
more senior loans.
The
Company’s assets include a significant amount of mezzanine loans that involve a
higher degree of risk than long-term senior mortgage loans. In particular, a
foreclosure by the holder of the senior loan could result in the mezzanine loan
becoming unsecured. Accordingly, the Company may not recover some or all of its
investment in such a mezzanine loan. Additionally, the Company may permit higher
loan-to-value ratios on mezzanine loans than it would on conventional mortgage
loans when the Company is entitled to share in the appreciation in value of the
property securing the loan.
Prepayment
rates can increase which would adversely affect yields on the Company’s
investments.
The yield
on investments in mortgage loans and mortgage-backed securities and thus the
value of the Common Stock is sensitive to not only changes in prevailing
interest rates but also changes in prepayment rates, which results in a
divergence between the Company’s borrowing rates and asset yields, consequently
reducing future net income derived from the Company’s investments. The Company’s
borrowing costs also may exceed its interest income from its investments, and it
could incur operating losses.
Limited
recourse loans limit the Company’s recovery to the value of the mortgaged
property.
A
substantial portion of the commercial mortgage loans the Company acquires may
contain limitations on the mortgagee’s recourse against the borrower. In other
cases, the mortgagee’s recourse against the borrower is limited by applicable
provisions of the laws of the jurisdictions in which the mortgaged properties
are located or by the mortgagee’s selection of remedies and the impact of those
laws on that selection. In those cases, in the event of a borrower default,
recourse may be limited to only the specific mortgaged property and other
assets, if any, pledged to secure the relevant commercial mortgage loan. As to
those commercial mortgage loans that provide for recourse against the borrower
and their assets generally, such recourse may not provide a recovery in respect
of a defaulted commercial mortgage loan equal to the liquidation value of the
mortgaged property securing that commercial mortgage loan.
The
volatility of certain mortgaged property values may adversely affect the
Company’s commercial mortgage loans.
Commercial
and multifamily property values and net operating income derived from them are
subject to volatility and may be affected adversely by a number of factors,
including, but not limited to, national, regional and local economic conditions
(which may be adversely affected by plant closings, industry slowdowns and other
factors); local real estate conditions (such as an oversupply of housing,
retail, industrial, office or other commercial space); changes or continued
weakness in specific industry segments; perceptions by prospective tenants,
retailers and shoppers of the safety, convenience, services and attractiveness
of the property; the willingness and ability of the property’s owner to provide
capable management and adequate maintenance; construction quality, age and
design; demographic factors; retroactive changes to building or similar codes;
and increases in operating expenses (such as energy costs).
The
Company’s hedging transactions can limit the Company’s gains and increase the
Company’s exposure to losses.
The
Company uses hedging strategies that involve risk and that may not be successful
in insulating the Company from exposure to changing interest and prepayment
rates. A liquid secondary market may not exist for hedging instruments purchased
or sold, and the Company may be required to maintain a position until exercise
or expiration, which could result in losses or limit its gains.
The
Company may make non-U.S. dollar denominated investments and investments in
non-U.S. dollar denominated securities, which subject it to currency rate
exposure and the uncertainty of foreign laws and markets.
The
Company purchases mortgage-backed securities denominated in foreign currencies
and also acquires interests in loans to non-U.S. companies, which may expose the
Company to risks not typically associated with U.S. or U.S. dollar denominated
investments. These risks include changes in exchange control regulations,
political and social instability, expropriation, imposition of foreign taxes,
multiple and conflicting tax laws, less liquid markets and less available
information than is generally the case in the United States, higher transaction
costs, less developed bankruptcy laws, difficulty in enforcing contractual
obligations, lack of uniform accounting and auditing standards, and greater
price volatility. Any of these risks could adversely affect the Company’s
receipt of interest income from these investments.
To the
extent that any of the Company’s investments are denominated in foreign
currency, these non-U.S. dollar denominated investments will be subject to the
risk that the value of a particular currency will change in relation to one or
more other currencies. Among the factors that may affect currency values are
trade balances, the level of short-term interest rates, differences in relative
values of similar assets in different currencies, long-term opportunities for
investment and capital appreciation, and political developments. Although the
Company may employ hedging techniques to minimize foreign currency risk, it can
offer no assurance that these strategies will be effective and may incur losses
on these investments as a result of currency rate fluctuations.
The
Company is subject to significant competition.
The
Company is subject to significant competition in seeking investments. It
competes with other companies, including other REITs, insurance companies and
other investors, including funds and companies affiliated with the Manager. Some
of its competitors have greater resources than it has and it may not be able to
compete successfully for investments. Competition for investments may lead to
the returns available from such investments decreasing which may further limit
its ability to generate its desired returns. The Company cannot assure investors
that additional companies will not be formed that compete with it for
investments or otherwise pursue investment strategies similar to the
Company’s.
Maintenance
of the Company’s Investment Company Act exemption imposes limits on its
operations. Failure to maintain its Investment Company Act exemption could
adversely affect the Company’s ability to operate.
The
Company intends to continue to conduct its business so as not to become
regulated as an investment company under the Investment Company Act. Under the
Investment Company Act, a non-exempt entity that is an investment company is
required to register with the SEC and is subject to extensive, restrictive and
potentially adverse regulation relating to, among other things, operating
methods, management, capital structure, dividends and transactions with related
parties. The Investment Company Act exempts entities that are “primarily engaged
in the business of purchasing or otherwise acquiring mortgages and other liens
on and interests in real estate. Under current interpretation by the staff of
the SEC, to qualify for this exemption, the Company, among other things, must
maintain at least 55% of its assets in Qualifying Interests.
A portion
of the CMBS acquired by the Company are collateralized by pools of first
mortgage loans where the terms of the CMBS owned by the Company provide the
right to monitor the performance of the underlying mortgage loans through loan
management and servicing rights and the right to control workout/foreclosure
rights in the event of default on the underlying mortgage loans. When such
rights exist, the Company believes that the related Controlling Class CMBS
constitute Qualifying Interests for purposes of the Investment Company Act.
Therefore, the Company believes that it should not be required to register as an
“investment company” under the Investment Company Act as long as it continues to
invest in a sufficient amount of such Controlling Class CMBS and/or in other
Qualifying Interests.
If the
SEC or its staff were to take a different position with respect to whether the
Company’s Controlling Class CMBS constitute Qualifying Interests, the Company
could be required to modify its business plan so that either (i) it would not be
required to register as an investment company or (ii) it would register as an
investment company under the Investment Company Act. Modification of the
Company’s business plan so that it would not be required to register as an
investment company might entail a disposition of a significant portion of the
Company’s Controlling Class CMBS or the acquisition of significant additional
assets, such as agency pass-through and other mortgage-backed securities, which
are Qualifying Interests. Modification of the Company’s business plan to
register as an investment company could result in increased operating expenses
and could entail reducing the Company’s indebtedness, which also could require
the Company to sell a significant portion of its assets. No assurances can be
given that any such dispositions or acquisitions of assets, or de-leveraging,
could be accomplished on favorable terms. Consequently, any such modification of
the Company’s business plan could have a material adverse effect on the Company.
Further, if it were established that the Company were operating as an
unregistered investment company, there would be a risk that the Company would be
subject to monetary penalties and injunctive relief in an action brought by the
SEC, that the Company would be unable to enforce contracts with third parties,
and that third parties could seek to obtain rescission of transactions
undertaken during the period it was established that the Company was an
unregistered investment company. Any such result would likely have a material
adverse effect on the Company.
The
Company’s liquidity position could be adversely affected if it were unable to
complete additional CDOs on favorable terms or at all.
The
Company has completed several CDOs through which it raised a significant amount
of debt capital. Relevant considerations regarding the Company’s ability to
complete additional term debt transactions include:
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to
the extent that the capital markets generally, and the asset-backed
securities market in particular, suffer disruptions, the Company may be
unable to complete CDOs;
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disruptions
in the credit quality and performance of the Company’s commercial real
estate securities and loan portfolio, particularly that portion which
previously has been securitized and serves as collateral for existing
CDOs, could reduce or eliminate investor demand for its CDOs in the
future;
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any
material downgrading or withdrawal of ratings given to securities
previously issued in the Company’s CDOs would reduce demand for additional
term debt by it; and
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structural
changes imposed by rating agencies or investors may reduce the leverage it
is able to obtain, increase the cost and otherwise adversely affect the
efficiency of its CDOs.
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Current
global recessionary economic conditions and adverse developments in the credit
markets have substantially reduced or eliminated the availability of CDO
transactions for the Company. The continued unavailability of CDO transactions
may have a material adverse effect on the Company’s growth and its Common Stock
price.
The
Company’s repurchase agreements and its CDO financing agreements may limit its
ability to make investments.
In order
to borrow money to make investments under the Company’s repurchase agreements,
to the extent that the Company is allowed to make additional borrowings pursuant
to the respective terms of such agreements, its lenders have the right to review
the potential investment for which the Company is seeking financing. The Company
may be unable to obtain the consent of its lenders to make investments that it
believes are favorable to the Company. If the Company’s lenders do not consent
to the inclusion of the potential asset in a repurchase facility, the Company
may be unable to obtain alternate financing for that investment. The Company’s
lender’s consent rights with respect to its repurchase agreements may limit its
ability to execute its business plan.
Each CDO
financing in which the Company engages will contain certain eligibility criteria
with respect to the collateral that it seeks to acquire and sell to the CDO
issuer. If the collateral does not meet the eligibility criteria for eligible
collateral as set forth in the transaction documents of such CDO transaction,
the Company may not be able to acquire and sell such collateral to the CDO
issuer. The inability of the collateral to meet eligibility requirements with
respect to the Company’s CDOs may limit the Company’s ability to execute its
business plan.
The
Company may become subject to environmental liabilities.
The
Company may become subject to material environmental risks when it acquires
interests in properties with significant environmental problems. Such
environmental risks include the risk that operating costs and values of these
assets may be adversely affected by the obligation to pay for the cost of
complying with existing environmental laws, ordinances and regulations, as well
as the cost of complying with future legislation. Such laws often impose
liability regardless of whether the owner or operator knows of, or was
responsible for, the presence of such hazardous or toxic substances. The costs
of investigation, remediation or removal of hazardous substances could exceed
the value of the property. The Company’s income and ability to make
distributions to stockholders could be affected adversely by the existence of an
environmental liability with respect to the Company’s properties.
The
price of the Common Stock may fluctuate significantly, which could negatively
affect holders of the Common Stock.
The
trading price of the Common Stock may be volatile in response to a number of
factors, including actual or anticipated variations in the Company’s quarterly
financial results or dividends, changes in financial estimates by securities
analysts, additions or departures of key management personnel, the inability of
the Company to obtain or maintain external sources of financing, prevailing
interest rates, issuances of the Common Stock, preferred stock or debt
securities, and changes in market valuations of other companies in the real
estate industry, even if not similar to the Company. In addition, the Company’s
financial results may be below the expectations of securities analysts and
investors. If this were to occur, the market price of the Common Stock could
decrease significantly.
In
addition, the U.S. securities markets or sectors of these markets from time to
time have experienced significant price and volume fluctuations. These
fluctuations often have been unrelated to the operating performance of companies
in these markets or sectors. Broad market and industry factors may negatively
affect the price of the Common Stock, regardless of its operating
performance.
Future
offerings of debt securities, which would rank senior to the Common Stock upon
its liquidation, and future offerings of equity securities, including preferred
stock senior to the Common Stock for the purposes of dividend and liquidating
distributions, may adversely affect the market price of the Common
Stock.
The
Company may from time to time offer additional debt or equity securities. Upon
liquidation, holders of the Company’s debt securities and shares of its
preferred stock and lenders with respect to other borrowings will receive a
distribution of the Company’s available assets prior to the holders of its
Common Stock. Additional equity offerings may dilute the holdings of the
Company’s existing stockholders and reduce the market price of its Common Stock.
Any preferred stock the Company issues may have a preference on liquidating
distributions or a preference on dividend payments that would limit the
Company’s ability to make a dividend distribution to the holders of its Common
Stock under certain circumstances.
Sales of
substantial amounts of the Common Stock, or the perception that these sales
could occur, could have a material adverse effect on the price of the Common
Stock. In addition, secondary sales by the Manager of the Common Stock the
Manager owns, or the perception that these sales could occur, even if in
insubstantial amounts, could have a material adverse effect on the price of the
Common Stock. Holders of the Common Stock bear the risk of its future offerings
causing the market price of the Common Stock to decline and diluting their stock
holdings in the Company.
The
Company’s staggered board of directors and other provisions of its charter and
bylaws may prevent a change in its control, which could adversely affect the
price of the Common Stock.
The
Company’s board of directors is divided into three classes of directors. The
current terms of the directors expire in 2009, 2010 and 2011. Directors of each
class serve three-year terms, and each year one class of directors is elected by
the stockholders. The Board of Directors of the Company believe that, among
other reasons, a staggered board of directors is in the best interests of its
stockholders because such a board helps to promote stability and experience in
the Board of Directors and fosters long-term independent thinking that is in the
best interests of the Company. However, it is also possible that a staggered
board of directors may delay, prevent or reduce the possibility of a tender
offer or an attempt at a change in control. This may occur even though the
Company’s stockholders might consider a tender offer or change in control in
their best interests. In addition, the Company’s charter and bylaws also contain
other provisions that may delay or prevent a transaction or a change in control
that might be in the best interest of its stockholders. See “— Risks related to
taxation as a REIT — Restrictions on ownership of the Common Stock may inhibit
market activity in the Common Stock and restrict its business combination
opportunities.”
The
Company may not be able to maintain continued listing standards for the
NYSE.
Ordinarily,
a listed company would not be in compliance with the NYSE’s continued listing
standards if the average closing price of the company’s securities was less than
$1.00 over a consecutive 30-trading day period or the company’s market
capitalization was below $25 million over a consecutive 30 trading-day period.
Citing extreme volatility and a precipitous decline in the trading prices of
many securities in the U.S. and global equity markets, the NYSE has recently
temporarily suspended or relaxed these standards. If the Company were unable to
comply with the NYSE’s continued listing standards, its Common Stock could be
delisted and the Company’s business may be materially adversely
affected.
Risks
related to the Manager
Conflicts
of interest of the Manager may result in decisions that do not fully reflect
stockholders’ best interests.
The
Company and the Manager have common officers, 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 also could 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 fund managed by the
Manager. As of December 31, 2008, the Company had $30,000 outstanding under the
BlackRock Facility. On January 9, 2009, the Company borrowed an additional
$3,450 under the BlackRock Facility.
The
Company is dependent on the Manager, and the termination by the Company of its
Management Agreement with the Manager could result in a termination fee and
other payments.
The
Company’s success is dependent on the Manager’s ability to attract and retain
quality personnel. The market for portfolio managers, investment analysts,
financial advisers and other professionals is extremely competitive. There can
be no assurance the Manager will be successful in its efforts to recruit and
retain the required personnel.
The
Management Agreement between the Company and the Manager provides for base
management fees payable to the Manager without consideration of the performance
of the Company’s portfolio and also provides for incentive fees based on certain
performance criteria, which could result in the Manager recommending riskier or
more speculative investments. Termination of the Management Agreement by the
Company would result in the payment of a substantial termination fee and other
payments, which could adversely affect the Company’s financial condition.
Termination of the Management Agreement could also adversely affect the Company
if the Company were unable to find a suitable replacement.
The
Management Agreement between the Company and the Manager, pursuant to its terms,
expires on March 31, 2009. If the Company is unable to renew or extend the
Management Agreement and is unable to find a suitable replacement to serve as
Manager, its business would be materially adversely affected.
There
is a limitation on the liability of the Manager.
Pursuant
to the Management Agreement, the Manager does not assume any responsibility
other than to render the services called for under the Management Agreement and
is not responsible for any action of the Company’s Board of Directors in
following or declining to follow its advice or recommendations. The Manager and
its directors and officers will not be liable to the Company, any of its
subsidiaries, its unaffiliated directors, its stockholders or any subsidiary’s
stockholders for acts performed in accordance with and pursuant to the
Management Agreement, except by reason of acts constituting bad faith, willful
misconduct, gross negligence or reckless disregard of their duties under the
Management Agreement. The Company has agreed to indemnify the Manager and its
directors and officers with respect to all expenses, losses, damages,
liabilities, demands, charges and claims arising from acts of the Manager not
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of duties, performed in good faith in accordance with and pursuant to
the Management Agreement.
The
Company may change its investment and operational policies without stockholder
consent.
The
Company may change its investment and operational policies, including the
Company’s policies with respect to investments, acquisitions, growth,
operations, indebtedness, capitalization and distributions, at any time without
the consent of the Company’s stockholders, which could result in the Company
making investments that are different from, and possibly riskier than, the types
of investments described in this filing. A change in the Company investment
strategy may increase the Company’s exposure to interest rate risk, default risk
and real estate market fluctuations, all of which could adversely affect the
Company’s ability to make distributions.
Risks
related to taxation as a REIT
The
Company’s failure to qualify as a REIT would result in higher taxes and reduced
cash available for distribution to its stockholders.
The
Company operates in a manner intended to qualify as a REIT for federal income
tax purposes. Continued qualification as a REIT will depend on the Company’s
ability to satisfy certain asset, income, organizational, distribution,
stockholder ownership and other requirements on a continuing basis. In
particular, the Company’s ability to satisfy the asset tests depends upon its
analysis of the fair market values of its assets, some of which are not
susceptible to a precise determination, and for which it will not obtain
independent appraisals. The Company’s compliance with the REIT income and
quarterly asset requirements also depends upon its ability to successfully
manage the composition of its income and assets on an ongoing basis. Moreover,
the proper classification of an instrument as debt or equity for federal income
tax purposes, and the tax treatment of participation interests that the Company
holds in mortgage loans and mezzanine loans, may be uncertain in some
circumstances, which could affect the application of the REIT qualification
requirements. Accordingly, there can be no assurance that the IRS will not
contend that the Company’s interests in subsidiaries or other issuers will not
cause a violation of the REIT requirements.
If the
Company were to fail to qualify as a REIT in any taxable year, it would be
subject to federal income tax, including any applicable alternative minimum tax,
on its taxable income at regular corporate rates, and distributions to
stockholders would not be deductible by the Company in computing its taxable
income. Any such corporate tax liability could be substantial and would reduce
the amount of cash available for distribution to the Company’s stockholders,
which in turn could have an adverse impact on the value of, and trading prices
for, its stock. Unless entitled to relief under certain Code provisions, the
Company also would be disqualified from taxation as a REIT for the four taxable
years following the year during which it ceased to qualify as a
REIT.
If the
Company fails to qualify as a REIT, the Company might need to borrow funds or
liquidate some investments in order to pay the additional tax liability.
Accordingly, funds available for investment or distribution to the Company’s
stockholders would be reduced for each of the years involved.
Qualification
as a REIT involves the application of highly technical and complex tax rules and
various factual determinations, some of which are based upon matters that are
not entirely within the Company’s control. There are only limited judicial or
administrative interpretations of these provisions. Although the Company
believes that it operates in a manner consistent with the REIT qualification
rules, the Company may not be able to remain so qualified.
In
addition, the rules dealing with federal income taxation are constantly under
review by persons involved in the legislative process and by the IRS and the
United States Department of the Treasury. Changes to the tax laws could
adversely affect the Company or its stockholders.
REIT
distribution requirements could adversely affect the Company’s ability to
execute its business plan.
To
qualify for taxation as a REIT, the Company, among other requirements, generally
must distribute annually to its stockholders at least 90% of its net taxable
income, excluding any net capital gain. If the Company qualifies as a REIT,
dividends that it pays are generally tax deductible, with the distributed
earnings therefore not subject to federal income tax at the REIT level. The
Company intends to make distributions to its stockholders to comply with the
requirements of the Code. However, certain of the Company’s assets may generate
substantial mismatches between taxable income and available cash. As a result,
the requirement to distribute a substantial portion of its net taxable income
could cause the Company to: (i) sell assets in adverse market conditions, (ii)
borrow on unfavorable terms or (iii) distribute amounts that would otherwise be
invested in future acquisitions, capital expenditures or repayment of debt, in
order to comply with REIT requirements. Pursuant to temporary guidance that was
recently issued by the IRS, with respect to taxable years ending on or before
December 31, 2009, up to 90% of the Company’s REIT distribution requirement may
be satisfied by distributing stock of the Company, with the remainder
distributed in cash, provided that certain requirements are satisfied
(including, that the Company’s stock continues to be publicly traded on an
established securities market in the United States).
Restrictions
on ownership of the Common Stock may inhibit market activity in the Company’s
stock and restrict its business combination opportunities.
In order
for the Company to maintain its qualification as a REIT under the Code, not more
than 50% in value of its outstanding stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code) at any time during the
last half of each taxable year, and there must be at least 100 direct owners of
the Company’s stock. To facilitate compliance with these tax law requirements
for qualification as a REIT, the Company’s charter generally prohibits any
person from acquiring or holding, directly or indirectly, shares of stock in
excess of 9.8% (in value or in number of shares, whichever is more restrictive)
of the aggregate of the outstanding shares of any class of its stock. The
Company’s charter further prohibits (i) any person from beneficially or
constructively owning shares of stock that would result in the Company being
“closely held” under Section 856(h) of the Code or would otherwise cause the
Company to fail to qualify as a REIT, and (ii) any person from transferring
shares of stock if such transfer would result in the Company’s stock being
beneficially owned by fewer than 100 persons. If any transfer of shares of stock
occurs which, if effective, would result in a violation of one or more of these
ownership limitations, then that number of shares of stock, the beneficial or
constructive ownership of which otherwise would cause such person to violate
such limitations (rounded up to a whole number of shares) will be automatically
transferred to a trustee of a trust for the exclusive benefit of one or more
charitable beneficiaries, and the intended transferee may not acquire any rights
in such shares; provided, however, that if any transfer occurs which, if
effective, would result in shares of capital stock being owned by fewer than 100
persons, then the transfer will be null and void and the intended transferee
will acquire no rights to the stock. Subject to certain limitations, the
Company’s Board of Directors may waive the limitations for certain
investors.
The
provisions of the Company’s charter or relevant Maryland law may inhibit market
activity and the resulting opportunity for the holders of its Common Stock to
receive a premium for their Common Stock that might otherwise exist in the
absence of such provisions. Such provisions also may make the Company an
unsuitable investment vehicle for any person seeking to obtain ownership of more
than 9.8% of the outstanding shares of its Common Stock.
Material
provisions of the Maryland General Corporation Law (“MGCL”) relating to
“business combinations” and a “control share acquisition” and of the Company’s
charter and bylaws may also have the effect of delaying, deterring or preventing
a takeover attempt or other change in control of the Company that would be
beneficial to stockholders and might otherwise result in a premium over then
prevailing market prices. Although the Company’s bylaws contain a provision
exempting the acquisition of i Common Stock by any person from the control share
acquisition statute, there can be no assurance that such provision will not be
amended or eliminated at any time in the future. These ownership limits could
delay or prevent a transaction or a change in its control that might involve a
premium price for its Common Stock or otherwise be in the best interest of its
stockholders.
Even
if the Company remains qualified as a REIT, it may face other tax liabilities
that reduce its cash flow.
Even if
the Company remains qualified for taxation as a REIT, the Company (or its
subsidiaries) may be subject to certain federal, state, local and foreign taxes
on their income and assets, including taxes on any undistributed income, tax on
income from certain activities conducted as a result of a foreclosure, and
state, local, or foreign income, property and transfer taxes, such as mortgage
recording taxes. Any of these taxes would decrease cash available for
distribution to the Company’s stockholders. In addition, in order to meet the
REIT qualification requirements, or to avert the imposition of a 100% tax that
applies to certain gains derived by a REIT from dealer property or inventory,
the Company holds some of its assets through taxable REIT subsidiaries. Such
subsidiaries are potentially subject to corporate level income tax at regular
rates.
Complying
with REIT requirements may cause the Company to forgo otherwise attractive
opportunities.
To
qualify as a REIT for federal income tax purposes, the Company must continually
satisfy tests concerning, among other things, the sources of its income, the
nature and diversification of its assets, the amounts it distributes to its
stockholders and the ownership of its stock. The Company also may be required to
make distributions to stockholders at disadvantageous times or when it does not
have funds readily available for distribution. Thus, compliance with the REIT
requirements may hinder the Company’s ability to make certain attractive
investments.
The
“taxable mortgage pool” rules may increase the taxes that the Company or its
stockholders may incur, and may limit the manner in which it effects future
securitizations.
Certain
of the Company’s securitizations have resulted in the creation of taxable
mortgage pools for federal income tax purposes. As a REIT, so long as the
Company owns the entire equity interests in a taxable mortgage pool, it
generally would not be adversely affected by the characterization of the
securitization as a taxable mortgage pool. Certain categories of stockholders,
however, such as foreign stockholders eligible for treaty or other benefits,
stockholders with net operating losses, and certain tax-exempt stockholders that
are subject to unrelated business income tax, could be subject to increased
taxes on a portion of their dividend income from the Company that is
attributable to the taxable mortgage pool. In addition, to the extent that the
Company’s stock is owned by tax-exempt “disqualified organizations,” such as
certain government-related entities that are not subject to tax on unrelated
business income, it may incur a corporate level tax on a portion of its income
from the taxable mortgage pool. In that case, the Company may reduce the amount
of its distributions to any disqualified organization whose stock ownership gave
rise to the tax.
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS
|
While the
Company does not have any unresolved staff comments pursuant to Item 1B hereof,
the Company is still in discussions with the SEC regarding written comments
initially received on December 12, 2008. See Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operation – SEC Comment Letter” for additional discussion of these
comments.
The
Company does not maintain an office. The Company uses the offices of the Manager
located at 40 East 52nd Street,
New York, New York 10022, and does not pay rent for such use.
ITEM
3.
|
LEGAL
PROCEEDINGS
|
At
December 31, 2008, there were no pending legal proceedings in which the Company
or any of its subsidiaries was a defendant or of which any of their property was
subject.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
No
matters were submitted to a vote of the Company’s security holders during the
three months ended December 31, 2008 through the solicitation of proxies or
otherwise.
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
The
Company’s Common Stock has been listed on the NYSE and traded under the symbol
“AHR” since its initial public offering in March 1998. The following table sets
forth, for the periods indicated, the high, low and last sale prices in dollars
on the NYSE for the Company’s Common Stock and the dividend per share declared
by the Company.
|
|
High
|
|
|
Low
|
|
|
Last
Sale
|
|
|
Dividends
Declared
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$ |
5.50 |
|
|
$ |
1.75 |
|
|
$ |
2.23 |
|
|
|
- |
(1)
|
Third
Quarter
|
|
|
7.42 |
|
|
|
4.88 |
|
|
|
5.36 |
|
|
|
0.31 |
|
Second
Quarter
|
|
|
9.59 |
|
|
|
6.49 |
|
|
|
7.04 |
|
|
|
0.31 |
|
First
Quarter
|
|
|
8.31 |
|
|
|
5.08 |
|
|
|
6.69 |
|
|
|
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$ |
10.20 |
|
|
$ |
6.67 |
|
|
$ |
7.24 |
|
|
$ |
0.30 |
|
Third
Quarter
|
|
|
12.11 |
|
|
|
6.53 |
|
|
|
9.10 |
|
|
|
0.30 |
|
Second
Quarter
|
|
|
12.94 |
|
|
|
11.50 |
|
|
|
11.70 |
|
|
|
0.30 |
|
First
Quarter
|
|
|
14.08 |
|
|
|
11.01 |
|
|
|
12.00 |
|
|
|
0.29 |
|
(1) The
Board of Directors did not declare a dividend on the Common Stock for the fourth
quarter of 2008. See “— Dividends” below.
On March
12, 2009, the closing sale price for the Common Stock, as reported on the NYSE,
was $0.55. At February 20, 2009, there were approximately 1,068 record holders
of the Common Stock. This figure does not reflect beneficial ownership of shares
held in nominee name.
Dividends
To
qualify for taxation as a REIT, the Company, among other requirements, must
distribute annually to its stockholders at least 90% of its net taxable income,
excluding any net capital gain.
Holders
of the Common Stock are entitled to receive dividends only when, as and if
declared by the Company’s Board of Directors. Due to current market conditions
and the Company’s current liquidity position, the Company’s Board of Directors
anticipates that the Company will pay cash dividends on its stock only to the
extent necessary to maintain its REIT status until the Company’s liquidity
position has improved and market values of commercial real estate debt show
signs of stability. The Board of Directors did not declare a dividend on the
Common Stock for the fourth quarter of 2008 since the Company’s 2008 net taxable
income distribution requirements were satisfied by distributions made for the
first three quarters of 2008. The Board of Directors also did not declare a
dividend on the Common Stock and the Company’s preferred stock for the first
quarter of 2009. To the extent the Company is required to make distributions to
maintain its qualification as a REIT in 2009, the Company anticipates it will
rely upon temporary guidance that was recently issued by the IRS, which allows
certain publicly traded REITs to satisfy their net taxable income distribution
requirements by distributing up to 90% in stock, with the remainder distributed
in cash.
The terms
of the Company’s preferred stock prohibit the Company from declaring or paying
cash dividends on the Common Stock unless full cumulative dividends have been
declared and paid on the preferred stock.
Recent Sales of Unregistered
Securities
During
the year ended December 31, 2008, the Company issued 2,872,325 shares of
unregistered Common Stock with an aggregate value of $13,010 as
follows:
|
·
|
On
March 28, 2008, 316,320 unregistered shares of Common Stock with an
aggregate value of $2,116 were issued to 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
May 15, 2008, 6,000 unregistered shares of Common Stock with an aggregate
value of $16 were issued to directors of the Company not employed by the
Manager in connection with the Company’s annual grant of restricted stock
to directors.
|
|
·
|
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 (the “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 will
be paid in shares of the Common Stock subject to certain provisions under
the Management Agreement and the Plan and pursuant to a consent from the
Nominating and Corporate Governance
Committee.
|
|
·
|
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 Manager
Equity Plan as quarterly payments in shares of Common Stock of the base
management fee and incentive fee to the Manager under Management
Agreement. For the full one-year term of the Management Agreement, the
Manager has agreed that the entire base management fee and incentive fee
earned are 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 under the Plan to directors of the
Company not employed by the Manager under the Plan as quarterly payment of
an annual retainer.
|
|
·
|
On
November 25, 2008, 1,017,685 unregistered shares of Common Stock with an
aggregate value of $2,603 were issued to the Manager under the Manager
Equity Plan as quarterly payments in shares of Common Stock of the base
management fee and incentive fee to the Manager under the Management
Agreement.
|
|
·
|
On
November 25, 2008, 46,379 unregistered shares of Common Stock with an
aggregate value of $119 were issued under the Plan to directors of the
Company not employed by the Manager under the Plan as quarterly payment of
an annual retainer.
|
|
·
|
On
December 22, 2008, 14,323 unregistered shares of Common Stock with an
aggregate value of $38 were issued under the Plan to a former director of
the Company not employed by the Manager as quarterly payment of an annual
retainer earned for the period he served as a
director.
|
|
·
|
On
December 23, 2008, 384,544 unregistered shares of Common Stock with an
aggregate value of $973 were issued to the Manager pursuant to the
provision of the Management Agreement, requiring the Company to pay to the
Manager as part of the base management fee 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 the tenth trading day of the
applicable measurement period that commences in the fourth quarter of each
year.
|
The
issuances of Common Stock were made in reliance upon the exemption from
registration under Section 4(2) of the Securities Act.
Common Stock Performance
Graph
The
following graph compares the cumulative total stockholder return on the Common
Stock of the Company from December 31, 2003 through December 31, 2008, with the
cumulative total return of the Nasdaq Composite Index (“NASDAQ Composite”), the
Russell 2000 Index (the “Russell 2000”) and the SNL Finance REIT Index (“SNL
Finance REIT”), for the same period. The graph assumes the investment of $100 in
the Common Stock of the Company and in each index, for comparative purposes.
Total return equals appreciation in stock price plus dividends paid, and assume
that all dividends are reinvested. The following information has been obtained
from sources believed to be reliable, but neither its accuracy nor its
completeness is guaranteed. The performance graph is not necessarily indicative
of future investment performance.
![](chart.jpg)
|
|
Period
Ending
|
|
Index
|
|
12/31/03
|
|
|
12/31/04
|
|
|
12/31/05
|
|
|
12/31/06
|
|
|
12/31/07
|
|
|
12/31/08
|
|
Anthracite
Capital, Inc.
|
|
|
100.00 |
|
|
|
125.77 |
|
|
|
118.26 |
|
|
|
156.96 |
|
|
|
100.50 |
|
|
|
35.42 |
|
NASDAQ
Composite
|
|
|
100.00 |
|
|
|
108.59 |
|
|
|
110.08 |
|
|
|
120.56 |
|
|
|
132.39 |
|
|
|
78.72 |
|
Russell
2000
|
|
|
100.00 |
|
|
|
118.33 |
|
|
|
123.72 |
|
|
|
146.44 |
|
|
|
144.15 |
|
|
|
95.44 |
|
SNL
Finance REIT(1)
|
|
|
100.00 |
|
|
|
124.69 |
|
|
|
99.77 |
|
|
|
126.37 |
|
|
|
78.59 |
|
|
|
42.15 |
|
(1) As of December 31, 2008, the
SNL Finance REIT Index comprised the following companies: Alesco Financial Inc.,
American Capital Agency Corp., American Church Mortgage, American Mortgage
Acceptance, Annaly Capital Management, Anthracite Capital Inc., Anworth Mortgage
Asset Corp., Arbor Realty Trust Inc., Bimini Capital Management, Inc, BRT Realty
Trust, Capital Trust Inc., Capstead Mortgage Corp., Care Investment Trust Inc.,
Chimera Investment Corp., Crystal River Capital Inc, Dynex Capital Inc., Eastern
Light Capital, Inc, Gramercy Capital Corp., Hanover Capital Mortgage Hldgs,
Hatteras Financial Corp., Impac Mortgage Holdings Inc., iStar Financial Inc.,
JER Investors Trust Inc., Luminent Mortgage Capital Inc., MFA Financial, New
York Mortgage Trust Inc., Newcastle Investment Corp., NorthStar Realty Finance
Corp., Origen Financial Inc., PMC Commercial Trust, RAIT Financial Trust, Realty
Finance Corporation, Redwood Trust Inc., Resource Capital Corp., Thornburg
Mortgage Inc.
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
The
selected financial data set forth below at and for the years ended December 31,
2008, 2007, 2006, 2005, and 2004 has been derived from the Company’s audited
consolidated financial statements. This information should be read in
conjunction with “Item 1. Business”, “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations”, and the audited
consolidated financial statements and notes thereto included in “Item 8.
Financial Statements and Supplementary Data”. The Company derived the selected
financial data as of December 31, 2005 and 2004 and for each of the two years in
the period ended December 31, 2005 from the Company’s audited consolidated
financial statements and notes thereto not included elsewhere in this
report.
|
|
Year
ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
349,169 |
|
|
$ |
326,436 |
|
|
$ |
275,986 |
|
|
$ |
231,768 |
|
|
$ |
194,967 |
|
Earnings
(loss) from equity investments
|
|
|
(53,630 |
) |
|
|
32,093 |
|
|
|
27,431 |
|
|
|
12,146 |
|
|
|
8,899 |
|
Interest
expense
|
|
|
215,302 |
|
|
|
241,000 |
|
|
|
212,388 |
|
|
|
163,458 |
|
|
|
128,166 |
|
Other
operating expenses
|
|
|
33,088 |
|
|
|
27,521 |
|
|
|
25,830 |
|
|
|
19,181 |
|
|
|
12,383 |
|
Other
gain (loss) (1)
|
|
|
(238,352 |
) |
|
|
(6,032 |
) |
|
|
13,906 |
|
|
|
9,322 |
|
|
|
(20,125 |
) |
Income
(loss) before taxes
|
|
|
(191,203 |
) |
|
|
83,976 |
|
|
|
79,105 |
|
|
|
70,597 |
|
|
|
43,192 |
|
Income
taxes
|
|
|
(2,409 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Income
(loss) from continuing operations
|
|
|
(193,612 |
) |
|
|
83,976 |
|
|
|
79,105 |
|
|
|
70,597 |
|
|
|
43,192 |
|
Income
from discontinued operations (2)
|
|
|
- |
|
|
|
- |
|
|
|
1,366 |
|
|
|
- |
|
|
|
- |
|
Net
income (loss)
|
|
|
(193,612 |
) |
|
|
83,976 |
|
|
|
80,471 |
|
|
|
70,597 |
|
|
|
43,192 |
|
Net
income (loss) available to common stockholders
|
|
|
(210,878 |
) |
|
|
72,320 |
|
|
|
75,079 |
|
|
|
65,205 |
|
|
|
25,768 |
|
Net
income (loss) from continuing operations
per share of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(2.96 |
) |
|
|
1.18 |
|
|
|
1.29 |
|
|
|
1.20 |
|
|
|
0.50 |
|
Diluted
|
|
|
(2.96 |
) |
|
|
1.18 |
|
|
|
1.29 |
|
|
|
1.20 |
|
|
|
0.50 |
|
Income
from discontinued operations per
share of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
- |
|
|
|
- |
|
|
|
0.02 |
|
|
|
- |
|
|
|
- |
|
Diluted
|
|
|
- |
|
|
|
- |
|
|
|
0.02 |
|
|
|
- |
|
|
|
- |
|
Net
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(2.96 |
) |
|
|
1.18 |
|
|
|
1.31 |
|
|
|
1.20 |
|
|
|
0.50 |
|
Diluted
|
|
|
(2.96 |
) |
|
|
1.18 |
|
|
|
1.31 |
|
|
|
1.20 |
|
|
|
0.50 |
|
Balance Sheet Data (at period
end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
3,827,369 |
|
|
|
5,247,710 |
|
|
|
5,218,263 |
|
|
|
4,234,825 |
|
|
|
3,729,134 |
|
Total
liabilities
|
|
|
3,163,403 |
|
|
|
4,796,339 |
|
|
|
4,562,154 |
|
|
|
3,636,807 |
|
|
|
3,215,396 |
|
Total
stockholders’ equity
|
|
|
617,492 |
|
|
|
451,371 |
|
|
|
656,109 |
|
|
|
598,018 |
|
|
|
513,738 |
|
|
(1)
|
Other
gain (loss) for the years ended December 31, 2008, 2007, 2006, 2005 and
2004 consisted of the following:
|
|
|
|
2008 |
* |
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Other
gain (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
loss on securities and swaps held-for-trading, net
|
|
$ |
(36,949 |
) |
|
$ |
(906 |
) |
|
$ |
3,510 |
|
|
$ |
- |
|
|
$ |
- |
|
Unrealized
gain (loss) on securities held-for-trading
|
|
|
(1,189,965 |
) |
|
|
(1,508 |
) |
|
|
3,191 |
|
|
|
(1,999 |
) |
|
|
(11,464 |
) |
Unrealized
loss on swaps classified as held-for-trading
|
|
|
(61,473 |
) |
|
|
(2,737 |
) |
|
|
(3,447 |
) |
|
|
- |
|
|
|
- |
|
Unrealized
gain on liabilities
|
|
|
1,219,779 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Gain
on sale of securities available-for-sale, net
|
|
|
- |
|
|
|
5,316 |
|
|
|
29,032 |
|
|
|
16,543 |
|
|
|
17,544 |
|
Dedesignation
of derivative instruments
|
|
|
(7,084 |
) |
|
|
- |
|
|
|
(12,661 |
) |
|
|
- |
|
|
|
- |
|
Provision
for loan losses
|
|
|
(165,928 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Foreign
currency gain (loss)
|
|
|
3,268 |
|
|
|
6,272 |
|
|
|
2,161 |
|
|
|
(134 |
) |
|
|
(187 |
) |
Loss
on impairment of securities
|
|
|
- |
|
|
|
(12,469 |
) |
|
|
(7,880 |
) |
|
|
(5,088 |
) |
|
|
(26,018 |
) |
Total
other gain (loss)
|
|
$ |
(238,352 |
) |
|
$ |
(6,032 |
) |
|
$ |
13,906 |
|
|
$ |
9,322 |
|
|
$ |
(20,125 |
) |
*The
Company adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“FAS 159”) in January of 2008 as of
January 1, 2008. See Note 3 of the consolidated financials statements,
“Fair Value Disclosures” for further discussion.
|
(2)
|
The
Company purchased a defaulted loan from a Controlling Class CMBS trust
during the first quarter of 2006. The Company sold the property during the
second quarter of 2006 and recorded a gain from discontinued operations of
$1,366 on its consolidated statement of
operations.
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
All
dollar figures expressed herein are expressed in thousands, except share and per
share amounts.
Executive
Overview
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. 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
in three investment sectors: (i) commercial real estate debt securities, (ii)
commercial real estate loans and (iii) commercial real estate
equity.
The
Company’s consolidated financial statements have been prepared on a going
concern basis of accounting which contemplates continuity of operations,
realization of assets, liabilities and commitments in the normal course of
business. There are substantial doubts that the Company will be able to continue
as a going concern and, therefore, may be unable to realize its assets and
discharge its liabilities in the normal course of business. The financial
statements do not reflect any adjustments relating to the recoverability and
classification of recorded asset amounts or to the amounts and classification of
liabilities that may be necessary should the Company be unable to continue as a
going concern.
Effect
of Market Conditions on the Company’s Business & Recent
Developments
During
2008 and particularly in the fourth quarter, global economic conditions
continued to worsen, resulting in ongoing disruptions in the credit and capital
markets, significant devaluations of assets and a severe economic downturn
globally. Assets linked to the U.S. commercial real estate finance market have
been particularly affected as demand for such assets has sharply declined and
defaults have risen, including for CMBS and commercial real estate loans.
Available liquidity, which began to decline during the second half of 2007,
became scarce in 2008 and remains depressed into 2009. Under normal market
conditions, the Company relies on the credit and equity markets for capital to
finance its investments and grow its business. However, in the current
environment, the Company is focused principally on managing its
liquidity.
The
recessionary economic conditions and ongoing market disruptions have had, and
the Company expects will continue to have, an adverse effect on the Company and
the commercial real estate and other assets in which the Company has invested.
These effects include:
|
·
|
Negative
operating results. The Company incurred net income (loss) available to
common stockholders of $(210,878) for the year ended December 31, 2008
compared with $72,320 for the year ended December 31, 2007, driven
primarily by significant net realized and unrealized losses, the
incurrence of sizable provisions for loan losses (including the
establishment of a general reserve) and a loss from equity investments
compared with earnings in the prior year. The establishment of a general
reserve for loan losses was deemed necessary given the dramatic change in
the prospects for loan performance as a result of significant property
value declines in the fourth quarter. See Note 2 of the consolidated
financial statements, “Significant Accounting Policies – Allowance for
Loan Losses” for a discussion of the methodology used to calculate the
general reserve.
|
|
·
|
Adverse
impact on liquidity and access to capital. The Company’s cash and cash
equivalents sharply decreased to $9,686 at December 31, 2008 from $91,547
at December 31, 2007 due to, among other things, an increase in the
receipt and funding of margin calls and amortization payments under the
Company’s secured credit facilities and reduced cash flow from
investments. In order to secure the amendment and extension of its secured
credit facilities (including repurchase agreements) in 2008 with Bank of
America, Deutsche Bank and Morgan Stanley, the Company agreed not to
request new borrowings under the facilities. Financings through
collateralized debt obligations (“CDOs”), which the Company historically
utilized, are no longer available, and the Company does not expect to be
able to finance investments through CDOs for the foreseeable
future.
|
|
·
|
Change
in business objectives and dividend policy. The Company is currently
focused on managing its liquidity and, unless its liquidity position and
market conditions significantly improve, anticipates no new investment
activity in 2009. In addition, the Company’s Board of Directors (the
“Board of Directors”) anticipates that the Company will only pay cash
dividends on its preferred and common stock to the extent necessary to
maintain its REIT status until the Company’s liquidity position has
improved.
|
These
effects have led to the following adverse consequences for the
Company:
|
·
|
Substantial
doubt about the ability to continue as a going concern. The
Company’s independent registered public accounting firm has issued an
opinion on the Company’s consolidated financial statements that states the
consolidated financial statements have been prepared assuming the Company
will continue as a going concern and further states that the Company’s
liquidity position, current market conditions and the uncertainty relating
to the outcome of the Company’s ongoing negotiations with its lenders have
raised substantial doubt about the Company’s ability to continue as a
going concern. The Company obtained agreements from its secured
credit facility lenders on March 17, 2009 that the going concern reference
in the independent registered public accounting firm’s opinion to the
consolidated financial statements is waived or does not constitute an
event of default and/or covenant breach under the applicable
facility.
|
|
·
|
Breach
of covenants. Financial covenants in certain of the Company’s
secured credit facilities include, without limitation, a covenant that the
Company’s net income (as defined in the applicable credit facility) will
not be less than $1.00 for any period of two consecutive quarters and
covenants that on any date the Company’s tangible net worth (as defined in
the applicable credit facility) will not have decreased by twenty percent
or more from the Company’s tangible net worth as of the last business day
in the third month preceding such date. The Company’s
significant net loss for the three months ended December 31, 2008 resulted
in the Company not being in compliance with these covenants. On
March 17, 2009, the secured credit facility lenders waived this covenant
breach until April 1, 2009. In addition, the Company’s secured
credit facility with BlackRock Holdco 2, Inc. (“Holdco 2”) requires the
Company to immediately repay outstanding borrowings under the facility to
the extent outstanding borrowings exceed 60% of the fair market value (as
determined by the Company’s manager) of the shares of common stock of
Carbon Capital II, Inc. (“Carbon II”) securing such
facility. As of February 28, 2009, 60% of the fair market value
of such shares declined to approximately $24,840 and outstanding
borrowings under the facility were $33,450. On March 17, 2009,
Holdco 2 waived this breach until April 1, 2009 Additionally,
in the first quarter of 2009, Anthracite Euro CRE CDO 2006-1 plc (“Euro
CDO”) failed to satisfy its Class E overcollateralization and interest
reinvestment tests. As a result of Euro CDO’s failure to
satisfy these tests, half of each interest payment due to the Company, as
the Euro CDO’s preferred shareholder, will remain in the CDO as
reinvestable cash until the tests are cured. However, since the
Euro CDO’s preferred shares were pledged to one of the Company’s secured
lenders in December 2008, the cash flow was already being diverted to pay
down that lender’s outstanding
balance.
|
|
·
|
Inability
to satisfy margin call. During the first quarter of 2009, the
Company received a margin call of $46,300 and C$5,300 from one of its
secured credit facility lenders. As part of the Company’s
ongoing discussions with this lender and the other secured credit facility
lenders, the Company has been negotiating to have the margin call waived
in consideration of certain agreements to be made by the
Company. On March 17, 2009, the lender waived this event of
default until April 1, 2009.
|
|
·
|
Reduction
or elimination of dividends. Due to current market conditions and the
Company’s current liquidity position, the Company’s Board of Directors
anticipates that the Company will pay cash dividends on its stock only to
the extent necessary to maintain its REIT status until the Company’s
liquidity position has improved and market values of commercial real
estate debt show signs of stability. The Board of Directors did not
declare a dividend on the Company’s common stock, par value $0.001 per
share (“Common Stock”) for the fourth quarter of 2008 since the Company’s
2008 net taxable income distribution requirements under REIT rules were
satisfied by distributions made for the first three quarters of 2008. The
Board of Directors also did not declare a dividend on the Common Stock and
the Company’s preferred stock for the first quarter of 2009. To the extent
the Company is required to make distributions to maintain its
qualification as a REIT in 2009, the Company anticipates it will rely upon
temporary guidance that was recently issued by the Internal Revenue
Service (“IRS”), which allows certain publicly traded REITs to satisfy
their net taxable income distribution requirements during 2009 by
distributing up to 90% in stock, with the remainder distributed in cash.
See Part II, Item 5, “Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities” for
additional discussion on dividends. Furthermore, the terms of the
Company’s preferred stock prohibit the Company from declaring or paying
cash dividends on the Common Stock unless full cumulative dividends have
been declared and paid on the preferred
stock.
|
As
discussed and for the reasons stated above, if the Company were unable to obtain
permanent waivers or extensions of the waivers from its secured credit facility
lenders on or before April 1, 2009, an event of default will immediately or with
the passage of time occur under the applicable respective facility.An event of
default under any of the Company’s facilities, absent a waiver, would trigger
cross-default and cross-acceleration provisions in all of the Company’s other
secured facilities and, if such debt were accelerated, would trigger a
cross-acceleration provision in one of the Company’s indentures. In
such an event, the Company would be required to repay all outstanding
indebtedness under its secured credit facilities and the one indenture
immediately. The Company would not have sufficient liquid assets
available to repay such indebtedness and, unless the Company were able to obtain
additional capital resources or waivers, the Company would be unable to continue
to fund its operations or continue its business.
Secured
credit facilities waivers
On March
17, 2009, the Company received waivers concerning covenant breaches from its
secured credit facility lenders as described above. In addition, the
Company's secured credit facility lenders agreed to permanently waive minimum
liquidity covenants in the facilities. In connection with the waivers, the
Company has agreed to pay $6 million to each of Morgan Stanley and Bank of
America and $3 million to Deutsche Bank.
CDO
tests
In
addition to the covenants under the Company’s secured credit facilities, four of
the seven CDOs issued by the Company contain compliance tests which, if
violated, could trigger a diversion of cash flows from the Company to
bondholders of the CDOs. The Company’s three CDOs designated as its HY series do
not have any compliance tests.
Interest
Coverage and Overcollateralization Tests (“Cash Flow Triggers”)
Four of
the seven CDOs issued by the Company contain tests that measure the amount of
overcollateralization and excess interest in the transaction. Failure to satisfy
these tests would cause the principal and/or interest cash flow that would
otherwise be distributed to more junior classes of securities (including those
held by the Company) to be redirected to pay down the most senior class of
securities outstanding until the tests are satisfied. Therefore, failure to
satisfy the coverage tests could adversely affect cash flows received by the
Company from the CDOs and thereby the Company’s liquidity and operating results.
The trigger percentages in the chart below represent the first threshold at
which cash flows would be redirected.
Generally,
the overcollateralization test measures the principal balance of the specified
pool of assets in a CDO against the corresponding liabilities issued by the CDO.
However, based on ratings downgrades, the principal balance of an asset or of a
specified percentage of assets in a CDO may be deemed reduced below their
current balance to levels set forth in the related CDO documents for purposes of
calculating the overcollateralization test. As a result, ratings downgrades can
reduce the principal balance of the assets used in the overcollateralization
test relative to the corresponding liabilities in the test, thereby reducing the
overcollateralization percentage. In addition, actual defaults of an asset would
also negatively impact compliance with the overcollateralization tests. A
failure to satisfy an overcollateralization test on a payment date could result
in the redirection of cash flows.
Weighted
Average Life, Minimum Weighted Average Recovery Rate, and the Weighted Average
Rating Factor (“Collateral Quality Tests”)
The
ability of EURO CDO to trade securities within its portfolio is dependent on
passing the collateral quality tests. Collateral quality tests limit
the ability of the Company’s CDOs to trade securities within its
portfolio. These tests apply to the Euro CDO, which is actively
managed. If one of these tests fails, then any subsequent trade will
either have to maintain or improve the result of the test or the trade cannot be
executed.
The Euro
CDO’s most significant test is the weighted average rating test which is
impacted when credit rating agencies downgrade the underlying CDO
collateral. Ratings downgrades of assets in the Company’s CDOs can
negatively impact compliance with the overcollateralization tests when an asset
is downgraded to Caa3 or below. The Company is permitted to actively manage the
Euro CDO collateral pool to facilitate compliance with this test through end of
February 2012, the reinvestment period. After the reinvestment
period, there are limited circumstances under which trades can be
executed. However, the Company’s ability to remain in compliance is
limited by the amount of securities held outside of the Euro CDO and also by the
Company’s inability to purchase new assets given its liquidity
position.
The chart
below is a summary of the Company’s CDO compliance tests as of December 31,
2008. During the first quarter of 2009, Anthracite Euro CRE CDO 2006-1 plc
(“Euro CDO”) failed to satisfy its Class E overcollateralization and interest
reinvestment tests.
Cash
Flow Triggers
|
|
CDO
I
|
|
|
CDO
II
|
|
|
CDO
III
|
|
|
CDO
Euro
|
|
Overcollateralization
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
125.1 |
% |
|
|
123.5 |
% |
|
|
116.7 |
% |
|
|
116.4 |
% |
Trigger
|
|
|
115.6 |
% |
|
|
113.2 |
% |
|
|
108.9 |
% |
|
|
116.4 |
% |
Pass/Fail
|
|
Pass
|
|
|
Pass
|
|
|
Pass
|
|
|
Pass
|
|
Interest
Coverage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
175.4 |
% |
|
|
196.7 |
% |
|
|
254.0 |
% |
|
|
116.4 |
% |
Trigger
|
|
|
108.0 |
% |
|
|
117.0 |
% |
|
|
111.0 |
% |
|
|
116.4 |
% |
Pass/Fail
|
|
Pass
|
|
|
Pass
|
|
|
Pass
|
|
|
Pass
|
|
Collateral
Quality Tests
|
|
CDO
I
|
|
|
CDO
II
|
|
|
CDO
III
|
|
|
CDO
Euro
|
|
Weighted
Average Life Test
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
3.93 |
|
Trigger
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
8.00 |
|
Pass/Fail
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
Pass
|
|
Minimum
Weighted Average Recovery Rate Test
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moody’s
|
|
Current
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
22.4 |
% |
Trigger
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
18.0 |
% |
Pass/Fail
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
Pass
|
|
Weighted
Average Rating Factor Test
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moody’s
|
|
Current
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
2721 |
|
Trigger
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
2740
|
|
Pass/Fail
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
Pass
|
|
Management
Agreement
On March
11, 2009, the Company’s unaffiliated directors approved the First Amendment and
Extension to the Amended and Restated Investment Advisory Agreement, dated March
31, 2008, between the Company and the Manager (as amended, the “Management
Agreement”). The Management Agreement will expire on March 31, 2010, unless
extended. For the full one-year term of the renewed contract, the
Manager has agreed to receive the entire management fee and any incentive fees
in the Company’s Common Stock subject to (i) the Common Stock continuing to be
listed on the New York Stock Exchange (the NYSE) and (ii)
if stockholder approval is required for any issuance of the Common Stock, such
required stockholder approval has been obtained. If the Common
Stock is at any time not listed on the NYSE or if
stockholder approval is required for any issuance of the Common Stock and such
required stockholder approval has not been obtained, such fees will be
payable in cash. The unaffiliated directors and the Manager may also
mutually agree to defer the payment of the management fee and the incentive fee,
in whole or in part. Such deferred fees will be payable in cash
unless the unaffiliated directors and the Manager mutually agree
otherwise.
General
The
Company’s principal investment focus is in a diverse portfolio of primarily high
yield commercial real estate loans and CMBS. The CMBS that the Company purchases
are fixed income instruments similar to bonds that carry an interest coupon and
stated principal. The cash flow used to pay the interest and principal on the
CMBS comes from a designated pool of first mortgage loans on commercial real
estate. These underlying mortgage loans usually are originated by commercial
banks or investment banks and are secured by a first mortgage on office
buildings, retail centers, apartment buildings, hotels or other types of
commercial real estate. A typical loan pool may contain several hundred
underlying mortgage loans with principal amounts of as little as $1,000 to over
$100,000. The pooling concept permits significant geographic diversification.
Converting loans into CMBS in this fashion allows investors to purchase these
securities in global capital markets and to participate in the commercial real
estate sector with significant diversification among property types, sizes and
locations in one fixed income investment.
The type
of CMBS issued from a typical loan pool is generally broken down by credit
rating. The highest rated CMBS will receive payments of principal first and is
therefore least exposed to the credit performance of the underlying mortgage
loans. These securities typically will carry a credit rating of AAA and will be
issued with a principal amount that represents some portion of the total
principal amount of the entire pool of underlying mortgage loans.
The CMBS
that receive principal payments last are generally rated below investment grade
(BB+ or lower) or non-rated. As the last to receive principal, these CMBS are
also the first to absorb any credit losses incurred in the pool of underlying
mortgage loans. Typically, the principal amount of these below investment grade
classes represents 2.0% to 5.0% of the principal of entire pool of underlying
mortgage loans. The investor that owns the lowest rated or non-rated, CMBS class
is designated as the controlling class representative for the underlying pool of
mortgage loans. This designation allows the holder to assert a significant
degree of influence over any workouts or foreclosures on any of the underlying
mortgage loans that have defaulted. These securities are generally issued with a
high yield to compensate for the credit risk inherent in owning the CMBS class
that is the first to absorb losses. At December 31, 2008, the Company owned 39
controlling class trusts in which the Company is in the first loss
position.
The
Company’s high yield commercial real estate loan strategy encompasses B Notes
(defined below) and mezzanine loans. B Notes and mezzanine loans are based on a
similar concept of investing in a portion of the principal and interest of a
specific loan instead of a pool of loans as in CMBS. In the case of B Notes, the
principal amount of a single loan is separated into a senior interest (“A Note”)
and a junior interest (“B Note”). Prior to a borrower’s default, the A Note and
the B Note receive principal and interest pari passu; however, after a borrower
defaults, the A Note receives its principal and interest first and the B Note
would absorb the credit losses that occur, if any, up to the full amount of its
principal. The B Note holder generally has certain rights to influence workouts
or foreclosures. The Company invests in B Notes as they provide relatively high
yields with a degree of influence over dispositions in the event of default.
Mezzanine loans generally are secured by ownership interests in an entity that
owns real estate. These loans generally are subordinate to a first mortgage and
would absorb a credit loss prior to the senior mortgage holder.
The
Company is managed by the Manager. The Company believes that the investment in
highly structured products requires significant expertise in traditional real
estate underwriting as well as in the capital markets. Through its external
management contract with the Manager, the Company seeks to source and manage
more opportunities by taking advantage of a unique platform that combines these
two disciplines.
The table
below is a summary of the Company’s investments by asset class for the last five
years:
|
|
Carrying
Value at December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real
estate securities(1)
|
|
$ |
935,963 |
|
|
|
33.6 |
% |
|
$ |
2,274,151 |
|
|
|
49.3 |
% |
|
$ |
2,494,099 |
|
|
|
53.0 |
% |
|
$ |
2,005,383 |
|
|
|
49.7 |
% |
|
$ |
1,623,939 |
|
|
|
44.6 |
% |
Commercial mortgage
loan pools(2)
|
|
|
1,022,105 |
|
|
|
36.6 |
|
|
|
1,240,793 |
|
|
|
26.9 |
|
|
|
1,271,014 |
|
|
|
27.0 |
|
|
|
1,292,407 |
|
|
|
32.0 |
|
|
|
1,312,045 |
|
|
|
36.1 |
|
Commercial real
estate loans(3)
|
|
|
823,777 |
|
|
|
29.5 |
|
|
|
1,082,785 |
|
|
|
23.5 |
|
|
|
554,148 |
|
|
|
11.8 |
|
|
|
425,453 |
|
|
|
10.6 |
|
|
|
329,930 |
|
|
|
9.1 |
|
Commercial
real estate equity
|
|
|
9,350 |
|
|
|
0.3 |
|
|
|
9,350 |
|
|
|
0.2 |
|
|
|
109,744 |
|
|
|
2.3 |
|
|
|
51,003 |
|
|
|
1.3 |
|
|
|
- |
|
|
|
- |
|
Commercial
real estate assets
|
|
|
2,791,195 |
|
|
|
100.0 |
|
|
|
4,607,079 |
|
|
|
99.9 |
|
|
|
4,429,005 |
|
|
|
94.1 |
|
|
|
3,774,246 |
|
|
|
93.6 |
|
|
|
3,265,914 |
|
|
|
89.8 |
|
Residential
mortgage-backed securities (“RMBS”)
|
|
|
787 |
|
|
|
- |
|
|
|
10,183 |
|
|
|
0.1 |
|
|
|
276,344 |
|
|
|
5.9 |
|
|
|
259,026 |
|
|
|
6.4 |
|
|
|
372,071 |
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,791,982 |
|
|
|
100.0 |
% |
|
$ |
4,617,262 |
|
|
|
100.0 |
% |
|
$ |
4,705,349 |
|
|
|
100.0 |
% |
|
$ |
4,033,272 |
|
|
|
100.0 |
% |
|
$ |
3,637,985 |
|
|
|
100.0 |
% |
|
(1)
|
Includes
the carrying value of the Company’s investment in Anthracite JV LLC (“AHR
JV”).
|
|
(2)
|
Represents
a Controlling Class CMBS that is consolidated for accounting purposes. See
Item 8, Note 7 of the consolidated financial statements, “Commercial
Mortgage Loan Pools”.
|
|
(3)
|
Includes the carrying value of
the Company’s investments in the Carbon Funds and RECP Anthracite
International JV Limited (“AHR International JV”). In January 2009, in
connection with the amendment and extension of the Company’s credit
facility with Morgan Stanley, the Company transferred its entire interest
in Anthracite International JV’s sole investment, an investment in a non-
U.S. commercial mortgage loan, to AHR MS, which then posted the asset as
additional collateral under the
facility.
|
Summary
of Commercial Real Estate Assets
A summary
of the Company’s commercial real estate assets with estimated fair values in
local currencies at December 31, 2008 is as follows:
|
|
Commercial
Real Estate
Securities (1)
|
|
|
Commercial
Real Estate
Loans (2)
|
|
|
Commercial
Real Estate
Equity
|
|
|
Commercial
Mortgage
Loan Pools
|
|
|
Total
Commercial
Real Estate
Assets
|
|
|
Total
Commercial
Real Estate
Assets (USD)
|
|
|
% of
Total
|
|
United
States Dollar (“USD”)
|
|
$ |
805,573 |
|
|
$ |
264,219 |
|
|
|
- |
|
|
$ |
1,022,105 |
|
|
$ |
2,091,897 |
|
|
$ |
2,091,897 |
|
|
|
74.9 |
% |
Great
British Pound (“GBP”)
|
|
£ |
9,321 |
|
|
£ |
43,662 |
|
|
|
- |
|
|
|
- |
|
|
£ |
52,983 |
|
|
|
76,176 |
|
|
|
2.8 |
% |
Euro
(“EUR”)
|
|
€ |
40,826 |
|
|
€ |
352,649 |
|
|
|
- |
|
|
|
- |
|
|
€ |
393,475 |
|
|
|
546,947 |
|
|
|
19.6 |
% |
Canadian
Dollar (“CAD”)
|
|
C$ |
62,660 |
|
|
C$ |
6,285 |
|
|
|
- |
|
|
|
- |
|
|
C$ |
68,945 |
|
|
|
55,849 |
|
|
|
2.0 |
% |
Japanese
Yen (“JPY”)
|
|
¥ |
859,457 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
¥ |
859,457 |
|
|
|
9,482 |
|
|
|
0.3 |
% |
Swiss
Francs (“CHF”)
|
|
|
- |
|
|
CHF |
23,976
|
|
|
|
- |
|
|
|
- |
|
|
CHF |
23,976
|
|
|
|
22,527 |
|
|
|
0.8 |
% |
Indian
Rupees (“INR”)
|
|
|
- |
|
|
|
- |
|
|
Rs |
455,532
|
|
|
|
- |
|
|
Rs |
455,532
|
|
|
|
9,350 |
|
|
|
0.3 |
% |
General
loan loss reserve
|
|
|
- |
|
|
$ |
(21,033 |
) |
|
|
- |
|
|
|
- |
|
|
$ |
(21,033 |
) |
|
$ |
(21,033 |
) |
|
|
(0.7 |
)% |
Total
USD Equivalent
|
|
$ |
935,963 |
|
|
$ |
823,777 |
|
|
$ |
9,350 |
|
|
$ |
1,022,105 |
|
|
$ |
2,791,195 |
|
|
$ |
2,791,195 |
|
|
|
100.0 |
% |
(1)
Includes the carrying value of the Company’s investment in AHR JV of $448
at December 31, 2008.
(2)
Includes the carrying value of the Company’s investments in the Carbon Capital
Funds of $40,871 and AHR International JV of $28,199 at December 31, 2008. In
January 2009, in connection with the amendment and extension of the Company’s
credit facility with Morgan Stanley, the Company transferred its entire interest
in Anthracite International JV’s sole investment, an investment in non-U.S.
commercial mortgage loan, to AHR MS, which then posted the asset as additional
collateral under the facility.
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 |
% |
EUR
|
|
€ |
131,645 |
|
|
€ |
354,458 |
|
|
|
- |
|
|
|
- |
|
|
€ |
486,103 |
|
|
|
710,707 |
|
|
|
15.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAD
|
|
C$ |
89,805 |
|
|
C$ |
6,249 |
|
|
|
- |
|
|
|
- |
|
|
C$ |
96,054 |
|
|
|
97,324 |
|
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JPY
|
|
¥ |
4,378,759 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
¥ |
4,378,759 |
|
|
|
39,196 |
|
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHF
|
|
|
- |
|
|
CHF
|
23,939
|
|
|
|
- |
|
|
|
- |
|
|
CHF
|
23,939
|
|
|
|
21,145 |
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INR
|
|
|
- |
|
|
|
- |
|
|
Rs
|
368,483
|
|
|
|
- |
|
|
Rs
|
368,483
|
|
|
|
9,350 |
|
|
|
0.2 |
% |
Total
USD Equivalent
|
|
$ |
2,274,151 |
|
|
$ |
1,082,785 |
|
|
$ |
9,350 |
|
|
$ |
1,240,793 |
|
|
$ |
4,607,079 |
|
|
$ |
4,607,079 |
|
|
|
100.0 |
% |
(1)
Includes the carrying value of the Company’s investments in the Carbon Funds of
$99,398 at December 31, 2007.
The
Company has foreign currency rate exposure related to its non-U.S. dollar
denominated assets. The Company’s primary currency exposures are the
Euro and the British pound. Changes in currency rates can adversely impact the
estimated fair value and earnings of the Company’s non-U.S.
holdings. The Company mitigates this impact by utilizing local
currency-denominated financings on its foreign investments. The
Company no longer uses various currency instruments to hedge the capital portion
of its foreign currency risk. In January 2009, the Company
discontinued the use of such instruments in an effort to avoid cash outlays
caused by the requirement to mark these instruments to market. The
Company has been primarily focused on preserving cash to pay down secured
lenders and maintaining these hedges creates unpredictable cash flows as
currency values move in relation to each other. Net foreign currency
gains were $1,684, $6,272, and $2,161 for the years ended December 31, 2008,
2007 and 2006, respectively.
Commercial
Real Estate Securities Portfolio Activity
The
following table details the par, estimated fair value, adjusted purchase price
(or “amortized cost”), and loss adjusted yield of the Company’s commercial real
estate securities included inside as well as outside of the Company’s CDOs at
December 31, 2008. The Dollar Price represents the estimated fair
value or adjusted purchase price of a security, respectively, relative to its
par value.
Commercial real estate
securities outside CDOs
|
|
Par
|
|
|
Estimated
Fair Value
|
|
|
Dollar
Price
|
|
|
Adjusted
Purchase
Price
|
|
|
Dollar
Price
|
|
|
Loss Adjusted
Yield
|
|
Investment grade CMBS
|
|
$ |
140,484 |
|
|
$ |
51,117 |
|
|
$ |
37.03 |
|
|
$ |
138,602 |
|
|
$ |
98.66 |
|
|
|
7.51 |
% |
Investment
grade REIT debt
|
|
|
121 |
|
|
|
93 |
|
|
|
77.24 |
|
|
|
123 |
|
|
|
101.41 |
|
|
|
5.27 |
% |
CMBS
rated BB+ to B
|
|
|
531,066 |
|
|
|
68,513 |
|
|
|
12.90 |
|
|
|
211,138 |
|
|
|
39.76 |
|
|
|
18.07 |
% |
CMBS
rated B- or lower(1)
|
|
|
527,629 |
|
|
|
32,685 |
|
|
|
5.94 |
|
|
|
121,961 |
|
|
|
22.86 |
|
|
|
16.55 |
% |
CDO
investments
|
|
|
325,125 |
|
|
|
24,176 |
|
|
|
7.44 |
|
|
|
16,449 |
|
|
|
5.06 |
|
|
|
65.27 |
% |
CMBS
Interest Only securities (“CMBS IOs”)
|
|
|
82,840 |
|
|
|
4,085 |
|
|
|
4.93 |
|
|
|
1,773 |
|
|
|
2.14 |
|
|
|
35.15 |
% |
Total
commercial real estate securities outside CDOs
|
|
|
1,607,265 |
|
|
|
180,669 |
|
|
|
11.21 |
|
|
|
490,046 |
|
|
|
30.41 |
|
|
|
16.35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
securities included in CDOs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
|
777,118 |
|
|
|
443,469 |
|
|
|
57.07 |
|
|
|
717,872 |
|
|
|
95.05 |
|
|
|
16.29 |
% |
Investment
grade REIT debt
|
|
|
210,624 |
|
|
|
155,773 |
|
|
|
73.96 |
|
|
|
211,589 |
|
|
|
100.46 |
|
|
|
5.48 |
% |
CMBS
rated BB+ to B
|
|
|
542,425 |
|
|
|
120,935 |
|
|
|
22.30 |
|
|
|
370,729 |
|
|
|
68.35 |
|
|
|
12.69 |
% |
CMBS
rated B- or lower
|
|
|
235,233 |
|
|
|
13,022 |
|
|
|
5.54 |
|
|
|
64,772 |
|
|
|
27.54 |
|
|
|
18.28 |
% |
CDO
investments
|
|
|
4,000 |
|
|
|
1,920 |
|
|
|
48.00 |
|
|
|
2,675 |
|
|
|
66.87 |
|
|
|
18.36 |
% |
Credit
tenant lease
|
|
|
22,643 |
|
|
|
20,175 |
|
|
|
89.10 |
|
|
|
23,245 |
|
|
|
102.66 |
|
|
|
5.66 |
% |
Total
commercial real estate securities included in CDOs
|
|
|
1,792,043 |
|
|
|
755,294 |
|
|
|
42.15
|
|
|
|
1,390,882 |
|
|
|
78.77
|
|
|
|
13.61
|
% |
Total
commercial real estate securities
|
|
$ |
3,399,308 |
|
|
$ |
935,963 |
|
|
$ |
27.53
|
|
|
$ |
1,880,928 |
|
|
$ |
55.33
|
|
|
|
11.01
|
% |
(1)
Includes the carrying value of the Company’s investment in AHR JV of $448
at December 31, 2008.
During
the year ended December 31, 2008, the Company’s commercial real estate
securities decreased by 58.9% from $2,274,150 to $935,963. This
decrease was primarily attributable to the decline in the fair market value of
the Company’s CMBS due to the significant widening of credit spreads during
2008.
The
following table details the par, estimated fair value, adjusted purchase price
(or “amortized cost”), and loss adjusted yield of the Company’s commercial real
estate securities included inside as well as outside of the Company’s CDOs at
December 31, 2007. The Dollar Price represents the estimated fair
value or adjusted purchase price of a security, respectively, relative to its
par value.
Commercial real estate
securities outside CDOs
|
|
Par
|
|
|
Estimated
Fair Value
|
|
|
Dollar
Price
|
|
|
Adjusted
Purchase
Price
|
|
|
Dollar
Price
|
|
|
Loss Adjusted
Yield
|
|
Investment
grade CMBS
|
|
$ |
179,638 |
|
|
$ |
149,856 |
|
|
$ |
83.42 |
|
|
$ |
158,216 |
|
|
$ |
88.07 |
|
|
|
6.56 |
% |
Investment
grade 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 securities outside CDOs
|
|
|
2,464,679 |
|
|
|
730,176 |
|
|
|
29.61 |
|
|
|
880,323 |
|
|
|
35.70 |
|
|
|
9.34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
securities included in CDOs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
|
801,749 |
|
|
|
768,670 |
|
|
|
95.87 |
|
|
|
759,524 |
|
|
|
94.73 |
|
|
|
7.09 |
% |
Investment
grade REIT debt
|
|
|
223,324 |
|
|
|
226,059 |
|
|
|
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 |
% |
Total
commercial real estate securities included in CDOs
|
|
|
1,873,013 |
|
|
|
1,543,974 |
|
|
|
85.47 |
|
|
|
1,566,337 |
|
|
|
85.14 |
|
|
|
8.28 |
% |
Total
commercial real estate securities
|
|
$ |
4,337,692 |
|
|
$ |
2,274,150 |
|
|
$ |
52.43 |
|
|
$ |
2,446,660 |
|
|
$ |
56.40 |
|
|
|
8.58 |
% |
The
Company’s CDO offerings allow the Company to match fund its commercial real
estate portfolio by issuing long-term debt to finance long-term
assets. The CDO debt is non-recourse to the Company; therefore, the
Company’s losses are limited to its equity investment in the CDO. The
CDO debt is also hedged to protect the Company from an increase in short-term
interest rates. At December 31, 2008, over 57% of the estimated fair
value of the Company’s subordinated CMBS was match funded in the Company’s CDOs
in this manner. The Company retained all of the equity of CDOs I, II,
III, HY3 and Euro (each as defined below) and recorded the transactions on its
consolidated financial statements as secured financing.
The table
below summarizes the Company’s CDO collateral and debt at December 31,
2008.
|
|
Collateral at December 31, 2008
|
|
|
Debt at December 31, 2008
|
|
|
|
|
|
|
Adjusted
Purchase Price
|
|
|
Loss Adjusted
Yield
|
|
|
Adjusted Issue
Price
|
|
|
Weighted
Average Cost
of Funds *
|
|
|
Net
Spread
|
|
CDO
I
|
|
$ |
448,226 |
|
|
|
8.80 |
% |
|
$ |
384,992 |
|
|
|
8.32 |
% |
|
|
0.48 |
% |
CDO
II
|
|
|
294,914 |
|
|
|
8.52 |
% |
|
|
261,479 |
|
|
|
6.79 |
% |
|
|
1.73 |
% |
CDO
III
|
|
|
353,398 |
|
|
|
7.67 |
% |
|
|
358,551 |
|
|
|
6.23 |
% |
|
|
1.44 |
% |
CDO
HY3
|
|
|
321,533 |
|
|
|
12.51 |
% |
|
|
371,861 |
|
|
|
7.05 |
% |
|
|
5.46 |
% |
Euro
CDO
|
|
|
421,466 |
|
|
|
9.17 |
% |
|
|
366,278 |
|
|
|
5.44 |
% |
|
|
3.72 |
% |
Total
**
|
|
$ |
1,839,537 |
|
|
|
9.27 |
% |
|
$ |
1,743,160 |
|
|
|
6.79 |
% |
|
|
2.48 |
% |
* The
weighted average cost of funds is the current cost of funds plus hedging
expenses.
** The
Company chose not to sell $12,500 of par of Euro CDO debt rated BB.
On May
23, 2006, the Company closed its sixth CDO issuance (“CDO HY3”) resulting in the
issuance of $417,000 of non-recourse debt to investors. The debt is
secured by a portfolio of CMBS and subordinated commercial real estate loans.
This investment grade debt was rated AAA through BBB- and the Company retained
additional debt rated BB and 100% of the preferred shares issued by CDO
HY3.
On
December 14, 2006, the Company closed its seventh CDO, Euro CDO. The
Euro CDO sold €263,500 of non-recourse debt at a weighted average spread to Euro
LIBOR of 60 basis points. The €263,500 consists of €251,000 of
investment grade debt at a weighted average spread to Euro LIBOR of 50 basis
points and €12,500 of below investment grade debt. The Company
retained an additional €12,500 of below investment grade debt and all of the
CDO’s preferred shares. This transaction was the Company’s first CDO
that was not U.S. dollar denominated. In the first quarter of 2009,
Euro CDO failed to satisfy its Class E overcollateralization and interest
reinvestment tests. As a result of Euro CDO’s failure to satisfy
these tests, half of each interest payment due to the Company, as the Euro CDO’s
preferred shareholder, will remain in the CDO as reinvestable cash until the
tests are cured. However, since the Euro CDO’s preferred shares were
pledged to one of the Company’s secured lenders in December 2008, the cash flow
was already being diverted to pay down that lender’s outstanding
balance.
There
were no CDOs issued by the Company in 2007 or 2008.
The
Company does not expect to be able to finance investments through CDOs for the
foreseeable future. See Part I, Item 1,”Business — Effect of Market
Conditions on the Company’s Business & Recent Developments.”
Real
Estate Credit Profile of Below Investment Grade CMBS
The
Company views its below investment grade CMBS investment activity as two
portfolios: Controlling Class CMBS and other below investment grade
CMBS. The Company considers the CMBS where it maintains the right to
control the workout or foreclosure process on any defaulting loans in the
underlying pool of mortgage loans as controlling class CMBS (“Controlling
Class”). The distinction between the two is in the rights the Company
obtains with its investment in Controlling Class CMBS. Controlling
Class rights allow the Company to influence the workout and/or disposition of
defaults that occur in the underlying loans. These securities absorb
the first losses realized in the underlying loan pools. The coupon
payment on the non-rated security also can be reduced for special servicer fees
charged to the trust. The next highest rated security in the
structure then generally will be downgraded to non-rated and become the first to
absorb losses and expenses from that point on. At December 31, 2008,
the Company owns 39 trusts where it is in the first loss position and is
designated as the controlling class representative. The total par of
the loans underlying these securities was $57,048,888. At December
31, 2008, subordinated Controlling Class CMBS with a par of $1,543,567 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 for CDO HY1 and CDO HY2.
The
Company’s other below investment grade CMBS have more limited rights to
influence the workout or foreclosure on any defaulting loans in the underlying
pool of mortgage loans. The total par of the Company’s other below
investment grade CMBS at December 31, 2008 was $291,435. The average
credit protection, or subordination level, of this portfolio is
1.02%.
The
Company’s investment in its subordinated Controlling Class CMBS by credit rating
category at December 31, 2008 is as follows:
|
|
Par
|
|
|
Estimated
Fair Value
|
|
|
Dollar
Price
|
|
|
Adjusted
Purchase
Price
|
|
|
Dollar
Price
|
|
|
Weighted
Average
Subordination
Level
|
|
BB+
|
|
$ |
233,572 |
|
|
$ |
44,258 |
|
|
$ |
18.9 |
|
|
$ |
109,903 |
|
|
$ |
47.1 |
|
|
|
4.4 |
% |
BB
|
|
|
164,824 |
|
|
|
24,211 |
|
|
|
14.7 |
|
|
|
76,874 |
|
|
|
46.6 |
|
|
|
3.5 |
% |
BB-
|
|
|
172,505 |
|
|
|
33,158 |
|
|
|
19.2 |
|
|
|
85,802 |
|
|
|
49.7 |
|
|
|
5.1 |
% |
B+
|
|
|
103,712 |
|
|
|
10,690 |
|
|
|
10.3 |
|
|
|
39,907 |
|
|
|
38.5 |
|
|
|
2.1 |
% |
B
|
|
|
116,465 |
|
|
|
11,187 |
|
|
|
9.6 |
|
|
|
44,990 |
|
|
|
38.6 |
|
|
|
2.2 |
% |
B-
|
|
|
125,165 |
|
|
|
8,499 |
|
|
|
6.8 |
|
|
|
36,035 |
|
|
|
28.8 |
|
|
|
4.0 |
% |
CCC+
|
|
|
50,364 |
|
|
|
2,817 |
|
|
|
5.6 |
|
|
|
12,432 |
|
|
|
24.7 |
|
|
|
0.9 |
% |
CCC
|
|
|
35,592 |
|
|
|
1,470 |
|
|
|
4.1 |
|
|
|
11,582 |
|
|
|
32.5 |
|
|
|
0.8
|
% |
CC
|
|
|
12,643 |
|
|
|
253 |
|
|
|
2.0 |
|
|
|
2,084 |
|
|
|
16.5 |
|
|
|
0.3 |
% |
NR
|
|
|
528,724 |
|
|
|
25,703 |
|
|
|
4.9 |
|
|
|
89,462 |
|
|
|
16.9 |
|
|
|
n/a |
|
Total
|
|
$ |
1,543,566 |
|
|
$ |
162,246 |
|
|
$ |
10.5 |
|
|
$ |
509,071 |
|
|
$ |
32.9 |
|
|
|
|
|
The
Company’s investment in its subordinated Controlling Class CMBS by credit rating
category at December 31, 2007 is as follows:
|
|
Par
|
|
|
Estimated
Fair Value
|
|
|
Dollar
Price
|
|
|
Adjusted
Purchase
Price
|
|
|
Dollar
Price
|
|
|
Weighted
Average
Subordination
Level
|
|
BB+
|
|
$ |
277,946 |
|
|
$ |
189,351 |
|
|
$ |
68.1 |
|
|
$ |
228,054 |
|
|
$ |
82.1 |
|
|
|
3.6 |
% |
BB
|
|
|
191,808 |
|
|
|
117,702 |
|
|
|
61.4 |
|
|
|
154,916 |
|
|
|
80.8 |
|
|
|
2.6 |
% |
BB-
|
|
|
192,875 |
|
|
|
121,665 |
|
|
|
63.1 |
|
|
|
137,092 |
|
|
|
71.1 |
|
|
|
4.3 |
% |
B+
|
|
|
103,352 |
|
|
|
55,664 |
|
|
|
53.9 |
|
|
|
67,214 |
|
|
|
65.1 |
|
|
|
2.2 |
% |
B
|
|
|
140,275 |
|
|
|
71,947 |
|
|
|
51.3 |
|
|
|
83,949 |
|
|
|
59.9 |
|
|
|
1.8 |
% |
B-
|
|
|
123,683 |
|
|
|
49,817 |
|
|
|
40.3 |
|
|
|
63,282 |
|
|
|
51.2 |
|
|
|
1.3 |
% |
CCC
|
|
|
22,313 |
|
|
|
6,293 |
|
|
|
28.2 |
|
|
|
7,814 |
|
|
|
35.1 |
|
|
|
0.9 |
% |
NR
|
|
|
533,920 |
|
|
|
118,473 |
|
|
|
22.2 |
|
|
|
139,714 |
|
|
|
26.2 |
|
|
|
n/a |
|
Total
|
|
$ |
1,586,172 |
|
|
$ |
730,912 |
|
|
$ |
46.1 |
|
|
$ |
882,035 |
|
|
$ |
55.6 |
|
|
|
|
|
During
2008, the par amount of the Company’s Controlling Class CMBS was reduced by
$23,420; of this amount, none of the par reductions were related to Controlling
Class CMBS held in CDO HY1 and CDO HY2. Further delinquencies and
losses may cause the par reductions to continue and cause the Company to
conclude that a change in loss adjusted yield is required along with a
write-down of the adjusted purchase price on the consolidated statements of
operations according to Emerging Issues Task Force (“EITF”) Issue 99-20, Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets (“EITF 99-20”). Also during 2008, the loan
pools were paid down by $2,915,847. Pay down proceeds are distributed
to the highest rated CMBS class first and reduce the percent of total underlying
collateral represented by each rating category.
As the
portfolio matures and expected losses occur, subordination levels of the lower
rated classes of a CMBS investment will be reduced. This may cause
the lower rated classes to be downgraded, which would negatively affect their
estimated fair value and therefore the Company’s net asset
value. Reduced estimated fair value would negatively affect the
Company’s ability to finance any such securities that are not financed through a
CDO or similar matched funding vehicle. In some cases, securities
held by the Company may be upgraded to reflect seasoning of the underlying
collateral and thus would increase the estimated fair value of the
securities. During the year ended December 31, 2008, six securities
in one of the Company’s Controlling Class CMBS were upgraded by at least one
rating agency and forty two securities in one of the Company’s Controlling Class
CMBS were downgraded by at least one rating agency. Additionally, at
least one rating agency upgraded fourteen of the Company’s non-Controlling Class
commercial real estate securities, and downgraded ten. Three of the
Company’s investment grade REIT debt securities were upgraded and sixteen were
downgraded during the year ended December 31, 2008.
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 portfolio. The
year of issuance, or vintage year, is important, as certain vintages tend to
have more delinquencies others. The Company owns Controlling Class
CMBS issued in 1998, 1999 and 2001 to 2007. Comparable delinquency
statistics referenced by vintage year as a percentage of par outstanding at
December 31, 2008 are shown in the table below:
Vintage
Year
|
|
Underlying
Collateral
|
|
|
Delinquencies
Outstanding
|
|
|
Barclays Capital
Conduit Guide
|
|
1998
|
|
|
1,223,225 |
|
|
|
13.8 |
% |
|
|
8.6 |
% |
1999
|
|
|
483,231 |
|
|
|
3.6 |
% |
|
|
2.7 |
% |
2001
|
|
|
797,928 |
|
|
|
1.7 |
% |
|
|
1.7 |
% |
2002
|
|
|
897,926 |
|
|
|
0.9 |
% |
|
|
0.9 |
% |
2003
|
|
|
1,710,116 |
|
|
|
0.5 |
% |
|
|
0.9 |
% |
2004
|
|
|
5,943,239 |
|
|
|
1.3 |
% |
|
|
0.9 |
% |
2005
|
|
|
11,776,781 |
|
|
|
1.2 |
% |
|
|
0.8 |
% |
2006
|
|
|
13,544,373 |
|
|
|
1.2 |
% |
|
|
1.2 |
% |
2007
|
|
|
20,672,069 |
|
|
|
1.5 |
% |
|
|
1.0 |
% |
Total
|
|
$ |
57,048,888 |
|
|
|
1.6 |
%
* |
|
|
1.2 |
%
* |
*
Weighted average based on current principal balance.
Delinquencies
on the Company’s CMBS collateral as a percent of principal generally track
industry averages. While the Company’s portfolio under-performed relative to the
market during 2008, the absolute amount of delinquencies remains
low. These seasoning criteria generally will adjust for the lower
delinquencies that occur in newly originated collateral. See Item 7A
“Quantitative and Qualitative Disclosures About Market Risks” for a further
discussion of how delinquencies and loan losses affect the Company.
The
following table sets forth certain information relating to the aggregate
principal balance and payment status of delinquent commercial mortgage loans
underlying the Controlling Class CMBS held by the Company at December 31, 2008
and 2007:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Principal
|
|
|
Number
of
Loans
|
|
|
% of
Collateral
|
|
|
Principal
|
|
|
Number
of
Loans
|
|
|
% of
Collateral
|
|
Past
due 30 days to 60 days
|
|
$ |
192,683 |
|
|
|
2 |
|
|
|
0.3 |
% |
|
$ |
93,934 |
|
|
|
17 |
|
|
|
0.1 |
% |
Past
due 60 days to 90 days
|
|
|
140,149 |
|
|
|
15 |
|
|
|
0.2 |
% |
|
|
9,655 |
|
|
|
5 |
|
|
|
0.1 |
% |
Past
due 90 days or more
|
|
|
525,297 |
|
|
|
46 |
|
|
|
0.9 |
% |
|
|
169,710 |
|
|
|
25 |
|
|
|
0.3 |
% |
Real
Estate owned
|
|
|
23,888 |
|
|
|
10 |
|
|
|
0.1 |
% |
|
|
41,202 |
|
|
|
13 |
|
|
|
0.1 |
% |
Foreclosure
|
|
|
15,120 |
|
|
|
4 |
|
|
|
0.1 |
% |
|
|
29,674 |
|
|
|
4 |
|
|
|
0.1 |
% |
Total
Delinquent
|
|
$ |
897,137 |
|
|
|
77 |
|
|
|
1.6 |
% |
|
$ |
344,175 |
|
|
|
64 |
|
|
|
0.7 |
% |
Total
Collateral Balance
|
|
$ |
57,048,888 |
|
|
|
4,480 |
|
|
|
|
|
|
$ |
59,534,400 |
|
|
|
4,632 |
|
|
|
|
|
Of the 77
delinquent loans at December 31, 2008, 10 loans were real estate owned and being
marketed for sale, four loans were in foreclosure and the remaining 63 loans
were in some form of workout negotiations. The Controlling Class CMBS
owned by the Company have a delinquency rate of 1.6%, which generally tracks
industry averages. During 2008, the underlying collateral experienced
early payoffs of $2,915,847 representing 5.11% of the year-end pool
balance. These loans were paid off at par with no
loss. Aggregate losses related to the underlying collateral of
$20,842 were realized during the year ended December 31, 2008. This brings
cumulative realized losses to $147,746 representing 12.4% of the Company’s total
estimated loss of $1,194,695. These losses included special servicer
and other workout expenses. This experience to date is in line with
the Company’s revised loss expectations. Realized losses and special
servicer expenses are expected to increase on the underlying loans as the
portfolio matures. Special servicer expenses are also expected to
increase as portfolios mature.
To the
extent that realized losses differ from the Company’s original loss estimates,
it may be necessary to reduce or increase the projected yield on the applicable
CMBS investment to better reflect such investment’s expected earnings net of
expected losses, from the date of purchase. While realized losses on
individual assets may be higher or lower than original estimates, the Company
currently believes its aggregate loss estimates and yields remain
appropriate.
The
Company manages its credit risk through disciplined underwriting,
diversification, active monitoring of loan performance and exercise of its right
to influence the workout process for delinquent loans as early as
possible. The Company maintains diversification of credit exposures
through its underwriting process and can shift its focus in future investments
by adjusting the mix of loans in subsequent acquisitions. The
comparative profiles of the loans underlying the Company’s CMBS by property type
at December 31, 2008 and 2007 are as follows:
|
|
12/31/08 Exposure
|
|
|
12/31/07 Exposure
|
|
Property
Type
|
|
Collateral
Balance
|
|
|
% of
Total
|
|
|
Collateral
Balance
|
|
|
% of
Total
|
|
Office
|
|
$ |
19,381,308 |
|
|
|
33.9 |
% |
|
$ |
19,541,064 |
|
|
|
32.8 |
% |
Retail
|
|
|
16,272,391 |
|
|
|
28.5 |
% |
|
|
17,154,342 |
|
|
|
28.8 |
|
Multifamily
|
|
|
12,247,218 |
|
|
|
21.5 |
% |
|
|
13,503,618 |
|
|
|
22.7 |
|
Industrial
|
|
|
4,336,214 |
|
|
|
7.6 |
% |
|
|
4,473,917 |
|
|
|
7.5 |
|
Lodging
|
|
|
4,005,322 |
|
|
|
7.0 |
% |
|
|
3,970,017 |
|
|
|
6.7 |
|
Healthcare
|
|
|
323,391 |
|
|
|
0.6 |
% |
|
|
400,409 |
|
|
|
0.7 |
|
Other
|
|
|
483,044 |
|
|
|
0.9 |
% |
|
|
491,033 |
|
|
|
0.8 |
|
Total
|
|
$ |
57,048,888 |
|
|
|
100 |
% |
|
$ |
59,534,400 |
|
|
|
100 |
% |
At
December 31, 2008 and 2007, the commercial mortgage loans underlying the
Controlling Class CMBS held by the Company were secured by properties at the
locations identified below:
|
|
Percentage (1)
|
|
Geographic
Location
|
|
2008
|
|
|
2007
|
|
California
|
|
|
16.9 |
% |
|
|
16.8 |
% |
New
York
|
|
|
11.9 |
|
|
|
12.2 |
|
Texas
|
|
|
9.8 |
|
|
|
9.6 |
|
Florida
|
|
|
8.1 |
|
|
|
8.6 |
|
Other
(2)
|
|
|
53.3 |
|
|
|
52.8 |
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
(1)
|
Based
on a percentage of the total unpaid principal balance of the underlying
loans.
|
|
(2)
|
No
other individual category comprises more than 5% of the
total.
|
The
Company’s interest income calculated in accordance with EITF 99-20 for its CMBS
is computed based upon a yield, which assumes credit losses will
occur. The yield to compute the Company’s taxable income does not
assume there would be credit losses, as a loss can only be deducted for tax
purposes when it has occurred. This is the primary difference between
the Company’s income in accordance with generally accepted accounting principles
in the United States of America (“GAAP”) and taxable income.
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 mortgage loan in the Company’s CMBS
portfolio.
At
December 31, 2008 the carrying value of the Company’s commercial real estate
loans was $880,071. The portfolio consists of 58 loans. As a percentage of
carrying value, 28.8% are located in the United States and 71.2% are located
outside the United States. For additional information about the Company’s
commercial real estate portfolio, see Item 8, “Schedule IV-Mortgage Loans on
Real Estate”.
For the
year ended December 31, 2008, the Company purchased $2,286 of U.S. dollar
denominated commercial real estate loans. For the year ended December
31, 2008, the Company experienced repayments of $23,853 related to its
commercial real estate loan portfolio.
The
Company recorded a provision for loan losses of $165,928 for the year ended
December 31, 2008. This provision relates to eight loans with an
aggregate principal balance of $224,774 and accrued interest of $2,506, and a
general reserve of $21,033. 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 does not
believe the full collectability of the loans is probable. See Note 6
of the consolidated financial statements, “Commercial Mortgage Loans” for
further discussion.
Also
included in commercial real estate loans are the Company’s investments in Carbon
Capital, Inc. (“Carbon I”) and Carbon Capital II, Inc. (“Carbon II”, and
collectively with Carbon I, the “Carbon Funds.”) For the year ended
December 31, 2008, the Company recorded a net loss of $55,398 for the Carbon
Funds. During 2008, Carbon II increased its investment in U.S.
commercial real estate assets by $3,586 and received pay downs of
$85,078. The investment periods for the Carbon Funds have expired and
as repayments continue to occur, capital will be returned to
investors.
At
December 31, 2008 and 2007, the Company’s investments in the Carbon Funds were
as follows:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
Carbon
I
|
|
$ |
1,713 |
|
|
$ |
1,636 |
|
Carbon
II
|
|
|
39,158 |
|
|
|
97,762 |
|
|
|
$ |
40,871 |
|
|
$ |
99,398 |
|
Carbon II
recorded a provision for loan losses of $241,928 for the year ended December 31,
2008. This provision relates to eight loans with an aggregate
principal balance of $304,093 and accrued interest of $15,492 and a general
reserve of $4,838. The first is a $35,000 mezzanine loan secured by a
Class-A office building located in Midtown Manhattan which required a provision
totaling $35,464 (includes accrued interest of $464). The second is a
$30,149 first mortgage on a site for redevelopment to multifamily in New York
City which required a provision totaling $4,555 (includes accrued interest of
$226). The third loan is a $9,820 mezzanine loan secured by a
336-unit multi-family property located in Orlando, Florida which required a
provision totaling $4,438. The fourth is a $46,458 mezzanine loan
secured by a hotel located in the South Beach area of Miami, Florida which
required a provision totaling $47,604 (includes accrued interest of
$13,587). The fifth is a $43,427 first loss junior mezzanine loan
secured by a portfolio of office buildings and a parking garage located in
Washington, DC, Boston and Los Angeles which required a provision totaling
$43,643 (includes accrued interest of $216). The sixth is a $78,178
interest in a portfolio of apartment buildings located in San Francisco, CA
which required a provision of $39,926 (includes accrued interest of
$263). The seventh is a $43,360 first loss mezzanine interest in a
portfolio of multifamily and commercial properties in San Francisco which
required a provision totaling $43,726 (includes accrued interest of
$366). The eighth is a $17,700 mezzanine interest in a portfolio
secured by four, Class-A, office buildings in Manhattan which required a
provision totaling $17,734. Carbon II also recorded a loss on real
estate, held for sale, of $12,363 during 2008 related to a rental property in
Florida acquired upon the default of a mezzanine loan during
2007. The assets are in various stages of resolution and due to the
estimated reduction in value of the underlying collateral below the principal
balance of the assets, Carbon II does not believe the full collectability of the
assets is probable.
All of
the shares of Carbon II common stock owned by the Company are pledged under the
Company’s credit facility with Holdco. Pursuant to such facility’s credit
agreement, Holdco 2 has the option to purchase such shares.
Commercial
Real Estate Equity
The
Company has an indirect investment in a commercial real estate development fund
located in India. At December 31, 2008, the Company’s committed
capital was $11,000, of which $9,350 had been drawn. The entity
conducts its operations in the local currency, Indian Rupees.
BlackRock
Diamond Property Fund, Inc. (“BlackRock Diamond”) is a private REIT managed by
BlackRock Realty Advisors, Inc., a subsidiary of the Company’s
Manager. The Company invested $100,000 in BlackRock
Diamond. The Company redeemed $25,000 of its investment on June 30,
2007 and redeemed the remaining $75,000 on September 30, 2007. Over
the life of this investment, the Company recognized a cumulative profit of
$34,853, an annualized return of 20.8%.
The
Company purchased a defaulted loan from a Controlling Class CMBS trust during
the first quarter of 2006. The loan was secured by a first mortgage on a
multifamily property in Texas. Subsequent to the loan purchase, the Company
foreclosed on the loan and acquired title to the property in the
process. The Company sold the property during the second quarter of
2006 and recorded a gain from discontinued operations of $1,366 on the
consolidated statement of operations.
Residential
Mortgage-Backed Securities
As of
December 31, 2008, the Company had $787 of investments in RMBS. The
Company may in the future invest in RMBS depending upon market conditions and
its liquidity position.
SEC
Comment Letter
On
December 12, 2008, the Company received a letter from the Staff (the “Staff”) of
the Division of Corporation Finance of the SEC in which the Staff provided
written comments on the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007. The Company responded to the most recently issued
SEC correspondence on March 17, 2009. Currently, two comments remain
open. One comment relates to non-GAAP disclosures made in the
Company’s presentation of net interest margin and net interest spread from its
portfolio and the second comment relates to a general loan loss reserve for the
Company’s commercial real estate loans. The Company has (i) provided
additional information regarding its non-GAAP disclosures included in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations in this report and (ii) provided
additional information regarding its conclusions reached relating to a general
loan loss reserve.
Critical
Accounting Estimates
Management’s
discussion and analysis of financial condition and results of operations are
based on the amounts reported on the Company’s consolidated financial
statements. These consolidated financial statements are prepared in accordance
with GAAP. In preparing the consolidated financial statements, management is
required to make various estimates and assumptions that affect the reported
amounts. Significant judgment by management is required in making these
estimates and assumptions, and actual results may ultimately be materially
different from these estimates and assumptions. Changes in these estimates and
assumptions could have a material effect on the Company’s consolidated financial
statements. The following is a summary of the Company’s accounting policies that
are the most affected by management’s judgments, estimates and
assumptions:
Valuation
of Securities and Certain Liabilities
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. Management 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. Management utilizes this process to validate
the prices received from brokers and adjustments are made as deemed necessary by
management to capture current market information.
CDOs. 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 risks of the underlying collateral, (iv) terms and
reinvestment periods and (v) market transactions of similar CDOs.
Management 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. Management
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 fair value of senior unsecured convertible notes
are determined by reference to the mid-point of bid/ask prices obtained from
certain dealers in this market. The bid/ask prices represented the prices at
which the dealer was willing to buy or sell the note on the measurement date of
December 31, 2008. Trading in these notes is done over-the-counter and therefore
requires direct communication with the dealer to execute the
transaction. The dealer utilizes a model to publish their bid/ask
price, which considers, among other things (i) anticipated cash flows,
(ii) current market credit spreads and (iii) market transactions of
similar securities.
Senior and junior unsecured notes
and junior subordinated notes. The estimated fair values of
these liabilities are determined 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 regard to 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.
Securities
Held-for-Trading
Securities
held-for-trading are carried at estimated fair value with net realized and
unrealized gains or losses included on the consolidated statements of
operations.
Income on
these securities is recognized based upon a number of assumptions that are
subject to uncertainties and contingencies. Examples include, among
other things, the rate and timing of principal payments (including prepayments,
repurchases, defaults and liquidations), the pass-through or coupon rate and
interest rate fluctuations. Additional factors that may affect the
Company’s reported interest income on its commercial real estate securities
include interest payment shortfalls due to delinquencies on the underlying
commercial mortgage loans, the timing and magnitude of credit losses on the
commercial mortgage loans underlying the securities that are a result of the
general condition of the real estate market (including competition for tenants
and their related credit quality) and changes in market rental
rates. These uncertainties and contingencies are difficult to predict
and are subject to future events that may alter the assumptions.
The
Company recognizes interest income from its purchased beneficial interests in
securitized financial interests (“beneficial interests”) (other than beneficial
interests of high credit quality, sufficiently collateralized to ensure that the
possibility of credit loss is remote, or that cannot contractually be prepaid or
otherwise settled in such a way that the Company would not recover substantially
all of its recorded investment) in accordance with EITF 99-20. Accordingly, on a
quarterly basis, when changes in estimated cash flows from the cash flows
previously estimated occur due to actual prepayment and credit loss experience,
the Company calculates a revised yield based on the current amortized cost of
the investment (including any other-than-temporary impairments recognized to
date) and the revised cash flows. The revised yield is then applied
prospectively to recognize interest income.
In
January 2009, the Financial Accounting Standards Board (the “FASB”) issued Staff
Position (“FSP”) EITF 99-20-1, Amendments to the Impairment
Guidance of EITF Issue No. 99-20, (“FSP EITF 99-20-1”). FSP EITF
99-20-1 amends EITF Issue No. 99-20, to allow for an entity to exercise its
own judgment in arriving at estimates of future cash flows and assess the
probability of collecting all cash flows rather than relying solely on the
assumptions used by market participants. FSP EITF 99-20-1 is effective for
interim and annual periods ending after December 15, 2008. Retroactive
application of FSP EITF 99-20-1 is prohibited. The adoption of FSP EITF 99-20-1
did not materially impact the Company’s consolidated financial
statements.
For other
mortgage-backed and related mortgage securities, the Company accounts for
interest income under SFAS No. 91, Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases (“FAS 91”), using the effective yield method which
includes the amortization of discount or premium arising at the time of purchase
and the stated or coupon interest payments.
Impairment
- Securities
Management
must also assess whether unrealized losses on securities reflect a decline in
value that is other than temporary, and, accordingly, write the impaired
security down to its fair value through earnings. Significant judgment by
management is required in this analysis, which includes, but is not limited to,
making assumptions regarding the collectability of the principal and interest,
net of related expenses, on the underlying loans.
As of
January 1, 2008, the Company designated all of its securities available-for-sale
as securities held-for-trading. As a result, all unrealized gains and
losses are recognized in the consolidated statement of financial condition and
therefore the impairment charges relate to the calculation of interest income
under EITF 99-20.
Under
EITF 99-20, when changes in estimated cash flows from the cash flows previously
estimated occur due to actual prepayment and credit loss experience, and the
present value of the revised cash flows using the current expected yield is less
than the present value of the previously estimated remaining cash flows
(adjusted for cash receipts during the intervening period), an
other-than-temporary impairment is deemed to have occurred. Accordingly, the
security is written down to fair value with the resulting change being included
in income, and a new cost basis established. In both instances, the
original discount or premium is written off when the new cost basis is
established.
After
taking into account the effect of an impairment charge, income is recognized
under EITF 99-20 or FAS 91, as applicable, using the revised market yield for
the security used in establishing the write-down.
Securities
Available-for-Sale
Prior to
the adoption of SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“FAS 159”) in January of 2008, the
Company had designated certain investments in mortgage-backed securities,
mortgage-related securities and certain other securities as available-for-sale.
As of December 31, 2008, the Company did not hold any securities
available-for-sale. Securities available-for-sale are carried at
estimated fair value with the net unrealized gains or losses reported as a
component of accumulated other comprehensive income in stockholders’
equity. Changes in the valuations do not affect the Company’s
reported net income or cash flows, but impact stockholders’ equity and,
accordingly, book value per share.
In
accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities (“FAS 115”), when the estimated fair value
of the security classified as available-for-sale has been below amortized cost
for a significant period of time, and the Company concludes that it no longer
has the ability or intent to hold the security for the period of time over which
the Company expects the values to recover to amortized cost, the investment is
written down to its fair value. The resulting charge is included in
income, and a new cost basis is established.
Variable
Interest Entities
The
Company has analyzed the governing pooling and servicing agreements for each of
its Controlling Class CMBS and believes that the terms are industry standard and
are consistent with the qualifying special-purpose entity (“QSPE”)
criteria. However, there is uncertainty with respect to QSPE
treatment due to ongoing review by accounting standard setters, potential
actions by various parties involved with the QSPE, as well as varying and
evolving interpretations of the QSPE criteria under FAS 140. Additionally, the
standard setters continue to review the Financial Accounting Standards Board
(“FASB”) Interpretation No. 46, “Consolidation of Variable Interest
Entities” (revised December 2003) (“FIN 46R”) provisions related to
the computations used to determine the primary beneficiary of a VIE. Future
guidance from the standard setters may require the Company to consolidate CMBS
trusts in which the Company has invested.
Impairment-
Commercial Mortgage Loans
The
Company purchases and originates commercial mortgage loans to be held as
long-term investments. The Company also has investments in the Carbon Funds that
invest in commercial mortgage loans that are managed by the
Manager. Management periodically must evaluate each loan for possible
impairment. Impairment is indicated when it is deemed probable that
the Company will not be able to collect all amounts due according to the
contractual terms of the loan. If a loan were determined to be impaired, the
Company would establish a reserve for probable losses and a corresponding charge
to earnings. Given the nature of the Company’s loan portfolio and the underlying
commercial real estate collateral, significant judgment by management is
required in determining impairment and the resulting loan loss allowance, which
includes but is not limited to making assumptions regarding the value of the
real estate that secures the commercial mortgage loan.
Impairment
– Commercial Mortgage Loan Pools
Over the
life of the commercial mortgage loan pools, the Company reviews and updates its
loss assumptions to determine the impact on expected cash flows to be
collected. A decrease in estimated cash flows will reduce the amount
of interest income recognized in future periods and would result in an
impairment charge recorded on the consolidated statements of
operations. An increase in estimated cash flows will increase the
amount of interest income recorded in future periods.
Commercial
Mortgage Loans and Loan Pools – Loan Loss Reserve
The
Company recognizes impairment on loans when it is probable that the Company will
not be able to collect all amounts due according to the contractual terms of the
loan agreement. The Company measures impairment (both interest and
principal) based on the present value of expected future cash flows discounted
at the loan’s effective interest rate or the fair value of the collateral if the
loan is collateral dependent.
Allowance
for Loan Losses
The
Company’s allowance for estimated loan losses represents its estimate of
probable credit losses inherent in its commercial mortgage loan portfolio held
for investment as of the date of the consolidated statement of financial
condition. When determining the adequacy of the allowance for loan losses, the
Company considers historical and industry loss experience, economic conditions
and trends, the estimated fair values of its loans, credit quality trends and
other factors that it determines are relevant. Increases to the allowance for
loan losses are charged to current period earnings through the provision for
loan losses. The Company’s allowance for loan losses consists of two components,
a loan specific component and a general component. Amounts determined to be
uncollectible are charged directly to the allowance for loan
losses.
The loan
specific component of the Company’s allowance for loan losses consists of
individual loans that are impaired and for which the estimated allowance for
loan losses is determined in accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. The Company performs an analysis of each loan in
accordance with paragraph 8 of SFAS 114 by assessing whether “it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement”. The Company considers a loan to be
impaired when, based on current information and events, it believes it is
probable that it will be unable to collect all amounts due to it based on the
contractual terms of the loan.
The
general component of the Company’s allowance for loan losses is determined in
accordance with SFAS No. 5, Accounting for Contingencies.
This component of the allowance for loan losses represents the Company’s
estimate of losses inherent, but unidentified, in its portfolio as of the date
of the consolidated statement of financial condition. The general component of
the allowance for loan losses is estimated using a formula-based method based
upon a review of the Company’s loan portfolio’s risk characteristics, risk
grouping of loans in the portfolio based upon estimated probability of default
and severity of loss as well as consideration of general economic conditions and
trends. The Company’s general component excludes loans that have been fully and
partially reserved for in the loan specific component. The formula-based general
component is developed by calculating estimated losses based on the probability
of default (“PD”) given historical default trends in the commercial real estate
market and the Company’s judgment concerning those trends and other relevant
factors. The severity of the loss or loss given default (“LGD”) the Company
would incur if the loan defaulted is based on several factors including
historical trends in the commercial real estate industry, the estimated decline
in the market value of the underlying collateral since the date of purchase and
the Company’s position in the capital structure that owns the underlying
collateral (e.g., the Company expects mezzanine loans to suffer a greater loss
than a B note given mezzanine positions are subordinated to B notes
in a commercial real estate capital structure).
PD is
derived by the Company primarily from research based on two complementary data
sets: a) defaulted CMBS loans originated from 1995 on and b) large pool of life
insurance company loans that defaulted over a 30-year time frame from 1975. That
research examined the PD of loans at various levels of debt service coverage
ratios (DSCRs). The PD is greater for loans with less debt
coverage. The Company converts that information to a five-year
horizon to better reflect the term of the portfolio. Each year’s multiple is
based on the experience of both the life insurance industry and the CMBS
market. For example, the PD of a loan with a DSCR of 1.1 to 1.25 and
one year to maturity would be approximately 1.8%, while the PD would increase by
a multiple thereof for each additional year until maturity.
For loans
with a DSCR of less than 1.0 which also have additional cash reserves available
to supplement income for at least the next year, the DSCR may be increased to up
to 1.0 to reflect the availability of those reserves in meeting debt service
obligations.
The LGD
is determined based on the average property price during each of the calendar
years 2004 through 2008 compared to the prices at each valuation period.
Property prices benefited from significant appreciation through fiscal 2007,
which represented the peak of market prices for commercial real estate in the
US, based on a repeat-sales index of transaction prices published by Moody’s
Investors Service. Property prices declined throughout 2008, particularly in the
fourth quarter.
Commercial
real estate assets generally showed significant price appreciation for years up
to late 2007. As a result, loans originated in 2007 reflect a higher LGD ratio
than those originated in 2006 and prior years because of the substantial price
appreciation on older loans compared to the lower collateral value to loan ratio
on 2007 loans.
Equity
Investments
For those
investments in real estate entities where the Company does not control the
investee, or is not the primary beneficiary of a VIE, but can exert significant
influence over the financial and operating policies of the investee, the Company
uses the equity method of accounting. The Company recognizes its
share of each investee’s income or loss, and reduces its investment balance by
distributions received. The Company owned an equity method investment
in BlackRock Diamond, a privately held REIT that maintains its financial records
on a fair value basis. The Company retained such accounting relative
to its investment in BlackRock Diamond pursuant to EITF Issue 85-12, Retention of Specialized Accounting
for Investments in Consolidation.
Derivative
Instruments
The
Company utilizes various hedging instruments (derivatives) to hedge interest
rate and foreign currency exposures or to modify the interest rate or foreign
currency characteristics of related Company investments. For
accounting purposes, the Company’s management must decide whether to designate
these derivatives as either a hedge of an asset or liability, securities
available-for-sale, securities held-for-trading, or foreign currency exposure.
This designation decision affects the manner in which the changes in the fair
value of the derivatives are reported.
Recent
Accounting Pronouncements
Fair
Value Measurements
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“FAS
157”). FAS 157 defines fair value, establishes a framework for measuring fair
value and requires enhanced disclosures about fair value
measurements. FAS 157 requires companies to disclose the fair value
of their financial instruments according to a fair value hierarchy (i.e., Levels
1, 2 and 3, as defined). Additionally, companies are required to provide
enhanced disclosure regarding instruments in the Level 3 category (which have
inputs to the valuation techniques that are unobservable and require significant
management judgment), including a reconciliation of the beginning and ending
balances separately for each major category of assets and
liabilities. FAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and all interim periods within
those fiscal years. 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 had not been issued. FSP 157-3 clarifies the
application of FAS 157, 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 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 actual market transactions. The adoption by the Company of FSP 157-3
did not have a material impact on its financial statements or its determination
of fair values as of December 31, 2008.
Fair
Value Accounting
In
February 2007, the FASB issued FAS No. 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 are 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 statements 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
|
The fair
value option was elected for certain assets and liabilities to align the
measurement attributes of the assets and liabilities while mitigating volatility
in stockholders’ equity from using different measurement
attributes.
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 other gain (loss) on the consolidated
statements of operations.
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 will 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 the purpose of FSP 140-3
is to limit diversity in practice in accounting for these situations, resulting
in more consistent financial reporting. FSP 140-3 will be applied
prospectively to initial transfers and repurchase financings 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 statements of financial condition, and the corresponding interest
income and interest expense gross on its consolidated statements 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 its 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 statements 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 on the consolidated statements 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. SOP 07-1 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 SOP 07-1.
Variable
Interest Entities
The
consolidated financial statements include the financial statements of the
Company and its subsidiaries, which are wholly owned or controlled by the
Company or entities which are VIEs in which the Company is the primary
beneficiary under FASB Interpretation No. 46. 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 has analyzed the governing pooling and servicing agreements for each of
its Controlling Class CMBS and believes that the terms are industry standard and
are consistent with the QSPE criteria. 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 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.
Disclosures
about Transfers of Financial Assets and Interests in Variable Interest
Entities
In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities (“FAS 140-4” and “FIN 46(R)-8”,
respectively). FAS 140-4 and FIN 46(R)-8 amend FAS No. 140 to require
public entities to provide additional disclosures concerning transferors’
continuing involvements with transferred financial assets. It also amends
FIN 46(R) to require public enterprises, including sponsors that have a variable
interest in a variable interest entity, to provide additional disclosures
concerning their relationships with VIEs. FSP FAS 140-4 and FIN 46(R)-8 are
effective for reporting periods ending after December 15, 2008. The
adoption of the additional disclosure requirements of FAS 140-4 and FIN 46(R)-8
did not materially impact the Company’s consolidated financial
statements.
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
and as long as the conversion option is “indexed to the Company’s own stock” as
defined in EITF Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’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 its consolidated financial
statements. The
retrospective impact of adopting FSP APB 14-1 to diluted EPS for common shares
in 2007 and 2008 is a decline of less than $0.01 in each year resulting from an
increase in interest expense.
Results
of Operations
Interest
Income: The following tables set forth information regarding
interest income from certain of the Company’s interest-earning
assets.
|
|
|
|
|
Variance
|
|
|
|
Year Ended December 31,
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Variance
|
|
|
%
|
|
|
Variance
|
|
|
%
|
|
U.S.
dollar denominated income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities
|
|
$ |
168,580 |
|
|
$ |
171,994 |
|
|
$ |
161,589 |
|
|
$ |
(3,414 |
) |
|
|
(2.0 |
)% |
|
$ |
10,405 |
|
|
|
6.4 |
% |
Commercial
real estate loans
|
|
|
32,501 |
|
|
|
30,066 |
|
|
|
23,745 |
|
|
|
2,435 |
|
|
|
8.1 |
|
|
|
6,321 |
|
|
|
26.6 |
|
Commercial
mortgage loan pools
|
|
|
49,522 |
|
|
|
52,037 |
|
|
|
52,917 |
|
|
|
(2,515 |
) |
|
|
(4.8 |
) |
|
|
(880 |
) |
|
|
(1.7 |
) |
Residential
mortgage-backed securities
|
|
|
145 |
|
|
|
3,982 |
|
|
|
11,427 |
|
|
|
(3,837 |
) |
|
|
(96.4 |
) |
|
|
(7,445 |
) |
|
|
(65.2 |
) |
Cash
and cash equivalents
|
|
|
1,676 |
|
|
|
3,837 |
|
|
|
1,545 |
|
|
|
(2,161 |
) |
|
|
(56.3 |
) |
|
|
2,292 |
|
|
|
148.3 |
|
Total
U.S. interest income
|
|
|
252,424 |
|
|
|
261,916 |
|
|
|
251,223 |
|
|
|
(9,492 |
) |
|
|
(3.6 |
) |
|
|
10,693 |
|
|
|
4.3 |
|
Non-U.S
dollar denominated income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities
|
|
|
37,089 |
|
|
|
22,585 |
|
|
$ |
6,681 |
|
|
|
14,504 |
|
|
|
64.2 |
|
|
|
15,904 |
|
|
|
238.0 |
|
Commercial
real estate loans
|
|
|
58,402 |
|
|
|
39,915 |
|
|
|
17,224 |
|
|
|
18,487 |
|
|
|
46.3 |
|
|
|
22,691 |
|
|
|
131.7 |
|
Cash
and cash equivalents
|
|
|
1,254 |
|
|
|
2,020 |
|
|
|
858 |
|
|
|
(766 |
) |
|
|
(37.9 |
) |
|
|
1,162 |
|
|
|
135.4 |
|
Total
Non-U.S. interest income
|
|
|
96,745 |
|
|
|
64,520 |
|
|
|
24,763 |
|
|
|
32,225 |
|
|
|
49.9 |
|
|
|
39,757 |
|
|
|
160.6 |
|
Total
Interest Income
|
|
$ |
349,169 |
|
|
$ |
326,436 |
|
|
$ |
275,986 |
|
|
$ |
22,733 |
|
|
|
7.0 |
% |
|
$ |
50,450 |
|
|
|
18.3 |
% |
U.S.
dollar denominated income
For the
year ended 2008, total U.S. interest income decreased $9,492 or 3.6%. In 2008,
interest income related to commercial real estate securities decreased $3,414 or
2.0%. Net sales of commercial real estate securities in 2007 and 2008
reduced the Company’s interest earning portfolio. In addition, during 2008 the
Company increased loss assumptions for its Controlling Class CMBS from 1.3% to
1.8% of the total underlying collateral thereby reducing portfolio yields and
reducing interest income. Interest income from commercial real estate loans
increased $2,435 or 8.1% from 2007 levels. The full year impact of 2007
purchases on the Company’s portfolio balance contributed $3,573 or 11.9% to the
increase. Offsetting the increase is a $1,338 or 4.5% reduction in interest
income due to the non-accrual status of a loan that is in
default. During the second half of 2007 and continuing into the first
quarter of 2008, the Company sold most of its RMBS portfolio resulting in a
decrease in interest income $3,837 or 96.4%.
Non-U.S.
dollar denominated income
For the
years ended December 31, 2008 and December 31, 2007, interest income increased
$32,225, or 49.9% and $39,757, or 160.6%, respectively. During 2007 and 2006,
the Company continued to increase its investment in non-U.S. dollar portfolio
resulting in higher interest income from non-U.S. commercial real estate
securities and loans. Although the Company did not purchase any
non-U.S. commercial real estate securities or loans in 2008, the full year
impact on the non-US dollar portfolio from securities and loans purchased in
2007 resulted in an increase in interest income. The Company had
increased its investment portfolio outside the U.S. in order to provide
geographical diversification.
The
following table reconciles interest income and total income for the years ended
December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
Year Ended December 31,
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Variance
|
|
|
%
|
|
|
Variance
|
|
|
%
|
|
Interest income
|
|
$ |
349,169 |
|
|
$ |
326,436 |
|
|
$ |
275,986 |
|
|
$ |
22,733 |
|
|
|
7.0 |
% |
|
$ |
50,450 |
|
|
|
18.3 |
% |
Earnings
from BlackRock Diamond
|
|
|
- |
|
|
|
18,790 |
|
|
|
15,763 |
|
|
|
(18,790 |
) |
|
|
(100.0 |
) |
|
|
3,027 |
|
|
|
19.2 |
|
Earnings
from Carbon I
|
|
|
77 |
|
|
|
700 |
|
|
|
924 |
|
|
|
(623 |
) |
|
|
(89.0 |
) |
|
|
(224 |
) |
|
|
(24.2 |
) |
Earnings
(loss) from Carbon II
|
|
|
(55,397 |
) |
|
|
12,603 |
|
|
|
10,744 |
|
|
|
(68,000 |
) |
|
|
(539.6 |
) |
|
|
1,859 |
|
|
|
17.3 |
|
Earnings
from real estate joint ventures
|
|
|
1,690 |
|
|
|
- |
|
|
|
- |
|
|
|
1,690 |
|
|
|
100.0 |
|
|
|
- |
|
|
|
- |
|
Total
Income
|
|
$ |
295,539 |
|
|
$ |
358,529 |
|
|
$ |
303,417 |
|
|
$ |
(62,990 |
) |
|
|
(17.8 |
)% |
|
$ |
55,112 |
|
|
|
18.1 |
% |
The
Company fully redeemed its interest in BlackRock Diamond by September 30, 2007
in order to monetize its investment. Therefore, there was no activity for this
investment for the year ended December 31, 2008. For the year ended
December 31, 2008, Carbon II had a net loss of $(55,397) as compared to net
income of $12,603 and $10,744 in 2007 and 2006, respectively. The net
loss in 2008 is primarily the result of Carbon II establishing a loan loss
reserve of $255,835. The Company incurs its share of Carbon II’s operating
results through its approximately 26% ownership interest in Carbon
II.
Interest
Expense: The following
table sets forth information regarding the total amount of interest expense from
certain of the Company’s borrowings and cash flow hedges.
|
|
|
|
|
Variance
|
|
|
|
Year Ended December 31,
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Variance
|
|
|
%
|
|
|
Variance
|
|
|
%
|
|
U.S.
dollar denominated interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized
debt obligations
|
|
$ |
67,783 |
|
|
$ |
90,655 |
|
|
$ |
80,572 |
|
|
$ |
(22,872 |
) |
|
|
(25.2 |
)% |
|
$ |
10,233 |
|
|
|
12.7 |
% |
Commercial
real estate securities
|
|
|
11,710 |
|
|
|
27,889 |
|
|
|
35,994 |
|
|
|
(16,179 |
) |
|
|
(58.0 |
) |
|
|
(8,105 |
) |
|
|
(22.5 |
) |
Commercial
real estate loans
|
|
|
3,931 |
|
|
|
5,271 |
|
|
|
4,069 |
|
|
|
(1,339 |
) |
|
|
(25.4 |
) |
|
|
1,202 |
|
|
|
29.5 |
|
Commercial
mortgage loan pools
|
|
|
47,516 |
|
|
|
49,527 |
|
|
|
50,213 |
|
|
|
(2,011 |
) |
|
|
(4.1 |
) |
|
|
(686 |
) |
|
|
(1.4 |
) |
Residential
mortgage-backed securities
|
|
|
45 |
|
|
|
5,957 |
|
|
|
14,916 |
|
|
|
(5,912 |
) |
|
|
(99.2 |
) |
|
|
(8,959 |
) |
|
|
(60.1 |
) |
Senior
unsecured convertible notes
|
|
|
9,410 |
|
|
|
3,219 |
|
|
|
- |
|
|
|
6,191 |
|
|
|
100.0 |
|
|
|
3,219 |
|
|
|
100.0 |
|
Senior
unsecured notes
|
|
|
12,232 |
|
|
|
9,613 |
|
|
|
1,299 |
|
|
|
2,619 |
|
|
|
27.2 |
|
|
|
8,314 |
|
|
|
640.0 |
|
Junior
subordinated notes
|
|
|
13,276 |
|
|
|
13,450 |
|
|
|
12,447 |
|
|
|
(174 |
) |
|
|
(1.3 |
) |
|
|
1,003 |
|
|
|
8.1 |
|
Equity
investment
|
|
|
984 |
|
|
|
587 |
|
|
|
- |
|
|
|
397 |
|
|
|
100.0 |
|
|
|
587 |
|
|
|
100.0 |
|
Cash
flow hedges
|
|
|
1,411 |
|
|
|
(841 |
) |
|
|
1,966 |
|
|
|
2,252 |
|
|
|
(267.8 |
) |
|
|
(2,807 |
) |
|
|
(142.8 |
) |
Hedge
ineffectiveness*
|
|
|
(189 |
) |
|
|
488 |
|
|
|
262 |
|
|
|
(677 |
) |
|
|
(138.6 |
) |
|
|
226 |
|
|
|
86.3 |
|
Total
U.S. interest expense
|
|
|
168,109 |
|
|
|
205,815 |
|
|
|
201,738 |
|
|
|
(37,706 |
) |
|
|
(18.3 |
) |
|
|
4,077 |
|
|
|
2.0 |
|
Non-U.S.
dollar denominated interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
CDO
|
|
|
21,423 |
|
|
|
18,293 |
|
|
|
765 |
|
|
|
3,130 |
|
|
|
17.1 |
|
|
|
17,378 |
|
|
|
2271.6 |
|
Commercial
real estate securities
|
|
|
11,571 |
|
|
|
5,470 |
|
|
|
3,328 |
|
|
|
6,101 |
|
|
|
111.5 |
|
|
|
2,142 |
|
|
|
64.4 |
|
Commercial
real estate loans
|
|
|
8,729 |
|
|
|
7,861 |
|
|
|
6,557 |
|
|
|
868 |
|
|
|
11.0 |
|
|
|
1,304 |
|
|
|
19.9 |
|
Junior
unsecured notes
|
|
|
5,470 |
|
|
|
3,561 |
|
|
|
- |
|
|
|
1,909 |
|
|
|
53.6 |
|
|
|
3,561 |
|
|
|
100.0 |
|
Total
Non-U.S. interest expense
|
|
|
47,193 |
|
|
|
35,185 |
|
|
|
10,650 |
|
|
|
12,008 |
|
|
|
34.1 |
|
|
|
24,535 |
|
|
|
230.4 |
|
Total
interest expense
|
|
$ |
215,302 |
|
|
$ |
241,000 |
|
|
$ |
212,388 |
|
|
|
(25,698 |
) |
|
|
(10.7 |
)% |
|
$ |
28,612 |
|
|
|
13.5 |
% |
*See Note
19 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
year ended December 31, 2008 interest expense decreased $37,706 or 18.3%. The
Company finances CMBS and certain commercial mortgage loans on its credit
facilities. During 2008, the Company significantly reduced the amount of
borrowings that finance its CMBS and commercial real estate loans by making
amortization and margin call payments to its lenders. In addition, the Company
sold CMBS during 2007 and 2008 and used the proceeds to pay down its credit
facilities. The impact of these payments reduced interest expense for 2008 for
CMBS by $16,179, or 58.0%, and reduced interest expense for commercial mortgage
loans by $1,339, or 25.4%. RMBS interest expense decreased $5,912, or
99.2% due to a decline in borrowings due to the sale of RMBS in 2007 and
2008. The decrease was partially offset by the issuance of senior
unsecured convertible notes in August and September of 2007 and senior unsecured
notes in May of 2007.
For the
year ended December 31, 2008, U.S. dollar interest expense related to
collateralized debt obligations declined $22,872, or 25.2%. CDO
interest rate swaps previously classified as cash flow hedges were dedesignated
as trading derivatives as of January 1, 2008. Interest expense
related to swaps designated as trading derivatives is classified in realized
gain (loss) while interest expense related to swaps designated as cash flow
hedges is classified in interest expense. For the year ended December
31, 2008, $(16,707) was included in realized gain (loss). Also related to the
dedesignation, $3,975 of OCI was reclassified from OCI to interest expense
during 2008. Also, upon the adoption of FAS 159, CDO liability
issuance costs were charged to distributions in excess of earnings. As a result,
there was no amortization of CDO issuance costs in 2008 versus $3,705 in
2007.
Non-U.S.
dollar denominated interest expense
For the
year ended December 31, 2008 versus 2007, non-U.S. dollar interest expense
increased $12,008 or 34.1%. For the year ended December 31, 2007
versus 2006, non-U.S. dollar interest expense increased $24,535 or
230.4%. During 2007 and 2006, the Company continued to increase its
investment in non-U.S. dollar portfolio resulting in higher interest income and
related expense from non-U.S. commercial real estate securities and
loans. Although the Company did not purchase any non-U.S. commercial
real estate securities or loans in 2008, the full year impact of securities and
loans purchased and financed in 2007 resulted in an increase in interest
expense. The Euro CDO was issued in December 2006 and as a result, is
the major contributing factor for the year end increase.
Net Interest
Margin and Net Interest Spread from the Portfolio: The Company
considers its interest generating portfolio to consist of its securities
available-for-sale, securities held-for-trading, commercial mortgage loans, and
cash and cash equivalents because these assets relate to its core strategy of
acquiring and originating high yield loans and securities backed by commercial
real estate, while at the same time maintaining a portfolio of investment grade
securities to enhance the Company’s liquidity. The Company’s equity
investments, which include the Carbon Funds, also generate a significant portion
of the Company’s income or loss.
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 sets forth the interest income, interest expense, net interest
margin, average yield, cost of funds and net interest spread for the Company’s
portfolio, on an “As reported” basis. This reflects the amounts and ratios based
on interest income and interest expense reported on the Company’s financial
statements prepared in accordance with GAAP.
|
|
For
the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Interest
income
|
|
$ |
349,169 |
|
|
$ |
326,436 |
|
|
$ |
275,986 |
|
Interest
expense
|
|
$ |
215,302 |
|
|
$ |
241,000 |
|
|
$ |
212,388 |
|
Net
interest income ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
3.4 |
% |
|
|
1.8 |
% |
|
|
1.5 |
% |
Average
yield
|
|
|
8.8 |
% |
|
|
7.0 |
% |
|
|
6.4 |
% |
Cost
of funds
|
|
|
5.3 |
% |
|
|
5.6 |
% |
|
|
5.4 |
% |
Net
interest spread
|
|
|
3.5 |
% |
|
|
1.4 |
% |
|
|
1.0 |
% |
Ratios
including income from equity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
2.0 |
% |
|
|
2.4 |
% |
|
|
2.0 |
% |
Average
yield
|
|
|
7.2 |
% |
|
|
7.4 |
% |
|
|
6.8 |
% |
Cost
of funds
|
|
|
5.3 |
% |
|
|
5.6 |
% |
|
|
5.4 |
% |
Net
interest spread
|
|
|
1.9 |
% |
|
|
1.8 |
% |
|
|
1.4 |
% |
Non-GAAP
Disclosure: Adjusted interest income and adjusted interest
expense amounts exclude income and expense related to the gross-up effect of the
consolidation of a VIE that includes commercial mortgage loan
pools.
The
following charts reconcile interest income and expense to adjusted interest
income and adjusted interest expense.
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Interest
income
|
|
$ |
349,169 |
|
|
$ |
326,436 |
|
|
$ |
275,986 |
|
Interest
expense related to the consolidation of commercial mortgage loan
pools
|
|
|
(47,516 |
) |
|
|
(49,527 |
) |
|
|
(50,213 |
) |
Adjusted
interest income
|
|
$ |
301,653 |
|
|
$ |
276,909 |
|
|
$ |
225,773 |
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Interest
expense
|
|
$ |
215,302 |
|
|
$ |
241,000 |
|
|
$ |
212,388 |
|
Interest
expense related to the consolidation of commercial mortgage loan
pools
|
|
|
(47,516 |
) |
|
|
(49,527 |
) |
|
|
(50,213 |
) |
Adjusted
interest expense
|
|
$ |
167,786 |
|
|
$ |
191,473 |
|
|
$ |
162,175 |
|
The
following chart sets forth the interest income, interest expense, net interest
margin, average yield, cost of funds and net interest spread for the Company’s
portfolio, on a “Non-GAAP” basis. This reflects amounts and ratios based on
interest income and interest expense adjusted to exclude income and expense
related to the gross-up effect of the consolidation of a variable interest
entity that includes commercial mortgage loan pools. The Company consolidates
this VIE as it owns 100% of the entity’s equity. The debt holders of
the consolidated VIE have recourse solely to the net assets of the consolidated
VIE rather than recourse to Anthracite’s other net assets. The
Company’s shareholders will not benefit from the interest income earned by the
VIE. Additionally, the VIE’s consolidated expenses do not represent the gross
expenses that will be absorbed by the Company’s shareholders. As a
result, management reviews and evaluates the Company’s operating performance net
of consolidated VIE amounts (“Non-GAAP”) and believes that this information may
be useful to investors.
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Adjusted
interest income
|
|
$ |
301,653 |
|
|
$ |
276,909 |
|
|
$ |
225,773 |
|
Adjusted
interest expense
|
|
$ |
167,786 |
|
|
$ |
191,473 |
|
|
$ |
162,175 |
|
Adjusted
net interest income ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
4.8 |
% |
|
|
2.5 |
% |
|
|
2.1 |
% |
Average
yield
|
|
|
10.8 |
% |
|
|
8.1 |
% |
|
|
7.4 |
% |
Cost
of funds
|
|
|
5.8 |
% |
|
|
6.2 |
% |
|
|
6.1 |
% |
Net
interest spread
|
|
|
5.0 |
% |
|
|
1.9 |
% |
|
|
1.3 |
% |
Ratios
including income from equity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
2.8 |
% |
|
|
3.3 |
% |
|
|
2.8 |
% |
Average
yield
|
|
|
8.5 |
% |
|
|
8.6 |
% |
|
|
7.9 |
% |
Cost
of funds
|
|
|
5.8 |
% |
|
|
6.2 |
% |
|
|
6.1 |
% |
Net
interest spread
|
|
|
2.7 |
% |
|
|
2.4 |
% |
|
|
1.8 |
% |
Other
Expenses: Expenses other than interest expense consist
primarily of management fees, incentive fees, and general and administrative
expenses. The table below summarizes those expenses for the years
ended December 31, 2008, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
For the Year Ended December 31,
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Variance
|
|
|
%
|
|
|
Variance
|
|
|
%
|
|
Management
fee
|
|
$ |
11,919 |
|
|
$ |
13,468 |
|
|
$ |
12,617 |
|
|
$ |
(1,549 |
) |
|
|
(11.5 |
)% |
|
$ |
851 |
|
|
|
6.8 |
% |
Incentive
fee
|
|
|
11,879 |
|
|
|
5,645 |
|
|
|
5,919 |
|
|
|
6,234 |
|
|
|
110.4 |
% |
|
|
(274 |
) |
|
|
(4.6 |
)% |
Incentive
fee- stock based
|
|
|
1,128 |
|
|
|
2,427 |
|
|
|
2,761 |
|
|
|
(1,299 |
) |
|
|
(53.5 |
)% |
|
|
(334 |
) |
|
|
(12.1 |
)% |
General
and administrative expense
|
|
|
8,162 |
|
|
|
5,981 |
|
|
|
4,533 |
|
|
|
2,181 |
|
|
|
36.5 |
% |
|
|
1,448 |
|
|
|
32.0 |
% |
Total
other expenses
|
|
$ |
33,088 |
|
|
$ |
27,521 |
|
|
$ |
25,830 |
|
|
$ |
5,567 |
|
|
|
20.2 |
% |
|
$ |
1,691 |
|
|
|
6.5 |
% |
Management
fees were based on 0.50% of average quarterly stockholders’ equity through March
31, 2008. The Company’s 2008 Management Agreement included a change
from the 2007 Management Agreement in the quarterly base management fee from
0.50% of stockholders’ equity to 0.375% for the first $400,000 in average total
stockholders’ equity, 0.3125% for the next $400,000 of average total
stockholders’ equity and 0.25% for the average total stockholders’ equity in
excess of $800,000. The decrease in 2008 of $1,549 or 11.5%, from
2007 and the increase $851, or 6.8%, from 2006 corresponds primarily with the
changes in the Company’s average stockholders’ equity. The Manager
earned an incentive fee of $11,879, $5,645 and $5,919 in 2008, 2007 and 2006,
respectively, as the Company achieved the necessary performance goals specified
in the Management Agreement. The decrease in incentive fee-stock
based of $1,299 and $334 for the years ended 2008 and 2007, 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 each year end. The
Company accrues the incentive fee – stock based expense each quarter based on
the shares outstanding at the end of the quarter. See Note 17 of the
consolidated financial statements, “Transactions with the Manager and Certain
Other Parties”, for further discussion of the Company’s Management
Agreement.
General
and administrative expense is comprised of accounting agent fees, custodial
agent fees, directors’ fees, fees for professional services, insurance premiums
and due diligence costs. The increase in general and administrative
expense for the year ended December 31, 2008 versus 2007 is primarily
attributable to increased legal and audit fees, professional fees associated
with capital raising activities, increased premiums for directors and officers
insurance, and director fees.
Other Gains
(Losses): Upon the adoption of FAS
159 on January 1, 2008, the Company elected to have the changes in the estimated
fair value of its trading securities (formerly classified as available-for-sale)
and long-term liabilities recorded in earnings. The loss of $(75,692)
for the year ended December 31, 2008 was comprised of realized loss on
securities and swaps held-for-trading, net of $(36,949), unrealized loss on
securities held-for-trading of $(1,189,965), unrealized loss on swaps classified
as held-for-trading of $(61,473) and loss from the dedesignation of derivative
instruments of $(7,084), offset by unrealized gain on liabilities of
$1,219,779. Foreign currency gain was $3,268 for the year ended
December 31, 2008. Included in accumulated other comprehensive loss
was a $(8,608) loss on foreign currency translation. As a result, the
Company’s foreign currency exposure for the year ended December 31, 2008
resulted in a net economic loss of $(7,831). The provision for loan
losses for the year ended December 31, 2008 totaled $(165,928) and was related
to several loans in various stages of resolution and a general loan loss reserve
of $(21,033).
During
the year ended December 31, 2007, the Company sold a portion of its securities
available-for-sale resulting in realized gains of $5,316. The Company
sold a retained CDO bond resulting in a gain of $6,630. This was
partially offset by the sale of the majority of the Company’s CMBS IOs and
multifamily agency securities during 2007, which generated a loss of $13,352,
and a related gain of $10,899 recorded in connection with hedges that no longer
qualified for hedge accounting. See Note 21 of the consolidated
financial statements, “Net Interest Income”.
During
2006, the Company sold a portion of its securities available-for-sale resulting
in realized gains of $29,032. The Company’s sale of seven CMBS held
as collateral for three of its CDOs resulted in a realized gain of
$28,520. The gain from these seasoned CMBS was a result of increased
value of the securities due to multiple credit upgrades and spread tightening of
approximately 475 basis points. Investment grade CMBS owned by the Company
outside of its CDOs were used to replace this collateral. During
2006, the Company changed its financing strategy and de-designated a portion of
its cash flows hedges and incurred a loss of $12,661. The Company
changed its financing strategy to emphasize the use of 90-day reverse repurchase
agreements and concurrently reduced the use of 30-day reverse repurchase
agreements.
The net
foreign currency gain (loss) of $3,268, $6,272 and $2,161, for the years ended
December 31, 2008, 2007 and 2006, respectively, relate to the Company’s hedging
of its net investment in non-U.S. assets.
The
losses on impairment of assets of $12,469 and $7,880 for the years ended
December 31, 2007, and 2006, respectively, were related to the impairment
charges of Controlling Class CMBS and franchise loan backed securities under
EITF 99-20. See Note 8 of the consolidated financial statements,
“Impairments – CMBS”.
Income from
Discontinued Operations: The
Company purchased a defaulted loan from a Controlling Class CMBS trust during
the first quarter of 2006. The Company sold the property during the
second quarter of 2006 and recorded a gain from discontinued operations of
$1,366 on the consolidated statements of operations.
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 holders of Common
Stock 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, all dividends paid to holders of Common Stock in
2008 are expected to be ordinary income to holders of the Common
Stock.
Due to
current market conditions and the Company’s current liquidity position, the
Company’s Board of Directors anticipates that the Company will pay cash
dividends on its stock only to the extent necessary to maintain its REIT status
until the Company’s liquidity position has improved and market values of
commercial real estate debt show signs of stability. The Board of
Directors did not declare a dividend on the Common Stock for the fourth quarter
of 2008 since the Company’s 2008 net taxable income distribution requirements
were satisfied by distributions made for the first three quarters of
2008. The Board of Directors also did not declare a dividend on the
Common Stock and the Company’s preferred stock for the first quarter of
2009. To the extent the Company is required to make distributions to
maintain its qualification as a REIT in 2009, the Company anticipates it will
rely upon temporary guidance that was recently issued by the IRS, which allows
certain publicly traded REITs to satisfy their net taxable income distribution
requirements by distributing up to 90% in stock, with the remainder distributed
in cash.
The terms
of the Company’s preferred stock prohibit the Company from declaring or paying
cash dividends on the Common Stock unless full cumulative dividends have been
declared and paid on the preferred stock.
Changes
in Financial Condition
Securities held-for-trading and
available-for-sale: The Company’s securities classified as
held-for-trading and available-for-sale, which are carried at estimated fair
value, included the following at December 31, 2008 and 2007:
U.S. dollar denominated securities
|
|
December 31,
2008
Estimated
Fair
Value(1)
|
|
|
Percentage
|
|
|
December
31, 2007
Estimated
Fair
Value(2)
|
|
|
Percentage
|
|
Commercial
real estate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS
IOs
|
|
$ |
4,085 |
|
|
|
0.4 |
% |
|
$ |
15,915 |
|
|
|
0.7 |
% |
Investment
grade CMBS
|
|
|
433,225 |
|
|
|
46.3 |
|
|
|
766,996 |
|
|
|
33.6 |
|
Non-investment
grade rated subordinated securities
|
|
|
143,400 |
|
|
|
15.2 |
|
|
|
630,139 |
|
|
|
27.6 |
|
Non-rated
subordinated securities
|
|
|
22,280 |
|
|
|
2.4 |
|
|
|
110,481 |
|
|
|
4.8 |
|
Credit
tenant lease
|
|
|
20,175 |
|
|
|
2.2 |
|
|
|
24,949 |
|
|
|
1.1 |
|
Investment
grade REIT debt
|
|
|
155,864 |
|
|
|
16.7 |
|
|
|
246,095 |
|
|
|
10.8 |
|
Multifamily
agency securities
|
|
|
- |
|
|
|
- |
|
|
|
37,123 |
|
|
|
1.6 |
|
CDO
investments
|
|
|
26,096 |
|
|
|
2.8 |
|
|
|
49,630 |
|
|
|
2.2 |
|
Total
|
|
|
805,125 |
|
|
|
86.0 |
|
|
|
1,881,328 |
|
|
|
82.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
adjustable rate securities
|
|
|
- |
|
|
|
- |
|
|
|
1,193 |
|
|
|
0.1 |
|
Residential
CMOs
|
|
|
387 |
|
|
|
- |
|
|
|
627 |
|
|
|
0.0 |
|
Hybrid
adjustable rate mortgages (“ARMs”)
|
|
|
400 |
|
|
|
- |
|
|
|
8,363 |
|
|
|
0.4 |
|
Total
RMBS
|
|
|
787 |
|
|
|
0.1 |
|
|
|
10,183 |
|
|
|
0.5 |
|
Total
U.S. dollar denominated securities
|
|
|
805,912 |
|
|
|
86.1 |
% |
|
|
1,891,511 |
|
|
|
82.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
dollar denominated securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
|
62,264 |
|
|
|
6.7 |
|
|
|
151,532 |
|
|
|
6.6 |
|
Non-investment
grade rated subordinated securities
|
|
|
59,854 |
|
|
|
6.4 |
|
|
|
212,433 |
|
|
|
9.3 |
|
Non-rated
subordinated securities
|
|
|
8,272 |
|
|
|
0.8 |
|
|
|
28,858 |
|
|
|
1.2 |
|
Total
Non-U.S. dollar denominated securities
|
|
|
130,390 |
|
|
|
13.9 |
% |
|
|
392,823 |
|
|
|
17.1 |
% |
Total
securities
|
|
$ |
936,302 |
|
|
|
100.0 |
% |
|
$ |
2,284,334 |
|
|
|
100.0 |
% |
|
|
Classified
as held-for-trading at December 31,
2008
|
|
(2)
|
Includes
securities available-for-sale at December 31, 2007, reclassified as
held-for-trading in the first quarter of
2008
|
During
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 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. and non-U.S. CMBS portfolio
during the first quarter of 2008.
At
December 31, 2008 and 2007, the aggregate estimated fair values by underlying
credit rating of the Company’s securities held-for-trading and
available-for-sale were as follows:
|
|
December 31, 2008(1)
|
|
|
December 31, 2007(2)
|
|
Security Rating
|
|
Estimated
Fair Value
|
|
|
Percentage
|
|
|
Estimated
Fair Value
|
|
|
Percentage
|
|
Agency
and agency insured securities
|
|
$ |
750 |
|
|
|
- |
% |
|
$ |
46,788 |
|
|
|
2 |
% |
AAA
|
|
|
127,254 |
|
|
|
14 |
|
|
|
150,759 |
|
|
|
7 |
|
AA+
|
|
|
34,483 |
|
|
|
4 |
|
|
|
26,548 |
|
|
|
1 |
|
AA
|
|
|
10,476 |
|
|
|
1 |
|
|
|
46,718 |
|
|
|
2 |
|
AA-
|
|
|
35,687 |
|
|
|
4 |
|
|
|
14,312 |
|
|
|
1 |
|
A+
|
|
|
41,814 |
|
|
|
4 |
|
|
|
78,860 |
|
|
|
3 |
|
A
|
|
|
38,080 |
|
|
|
4 |
|
|
|
104,791 |
|
|
|
5 |
|
A-
|
|
|
55,528 |
|
|
|
6 |
|
|
|
118,613 |
|
|
|
5 |
|
BBB+
|
|
|
105,070 |
|
|
|
11 |
|
|
|
247,527 |
|
|
|
11 |
|
BBB
|
|
|
147,684 |
|
|
|
16 |
|
|
|
199,667 |
|
|
|
9 |
|
BBB-
|
|
|
66,259 |
|
|
|
7 |
|
|
|
212,316 |
|
|
|
9 |
|
Total
investment grade securities
|
|
|
663,085 |
|
|
|
71 |
|
|
|
1,246,899 |
|
|
|
55 |
|
BB+
|
|
|
59,934 |
|
|
|
6 |
|
|
|
218,093 |
|
|
|
10 |
|
BB
|
|
|
58,034 |
|
|
|
6 |
|
|
|
265,067 |
|
|
|
12 |
|
BB-
|
|
|
36,795 |
|
|
|
5 |
|
|
|
128,016 |
|
|
|
6 |
|
B+
|
|
|
12,555 |
|
|
|
1 |
|
|
|
55,856 |
|
|
|
2 |
|
B
|
|
|
19,678 |
|
|
|
2 |
|
|
|
121,491 |
|
|
|
5 |
|
B-
|
|
|
12,417 |
|
|
|
1 |
|
|
|
53,506 |
|
|
|
2 |
|
CCC+
|
|
|
4,542 |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
CCC
|
|
|
1,470 |
|
|
|
- |
|
|
|
6,294 |
|
|
|
- |
|
CC
|
|
|
808 |
|
|
|
- |
|
|
|
5,018 |
|
|
|
- |
|
C
|
|
|
200 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
D
|
|
|
1,420 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Not
rated
|
|
|
65,364 |
|
|
|
7 |
|
|
|
184,094 |
|
|
|
8 |
|
Total
below investment grade securities
|
|
|
273,217 |
|
|
|
29 |
|
|
|
1,037,435 |
|
|
|
45 |
|
Total
securities
|
|
$ |
936,302 |
|
|
|
100 |
% |
|
$ |
2,284,334 |
|
|
|
100 |
% |
|
(1)
|
Classified
as held-for-trading at December 31,
2008
|
|
(2)
|
Includes
securities available-for-sale at December 31, 2007, reclassified as
held-for-trading in the first quarter of
2008
|
Borrowings: At
December 31, 2008 and 2007, the Company’s debt consisted of credit facilities,
CDOs, senior unsecured notes, senior convertible notes, junior unsecured notes,
junior subordinated notes, reverse repurchase agreements, and commercial
mortgage loans pools collateralized by a pledge of most of the Company’s
securities available-for-sale, securities held-for-trading and commercial
mortgage loans.
The
following table sets forth information regarding the Company’s
borrowings:
|
|
For the Year Ended
December 31, 2008
|
|
|
|
Adjusted
Issuance
Price
|
|
|
Maximum
Balance
|
|
Range of
Maturities
|
|
CDO
debt
|
|
$ |
1,743,161 |
|
|
$ |
1,781,339 |
|
23 days to 8.0 years
|
|
Commercial
mortgage loan pools
|
|
|
999,804 |
|
|
|
1,201,018 |
|
46 days to 9.9 years
|
|
Credit
facilities
|
|
|
480,332 |
|
|
|
543,290 |
|
1.1 to 1.7 years
|
|
Senior
unsecured convertible notes
|
|
|
80,000 |
|
|
|
80,000 |
|
18.7 years
|
|
Senior
unsecured notes*
|
|
|
162,500 |
|
|
|
162,500 |
|
8.3 years
|
|
Junior
unsecured notes
|
|
|
69,502 |
|
|
|
69,502 |
|
13.3 years
|
|
Junior
subordinated notes**
|
|
|
180,477 |
|
|
|
180,477 |
|
27.1 years
|
|
Total
Borrowings
|
|
$ |
3,715,776 |
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31, 2007
|
|
|
|
Adjusted
Issuance
Price
|
|
|
Maximum
Balance
|
|
Range of
Maturities
|
|
CDO
debt
|
|
$ |
1,823,328 |
|
|
$ |
1,828,168 |
|
54 days to 8.7 years
|
|
Commercial
mortgage loan pools
|
|
|
1,219,095 |
|
|
|
1,250,503 |
|
1.0 to 11.0 years
|
|
Reverse
repurchase agreements
|
|
|
80,119 |
|
|
|
951,194 |
|
1 to 10 days
|
|
Credit
facilities
|
|
|
671,601 |
|
|
|
736,832 |
|
172 days to 1.7 years
|
|
Senior
unsecured convertible notes
|
|
|
80,000 |
|
|
|
80,000 |
|
19.7 years
|
|
Senior
unsecured notes*
|
|
|
162,500 |
|
|
|
162,500 |
|
9.3 years
|
|
Junior
unsecured notes
|
|
|
73,103 |
|
|
|
73,103 |
|
14.3 years
|
|
Junior
subordinated notes**
|
|
|
180,477 |
|
|
|
180,477 |
|
28.1 years
|
|
Total
Borrowings
|
|
$ |
4,290,223 |
|
|
|
|
|
|
|
*The
senior unsecured notes can be redeemed at par by the Company beginning in April
2012.
** The
junior subordinated notes can be redeemed at par by the Company beginning in
October 2010.
The table
above does not include interest payments on the Company’s
borrowings. Such disclosure of interest payments has been omitted
because certain borrowings require variable rate interest payments. The
Company’s total interest payments for the years ended December 31, 2008 and 2007
were $216,934 and $226,666, respectively.
At
December 31, 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
|
|
|
Senior
Convertible
Notes
|
|
|
Total
Borrowings
|
|
Weighted
average yield
|
|
|
4.68 |
% |
|
|
4.55 |
% |
|
|
4.19 |
% |
|
|
7.64 |
% |
|
|
7.59 |
% |
|
|
6.56 |
% |
|
|
11.75 |
% |
|
|
4.95 |
% |
Interest
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
- |
% |
|
|
6.79 |
% |
|
|
4.19 |
% |
|
|
7.64 |
% |
|
|
7.59 |
% |
|
|
6.56 |
% |
|
|
11,75 |
% |
|
|
6.35 |
% |
Floating
|
|
|
4.68 |
% |
|
|
2.40 |
% |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2.89 |
% |
Effective
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
- |
% |
|
|
7.33 |
% |
|
|
4.19 |
% |
|
|
7.64 |
% |
|
|
7.59 |
% |
|
|
6.56 |
% |
|
|
11.75 |
% |
|
|
6.65 |
% |
Floating
|
|
|
4.68 |
% |
|
|
2.40 |
% |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2.89 |
% |
Hedging
Instruments: The Company may modify its exposure to market
interest and foreign exchange rates by entering into various financial
instruments. These financial instruments are intended to mitigate the
effect of changes in interest and foreign exchange rates on the value of the
Company’s assets and the cost of borrowing.
Interest
rate hedging instruments at December 31, 2008 and 2007 consisted of the
following:
|
|
December 31, 2008
|
|
|
|
Notional Value
|
|
|
Estimated Fair
Value
|
|
|
Unamortized
Cost
|
|
|
Average Remaining
Term (years)
|
|
Cash
flow hedges
|
|
$ |
87,573 |
|
|
$ |
(4,579 |
) |
|
$ |
(1,612 |
) |
|
|
3.0 |
|
Trading
swaps
|
|
|
74,748 |
|
|
|
2,873 |
|
|
|
- |
|
|
|
2.7 |
|
CDO
trading swaps
|
|
|
1,129,477 |
|
|
|
(91,560 |
) |
|
|
- |
|
|
|
4.9 |
|
CDO
LIBOR cap
|
|
|
85,000 |
|
|
|
53 |
|
|
|
1,407 |
|
|
|
4.4 |
|
Total
|
|
$ |
1,376,798 |
|
|
$ |
(93,213 |
) |
|
$ |
(205 |
) |
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Notional Value
|
|
|
Estimated Fair
Value
|
|
|
Unamortized
Cost
|
|
|
Average Remaining
Term (years)
|
|
Cash
flow hedges
|
|
$ |
231,500 |
|
|
$ |
(12,646 |
) |
|
$ |
(1,612 |
) |
|
|
7.0 |
|
CDO
cash flow hedges
|
|
|
875,548 |
|
|
|
(25,410 |
) |
|
|
- |
|
|
|
6.2 |
|
Trading
swaps
|
|
|
1,218,619 |
|
|
|
(1,296 |
) |
|
|
- |
|
|
|
1.2 |
|
CDO
trading swaps
|
|
|
279,527 |
|
|
|
5 |
|
|
|
- |
|
|
|
4.8 |
|
CDO
LIBOR cap
|
|
|
85,000 |
|
|
|
195 |
|
|
|
1,407 |
|
|
|
5.4 |
|
Total
|
|
$ |
2,690,194 |
|
|
$ |
(39,152 |
) |
|
$ |
(205 |
) |
|
|
|
|
Foreign
currency agreements at December 31, 2008 and 2007 consisted of the
following:
|
|
At December 31, 2008
|
|
|
|
Estimated Fair
Value
|
|
|
Unamortized
Cost
|
|
Average Remaining
Term
|
|
Currency
swaps
|
|
$ |
(30,236 |
) |
|
|
- |
|
8.3
years
|
|
CDO
currency swaps
|
|
|
29,624 |
|
|
|
- |
|
8.6
years
|
|
Forwards
|
|
|
4,530 |
|
|
|
- |
|
30 days
|
|
Total
|
|
$ |
3,918 |
|
|
$ |
- |
|
|
|
|
|
At December 31, 2007
|
|
|
|
Estimated Fair
Value
|
|
|
Unamortized
Cost
|
|
Average Remaining
Term
|
|
Currency
swaps
|
|
$ |
(12,060 |
) |
|
|
- |
|
7.5 years
|
|
CDO
currency swaps
|
|
|
9,967 |
|
|
|
- |
|
9.9 years
|
|
Forwards
|
|
|
4,041 |
|
|
|
- |
|
23 days
|
|
Total
|
|
$ |
1,948 |
|
|
$ |
- |
|
|
|
Liquidity and Capital Resources
During
2008 and particularly in the fourth quarter, global economic conditions
continued to worsen, resulting in ongoing disruptions in the credit and capital
markets, significant devaluations of assets and a severe economic downturn
globally. Assets linked to the U.S. commercial real estate finance
market have been particularly affected as demand for such assets has sharply
declined and defaults have risen, including for CMBS and commercial real estate
loans. Available liquidity, which began to decline during the second
half of 2007, became scarce in 2008 and remains depressed into
2009. Under normal market conditions, the Company relies on the
credit and equity markets for capital to finance its investments and grow its
business. However, in the current environment, the Company is focused
principally on managing its liquidity.
The
Company’s principal liquidity needs are to pay interest and principal on debt,
to fund margin calls and amortization payments, to pay dividends to holders of
shares of the Common Stock and preferred stock, to finance new investments in
real estate securities and loans and to pay operating expenses and fund other
business needs.
The
Company’s principal sources of liquidity have historically been credit
facilities (including master repurchase agreements), reverse repurchase
agreements, debt security issuances (including from securitization structures),
equity issuances and cash flows from operating activities.
The
recessionary economic conditions and ongoing market disruptions have had, and
the Company expects will continue to have, an adverse effect on the Company and
the commercial real estate loans and other assets in which the Company has
invested. The Company incurred net income (loss) available to common
stockholders of $(210,878) for the year ended December 31, 2008 compared with
$72,320 for the year ended December 31, 2007, driven primarily by significant
net realized and unrealized losses, the incurrence of sizable provisions for
loan losses (including the establishment of a general reserve) and a loss from
equity investments compared with earnings in the prior year. The
Company’s cash and cash equivalents sharply decreased to $9,686 at December 31,
2008 from $91,547 at December 31, 2007 due to, among other things, an increase
in the receipt and funding of margin calls and amortization payments under the
Company’s secured credit facilities and reduced cash flow from
investments. In order to secure the amendment and extension of
its secured credit facilities (including repurchase agreements) in 2008 with
Bank of America, Deutsche Bank and Morgan Stanley, the Company agreed not to
request new borrowings under the facilities. Financings through
collateralized debt obligations (“CDOs”), which the Company historically
utilized, are no longer available, and the Company does not expect to be able to
finance investments through CDOs for the foreseeable future.
Unless
its liquidity position and market conditions significantly improve, the Company
anticipates no new investment activity in 2009.
In
addition, the Company’s Board of Directors has announced that it anticipates
that the Company will pay cash dividends on its stock only to the extent
necessary to maintain its REIT status until the Company’s liquidity position has
improved and market values of commercial real estate debt show signs of
stability. The Board of Directors did not declare a dividend on the
Common Stock for the fourth quarter of 2008 since the Company’s 2008 net taxable
income distribution requirements under REIT rules were satisfied by
distributions made for the first three quarters of 2008. The Board of
Directors also did not declare a dividend on the Common Stock and the Company’s
preferred stock for the first quarter of 2009. To the extent the
Company is required to make distributions to maintain its qualification as a
REIT in 2009, the Company anticipates it will rely upon temporary guidance that
was recently issued by the IRS, which allows certain publicly traded REITs to
satisfy their net taxable income distribution requirements during 2009 by
distributing up to 90% in stock, with the remainder distributed in
cash. The terms of the Company’s preferred stock prohibit the Company
from declaring or paying cash dividends on the Common Stock unless full
cumulative dividends have been declared and paid on the preferred
stock.
Several
recent events significantly affected the Company’s access to sources of
liquidity and may materially affect the Company’s near-term liquidity
needs.
The
Company’s independent registered public accounting firm has issued an opinion on
the Company’s consolidated financial statements that states the consolidated
financial statements have been prepared assuming the Company will continue as a
going concern and further states that the Company’s liquidity position, current
market conditions and the uncertainty relating to the outcome of the Company’s
ongoing negotiations with its lenders have raised substantial doubt about the
Company’s ability to continue as a going concern. The Company
obtained agreements from its secured credit facility lenders on March 17, 2009
that the going concern reference in the independent registered public accounting
firm’s opinion to the consolidated financial statements is waived or does not
constitute an event of default and/or covenant breach under the applicable
facility. The addition of this going concern language, however, may
make capital raising activity by the Company more difficult.
Financial
covenants in certain of the Company’s secured credit facilities include, without
limitation, a covenant that the Company’s net income (as defined in the
applicable credit facility) will not be less than $1.00 for any period of two
consecutive quarters and covenants that on any date the Company’s tangible net
worth (as defined in the applicable credit facility) will not have decreased by
twenty percent or more from the Company’s tangible net worth as of the last
business day in the third month preceding such date. The Company’s
significant net loss for the three months ended December 31, 2008 resulted in
the Company not being in compliance with these covenants. On
March 17, 2009, the secured credit facility lenders waived this covenant breach
until April 1, 2009. In addition, the Company’s secured credit
facility with BlackRock Holdco 2, Inc. (“Holdco 2”) requires the Company to
immediately repay outstanding borrowings under the facility to the extent
outstanding borrowings exceed 60% of the fair market value (as determined by the
Company’s manager) of the shares of common stock of Carbon Capital II, Inc.
(“Carbon II”) securing such facility. As of February 28, 2009, 60% of
the fair market value of such shares declined to approximately $24,840 and
outstanding borrowings under the facility were $33,450. On March 17,
2009, Holdco 2 waived this breach until April 1, 2009.
During
the first quarter of 2009, the Company received a margin call of $46,300 and
C$5,300 from one of its secured credit facility lenders. As part of
the Company’s ongoing negotiation with this lender and the other secured credit
facility lenders, the Company has been negotiating to have the margin call
waived in consideration of certain agreements to be made by the
Company. On March 17, 2009, the lender waived this event of default
until April 1, 2009
On March
17, 2009, the Company received waivers concerning covenant breaches from its
secured credit facility lenders as described above. In addition, the
Company's secured credit facility lenders agreed to permanently waive minimum
liquidity covenants in the facilities. In connection with the waivers, the
Company has agreed to pay $6 million to each of Morgan Stanley and Bank of
America and $3 million to Deutsche Bank.
If the
Company were unable to obtain permanent waivers or extensions of the waivers
from its secured credit facility lenders on or before April 1, 2009, an event of
default will immediately or with the passage of time occur under the applicable
respective facility.
An event
of default under any of the Company’s facilities, absent a waiver, would trigger
cross-default and cross-acceleration provisions in all of the Company’s other
facilities and, if such debt were accelerated, would trigger a
cross-acceleration provision in one of the Company’s indentures. In
such an event, the Company would be required to repay all outstanding
indebtedness under its secured credit facilities and the one indenture
immediately. The Company would not have sufficient liquid assets
available to repay such indebtedness and, unless the Company were able to obtain
additional capital resources or waivers, the Company would be unable to continue
to fund its operations or continue its business.
If the
Company is unable to obtain forbearance from its secured credit facility lenders
from making margin calls, the Company's liquidity may be adversely affected by
new margin calls under the Company's credit facilities (including
repurchase agreements) that are dependent in part on the valuation of the
collateral to secure the financing. The Company's credit facilities
currently allow the lender, to varying degrees, to revalue the collateral to
values that the lender considers to reflect market value. If a counterparty
determines that the value of the collateral has decreased, it may initiate a
margin call requiring the Company to post additional collateral to cover the
decrease. When subject to such a margin call, the Company repays a portion of
the outstanding borrowing with minimal notice. The Company has hedged a certain
amount of its liabilities to offset market value declines due to changes in
interest rates, but is exposed to market value fluctuations due to spread
widening. A significant increase in margin calls as a result of the widening of
credit spreads or otherwise could harm the Company's liquidity, results of
operations, financial condition and business prospects. Additionally, in order
to obtain cash to satisfy a margin call, the Company may be required to
liquidate assets at a disadvantageous time, which could cause the Company to
incur further losses and consequently adversely affect its results of operations
and financial condition.
Management
believes that, unless the Company is successful in obtaining agreements from its
secured credit facility to forego the right to make future margin calls and
provide other relief, the Company’s existing liquidity and capital resources
will be insufficient to fund its operations and projected liquidity needs for
the next twelve months. The Company may need to raise debt or additional equity
capital in the future, which in the current market environment may be
unavailable at terms attractive to the Company or at all.
Currently,
the Company is ineligible to use a "short-form" registration statement and,
while it is ineligible, the Company’s ability to raise capital may be more
difficult, more expensive and subject to delays.
In
addition to the covenants under the Company’s secured facilities, certain of the
seven CDOs issued by the Company contain compliance tests which, if violated,
could trigger a diversion of cash flows from the Company to bondholders of the
CDOs. The Company’s first three CDOs contain certain interest
coverage and overcollateralization tests. At December 31, 2008, these
CDOs were in compliance with all such tests. The Company’s three CDOs
designated as its high yield (“HY”) series do not have any compliance
tests. A significant test in Euro CDO is the weighted average rating
test which is affected by credit rating agency downgrades to underlying CDO
collateral. In the first quarter of 2009, Euro CDO failed to satisfy
its Class E overcollateralization and interest reinvestment test. As
a result of Euro CDO’s failure to satisfy these tests, half of each interest
payment due to its preferred shareholder will remain in the CDO as reinvestable
cash until the test is cured. However, since the Euro CDO’s preferred
shares were pledged to one of the Company’s secured lenders in December 2008,
the cash flow was already being diverted to pay down that lender’s outstanding
balance. As of December 31, 2008, the Company’s other applicable CDOs
met all coverage tests.
At
December 31, 2008, the Company’s borrowings had the following remaining
maturities:
Borrowing Type
|
|
Within 30
days
|
|
|
31 to 59
days
|
|
|
60 days to
less than 1
year
|
|
|
1 year to 3
years
|
|
|
3 years to
5 years
|
|
|
Over 5 years
|
|
|
Total
|
|
Credit
facilities (1)
|
|
$ |
25,104 |
|
|
$ |
40,253 |
|
|
$ |
25,104 |
|
|
$ |
389,872 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
480,332 |
|
Commercial
mortgage loan pools
(2)
|
|
|
- |
|
|
|
85,630 |
|
|
|
62,807 |
|
|
|
103,034 |
|
|
|
172,170 |
|
|
|
576,162 |
|
|
|
999,804 |
|
CDOs
(2)
|
|
|
287 |
|
|
|
16,560 |
|
|
|
37,791 |
|
|
|
341,302 |
|
|
|
755,682 |
|
|
|
591,537 |
|
|
|
1,743,161 |
|
Senior
unsecured notes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
162,500 |
|
|
|
162,500 |
|
Senior
unsecured convertible notes(3)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
80,000 |
|
|
|
80,000 |
|
Junior
unsecured notes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
69,502 |
|
|
|
69,502 |
|
Junior
subordinated notes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
180,477 |
|
|
|
180,477 |
|
Total
borrowings
|
|
$ |
25,391 |
|
|
$ |
142,443 |
|
|
$ |
125,702 |
|
|
$ |
834,208 |
|
|
$ |
927,852 |
|
|
$ |
1,660,179 |
|
|
$ |
3,715,776 |
|
|
(1)
|
Includes
$4,584 of borrowings 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.
|
|
(3)
|
Assumes
holders of senior convertible notes do not exercise their right to require
the Company to repurchase their notes on September 1, 2012, September 1,
2017 and September 1, 2022.
|
Credit
Facilities and Reverse Repurchase Agreements
The
Company has entered into reverse repurchase agreements to finance its securities
that are not financed under its credit facilities or CDOs. Reverse
repurchase agreements are secured loans generally with a term of 30 to 90
days. After the initial period expires, there is no obligation for
the lender to extend credit for an additional period. This type of
financing generally is available only for more liquid securities.
In order
to secure the amendment and extension of its secured credit facilities
(including repurchase agreements) in 2008 with Bank of America, Deutsche Bank
and Morgan Stanley, the Company agreed not to request new borrowings under the
facilities.
The
Company’s credit facilities include a mark-to-market provision requiring the
Company to repay borrowings if the value of the pledged asset declines in excess
of a threshold amount, and bear interest at a variable rate. Under
the credit facilities and the reverse repurchase agreements, the respective
lenders retain the right to mark the underlying collateral to estimated fair
value. A reduction in the value of pledged assets will require the
Company to provide additional collateral or fund cash margin
calls. Recently, the Company has been required to provide such
additional collateral or fund margin calls. The Company received and
funded margin calls and amortization payments totaling $216,969 and $82,570
during 2008 and 2007, respectively. Since January 1, 2009, the Company has
further reduced mark-to-market debt by funding $17,056 in margin calls and
amortization payments.
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) the Company’s tangible
net worth may not decline 20% or more from its tangible net worth as of the last
business day in the third month preceding such date, (iii) the Company’s
tangible net worth may not decline 40% or more from its tangible net worth as of
the last business day in the twelfth month preceding such date, (iv) the
Company’s tangible net worth may 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 may not be greater than 3:1, (vi) on any date the Company’s liquid
assets (as defined in the related guaranty) may 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 December 31, 2008 amounted to $480,332) and (vii) the
Company’s cumulative income cannot be less than one dollar for two consecutive
quarters. Additionally, 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.
On
December 31, 2008, Morgan Stanley Bank extended its $300,000 non-USD facility
agreement (the “Agreement”) until February 17, 2010. Pursuant to the
Agreement, the Applicable Margin (as defined in the Agreement) on outstanding
borrowings increased to 3.50%, a Borrowing Base Deficiency (as defined in the
Agreement) was satisfied and the Company will no longer be entitled to request
new borrowings under the Agreement after the effectiveness of the Agreement. The
Agreement also incorporated ongoing amortization payments, an upfront balance
reduction of $15,000 and a second balance reduction payment of $15,000 required
by August of 2009. The Company is required to use all cash flow from collateral
under the Agreement to make ongoing amortization payments. In
connection with the extension of the facility (including but not limited to the
satisfaction of a margin call under the Agreement), the Company posted
additional assets as collateral under the Agreement comprised of notes and debt
in an aggregate principal amount of €99,600. The Company may be required in the
future to make additional prepayments or post additional collateral pursuant to
the Agreement. Certain financial covenants were added or modified so
that: (i) on any date, the Company’s tangible net worth may not be less than the
sum of $550,000 plus 75% of any equity offering proceeds from and after December
31, 2008, (ii) the Company’s total indebtedness to tangible net worth may not be
greater than 2.5:1 and (iii) the Company may not make, modify, amend or
supplement any covenant to any that is more restrictive on the Company without
providing the same covenant to Morgan Stanley Bank.
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) made 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. Additionally, 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.
As
detailed above, the Company is subject to financial covenants in its credit
facilities. The Company reported a net loss for the three months
ended December 31, 2008 that resulted in the Company not being in compliance
with the net income covenant as of such reporting date. The tangible
net worth of the Company also decreased by more than 20% from the Company’s
tangible net worth at September 30, 2008, and as such, it will not be in
compliance with the change in net worth covenant. The Company is not aware of
any other instances of non-compliance with these covenants for the year ended
December 31, 2008.
On
February 29, 2008, the Company entered into a binding loan commitment letter
(the “Commitment Letter”) with 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 Manager.
On March
7, 2008, the Company and Holdco 2 entered into the BlackRock
Facility. The BlackRock Facility had 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 an amount 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 December 31, 2008, based on the fair market value of the Carbon II
shares on a mark-to-market basis, the maximum principal amount of the BlackRock
Facility had declined to $39,356 and the Company has remaining unused borrowing
capacity of $3,352. As of February 28, 2009, the maximum principal
amount from the BlackRock Facility declined to approximately $24,840 due to a
decline in the fair market value of the shares of Carbon II that are pledged to
secure the BlackRock Facility. Due to the current value of Carbon II
and the amount of the Company’s outstanding borrowings under the BlackRock
Facility, the Company is currently not able to make new borrowings under this
facility. All of the shares of Carbon II common stock owned by the
Company are pledged under the Company’s credit facility with Holdco. Pursuant to
such facility’s credit agreement, Holdco 2 has the option to purchase such
shares.
The
BlackRock Facility initially bore interest at a variable rate equal to LIBOR or
prime 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
purchase price and reduce the BlackRock Facility’s commitment amount
accordingly, which may require termination of the BlackRock
Facility. If the Lenders were to purchase portions of Carbon II in
this manner, the BlackRock Facility’s commitment amount would be reduced by the
purchase price and the purchase price paid will 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,
will 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 outstanding at
December 31, 2008. On January 9, 2009, the Company borrowed an additional $3,450
from Holdco 2.
On
December 22, 2008, Holdco 2 agreed to renew the BlackRock Facility until March
5, 2010. In addition, the interest rate was increased by 1% to LIBOR or prime
plus 3.5%. The Company paid an extension fee of $150 to the Manager in relation
to this extension.
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 Issuances
On
February 12, 2007, the Company issued $86,250 of 8.25% Series D Cumulative
Redeemable Preferred Stock (“Series D Preferred Stock”), including $11,250 of
Series D Preferred Stock sold to underwriters pursuant to an over-allotment
option.
On April
4, 2008, the Company issued $23,375 of 12% Series E-1 Cumulative Convertible
Redeemable Preferred Stock (the “Series E-1
Preferred Stock”), $23,375 of 12% Series E-2 Cumulative Convertible Redeemable
Preferred Stock (the “Series E-2 Preferred Stock”) and $23,375 12% Series E-3
Cumulative Convertible Redeemable Preferred Stock (the “Series E-3 Preferred
Stock” and, together with the Series E-1 Preferred Stock and Series E-2
Preferred Stock, the “Series E Preferred Stock”). Aggregate net
proceeds to the Company were $69,839. The holder of each of the three
series of Series E Preferred Stock has the right to convert the preferred stock
into Common Stock at $7.49 per share (a 12% premium to the closing price Common
Stock on March 28, 2008, the pricing date).
On or
after April 4, 2012, the 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, the 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 all outstanding Series E-3 Preferred Stock exercised its
right to convert its shares into 3,119,661 shares of Common Stock. In
connection with the conversion, the Company paid the holder $390 for accumulated
but unpaid dividends and fractional shares remaining after conversion in
accordance with the terms of the Series E-3 Preferred Stock.
The
holder of Series E Preferred Stock 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, will 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 year ended
December 31, 2008, net of offering costs:
|
|
Shares
|
|
|
Net
Proceeds
|
|
Dividend
reinvestment and stock purchase plan
|
|
|
241,585 |
|
|
$ |
1,401 |
|
Sales
agency agreement
|
|
|
5,386,125 |
|
|
|
35,784 |
|
Management
and incentive fees*
|
|
|
2,083,503 |
|
|
|
9,619 |
|
Incentive
fee – stock based*
|
|
|
700,864 |
|
|
|
3,089 |
|
Series
E-3 preferred stock conversion
|
|
|
3,119,661 |
|
|
|
23,289 |
|
Private
transaction (see details below)
|
|
|
3,494,021 |
|
|
|
23,154 |
|
Director
compensation
|
|
|
81,958 |
|
|
|
286 |
|
Total
|
|
|
15,107,717 |
|
|
$ |
96,622 |
|
*See
Note 17 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 $23,154.
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. FASB Staff Position FIN 46(R)-5, Implicit Variable Interests under
FASB Interpretation No. 46 (“FIN 46(R)-5”) has certain scope exceptions,
one of which provides that an enterprise that holds a variable interest in a
QSPE does not consolidate that entity unless that enterprise has the unilateral
ability to cause the entity to liquidate. FAS 140 provides the
requirements for an entity to be considered a QSPE. To maintain the QSPE
exception, the trust must continue to meet the QSPE criteria both initially and
in subsequent periods. A trust’s QSPE status can be impacted in future periods
by activities by its transferors or other involved parties, including the manner
in which certain servicing activities are performed. To the extent its CMBS
investments were issued by a trust that meets the requirements to be considered
a QSPE, the Company records the investments at the purchase price paid. To the
extent the underlying trusts are not QSPEs the Company follows the guidance set
forth in FIN 46(R)-5 as the trusts would be considered VIEs.
At
December 31, 2008 the Company owned securities of 39 Controlling Class CMBS
trusts. One of the Company’s 39 Controlling Class trusts does not qualify as a
QSPE and has been consolidated by the Company. See Note 7 of the
consolidated financial statements, “Commercial Mortgage Loan
Pools”.
The
Company’s maximum exposure to loss as a result of its investment in these QSPEs
totaled $741,627 and $1,126,442 at December 31, 2008 and December 31, 2007,
respectively.
In
addition, the Company has completed two securitizations that qualify as QSPEs
under FAS 140. Through CDO HY1 and CDO HY2 the Company issued non-recourse
liabilities secured by commercial related assets including portions of 17
Controlling Class CMBS. Should future guidance from the standard setters
determine that Controlling Class CMBS are not QSPEs, the Company would be
required to consolidate the assets, liabilities, income and expense of CDO HY1
and CDO HY2.
The
Company’s total maximum exposure to loss as a result of its investment in CDO
HY1 and CDO HY2 at December 31, 2008 and December 31, 2007 was $14,259 and
$61,206, respectively.
The
Company also owns all of the preferred equity securities and a debt security in
LEAFs CMBS I Ltd (“LEAF”), a QSPE under FAS 140. LEAF issued non-recourse
liabilities secured by investment grade commercial real estate
securities. At December 31, 2008 and December 31, 2007, the Company’s
total maximum exposure to loss as a result of its investment in LEAF was $4,865
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 provided cash flows of
$60,499, $218,368, and $114,829 for the year ended December 31, 2008, 2007 and
2006, respectively. Operating cash flow is affected by the purchase
and sale of fixed income securities classified as trading securities. Proceeds
received from the sale and repayment of trading securities also increases
operating cash flows. Net cash from trading securities was an outflow of $53,515
for the year ended December 31, 2008 and an inflow of $130,801 and $35,454 for
the year ended December 31, 2007 and 2006, respectively. Also, during
2008, the Company terminated interest rate swaps that resulted in an outflow of
$17,101, while during the same period of 2007, such termination resulted in an
inflow of $17,459.
Net cash
provided by investing activities consists primarily of the purchase, sale, and
repayments on securities activities available for sale, commercial loan pools,
commercial mortgage loans and equity investments. Net cash from
investing activities was an inflow of $368,803 for the year ended December 31,
2008 versus cash outflows of $323,966 and $705,476 for the years ended December
31, 2007 and 2006, respectively. The variance in investing cash flows
is primarily attributable to purchases of securities and funding of commercial
mortgage loans in the years ended December 31, 2007 and 2006. During
the years ended December 31, 2008, 2007 and 2006, net cash used to fund
commercial loans was $2,286, $781,978, and 270,362,
respectively. Purchases of securities during the year ended December
31, 2008 of $53,515 are classified as operating activities due to the adoption
of FAS 159, versus purchases of securities during the years ended December 31,
2007 and 2006 of which $614,166 and $808,477 were classified as investing
activities prior to the adoption of FAS 159.
Net cash
from financing activities was an outflow of $514,839 for the year ended December
31, 2008 versus cash inflows of $116,739 and $614,335 for the years ended
December 31, 2007 and 2006, respectively. The variance in financing cash flows
is primarily attributable to margin calls on reverse repurchase agreements and
credit facilities, net of preferred stock and Common Stock issuances. During the
years ended December 31, 2008, 2007 and 2006, net cash provided by the issuances
of preferred stock and Common Stock was $130,103, $150,481 and $15,256,
respectively. Also, during the years ended December 31, 2007 and
2006, the Company issued senior unsecured notes and junior unsecured notes
(including junior subordinated notes to subsidiary trusts issuing preferred
securities) which raised $227,801 and $170,396 of cash in the aggregate,
respectively.
Transactions
with the Manager and Certain Other Parties
The
Company has entered into the Management Agreement, an administration
agreement and an accounting services agreement with the Manager, the employer,
with its affiliates, of certain directors and all of the officers of the
Company, under which the Manager and the Company’s officers manage the Company’s
day-to-day investment operations, subject to the direction and oversight of the
Company’s Board of Directors. Pursuant to the Management Agreement
and these other agreements, the Manager and the Company’s officers formulate
investment strategies, arrange for the acquisition of assets, arrange for
financing, monitor the performance of the Company’s assets and provide certain
other advisory, administrative and managerial services in connection with the
operations of the Company. For performing certain of these services,
the Company pays the Manager under the Management Agreement a base management
fee equal to 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 for the applicable
quarter.
On March
11, 2009, the Company’s unaffiliated directors approved the First Amendment and
Extension to the Amended and Restated Investment Advisory Agreement, dated as of
March 31, 2008, between the Company and the Manager (as amended, the “2008
Management Agreement”), and the parties entered into the First Amendment and
Extension as of such date.
For the
full one-year term of the renewed contract, the Manager has agreed to receive
all management fees and any incentive fees in Common Stock subject to (i) the
Common Stock continuing to be listed on the NYSE and (ii)
if stockholder approval is required for any issuance of the Common Stock, such
required stockholder approval has been obtained. If the Common Stock is
at any time not listed on the NYSE or if
stockholder approval is required for any issuance of the Common Stock and such
required stockholder approval has not been obtained, such fees will be
payable in cash. The Company’s unaffiliated directors and the Manager
may also mutually agree to defer the payment of any management fee and incentive
fee, in whole or in part. Such deferred fees will be payable in cash
unless the Company’s unaffiliated directors and the Manager mutually agree
otherwise.
The
Common Stock issued to the Manager has not been registered under the Securities
Act of 1933, as amended (the “Securities Act”), and may not be sold by the
Manager except pursuant to an effective registration statement or an exemption
from registration. For example, the Manager may sell such shares
pursuant to Rule 144 under the Securities Act subject to compliance with the
terms of such rule, including the six-month holding period.
The
following is a summary of management and incentive fees incurred for the year
ended December 31, 2008, 2007 and 2006:
|
|
For
the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Management
fee
|
|
$ |
11,919 |
|
|
$ |
13,468 |
|
|
$ |
12,617 |
|
Incentive
fee
|
|
|
11,879 |
|
|
|
5,645 |
|
|
|
5,919 |
|
Incentive
fee - stock based
|
|
|
1,128 |
|
|
|
2,427 |
|
|
|
2,761 |
|
Total
management and incentive fees
|
|
$ |
24,926 |
|
|
$ |
21,540 |
|
|
$ |
21,297 |
|
At
December 31, 2008, 2007, and 2006, respectively, management and incentive fees
of $9,666 (payable in Common Stock), $7,067, and $8,989 remain payable to the
Manager and are included on the consolidated statements of financial condition
as a component of other liabilities.
In
accordance with the provisions of the Management Agreement, the Company recorded
reimbursements to the Manager of $10, $293, and $400 for certain expenses
incurred on behalf of the Company during 2008, 2007, and 2006,
respectively.
The
Company also has administration and accounting services agreements with the
Manager. Under the terms of the administration agreement, the Manager
provides financial reporting, audit coordination and accounting oversight
services to the Company. Under the terms of the accounting services
agreement, the Manager provides investment accounting services to the
Company. For the years ended December 31, 2008, 2007, and 2006, the
Company paid administration and accounting service fees of $920, $473, and $234,
respectively, which are included in general and administrative expense on the
consolidated statements of operations.
The
special servicer for 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 deemed 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 Manager. See
Note 12 of the consolidated financial statements, “Borrowings”.
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 carrying value of the Company’s investment in Carbon I
at December 31, 2008 was $1,713. The Company does not incur any additional
management or incentive fees to the Manager related to its investment in Carbon
I. At December 31, 2008, the Company owned approximately 20% of the
outstanding shares of Carbon I.
The
Company entered into an aggregate commitment of $100,000 to acquire shares of
Carbon II, a private commercial real estate income opportunity fund managed by
the Manager. The carrying value of the Company’s investment in Carbon
II at December 31, 2008 was $39,158. The Company does not incur any additional
management or incentive fees to the Manager related to its investment in Carbon
II. At December 31, 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 AHR
JV. AHR JV invests in U.S. CMBS rated higher than BB. As
of December 31, 2008, the carrying value of the Company’s investment in AHR JV
was $448. 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 $30,872 in AHR International JV. As of December
31, 2008, the carrying value of the Company’s investment in AHR International JV
was $28,199. AHR International JV invests in investments backed by
non-U.S. real estate assets and is managed by the Manager. The other
shareholder in AHR International JV, RECP, is managed by or otherwise associated
with an affiliate of Credit Suisse. RECP holds the Company’s 12%
Series E Cumulative Convertible Redeemable Preferred Stock. Moreover, one of the
Company’s directors, Andrew Rifkin, was appointed by RECP.
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
December 31, 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 deemed probable.
REIT Status:
The
Company has elected to be taxed as a REIT and must comply with certain tax law
requirements in order to so qualify. In particular, the Company must
satisfy certain requirements relating to the nature of its gross assets and
gross income, the composition of its stockholders, as well as minimum
distribution requirements and other requirements that apply to REITs pursuant to
the United States Internal Revenue Code of 1986, as amended and the Treasury
regulations. Provided that the Company qualifies as a REIT, it
generally will be permitted to reduce its taxable income by deducting dividends
that it pays to its stockholders, with the result that it is not subject to
federal income tax on its distributed income. The Company and its
subsidiaries may, however, be subject to tax on any net income, including
capital gains, that is not distributed, and may be subject to a variety of other
taxes, including certain excise taxes, as well as state, local and foreign
property taxes, withholding taxes, transfer taxes and mortgage recording taxes,
among others.
Certain
of the Company’s subsidiaries have elected to be treated as taxable REIT
subsidiaries. This election permits the subsidiaries to engage in certain
activities, including activities related to foreign investments, that may not
otherwise comply with the tax requirements applicable to REITs if the Company or
a pass-through (i.e. non-taxable) subsidiary had engaged in such
activities. Taxable REIT subsidiaries, however, are classified as
corporations for federal income tax purposes, and are potentially subject to
federal income tax on their income, depending on where they are incorporated and
the nature and source of their income and activities.
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Market
Risk: Market risk includes the exposure to loss resulting from
changes in interest rates, credit curve spreads, foreign currency exchange
rates, commodity prices and equity prices. The primary market risks
to which the Company is exposed are interest rate risk, credit curve 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 December 31, 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.
During
2008 the Company removed all of the interest rate hedges it previously used to
manage interest rate risk. As the value of the fixed rate assets
declined, the need to reduce interest rate duration with interest rate swaps
declined as well. Late in 2008 it became apparent that the fixed
income markets for credit risk assets no longer demonstrated a discrete
sensitivity to changes in market interest rates. As of the fourth
quarter of 2008, the Company has not been actively managing interest rate
duration as the value of its assets and its capital structure are not correlated
with changes in Treasury rates or any other index of rates.
The
Company continues to maintain seven CDOs that are used as a match funding
strategy for its commercial real estate debt assets. The objective
has been to match fund its assets so the interest rate risk and liquidity risk
would be minimized. In the current market the Company has been
protected from a significant amount of liquidity risk with these
instruments. 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. However, some CDO structures have
Interest Coverage (IC) and Overcollateralization (OC) tests that must be met to
permit the Company to continue to receive cash flows from its assets net of
interest expense paid on its liabilities. In the first quarter of
2009, Euro CDO failed to satisfy its Class E overcollateralization and interest
reinvestment test. As a result of Euro CDO’s failure to satisfy these
tests, half of each interest payment due to its preferred shareholder will
remain in the CDO as reinvestable cash until the test is
cured. However, since the Euro CDO’s preferred shares were pledged to
one of the Company’s secured lenders in December 2008, the cash flow was already
being diverted to pay down that lender’s outstanding balance.
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 amount of
borrowings under these types of facilities at the end of 2008 was
$480,332. The Company’s primary objective is to reduce these amounts
as soon as possible.
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 by currency are measured as
percentage changes from the respective values calculated in the scenario labeled
as “Base Case.” The base interest rate scenario assumes interest
rates at December 31, 2008. Actual results could differ significantly
from these estimates.
Projected
Percentage Change In Net Interest
Income
Per Share Given LIBOR Movements
|
|
Change
in LIBOR,
+
50 Basis Points
|
|
Projected
Change in
Earnings
per Share
|
|
USD
|
|
$ |
(0.010 |
) |
GBP
|
|
$ |
0.006 |
|
EUR
|
|
$ |
0.003 |
|
CAD
|
|
|
(0.001 |
) |
CHF
|
|
$ |
0.001 |
|
JPY
|
|
$ |
0.001 |
|
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 most of the principal from its below investment
grade CMBS investments will not be recoverable over time. The loss
adjusted yields of these securities 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 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 increase GAAP interest income by
approximately $0.10 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 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. The
Company no longer uses various currency instruments to hedge the capital portion
of its foreign currency risk. In January 2009, the Company
discontinued the use of such instruments in an effort to avoid cash outlays on
the mark-to-market of these instruments. The Company has been
primarily focused on preserving cash to pay down secured lenders and maintaining
these hedges creates unpredictable cash flows as currency values move in
relation to each other. The chart below illustrates the sensitivity
of the Company’s net income and stockholders’ equity to changes in each
currency.
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO
FINANCIAL STATEMENTS AND SCHEDULE
|
|
PAGE
|
|
|
|
Report
of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting
|
|
101
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
103
|
|
|
|
Consolidated
Financial Statements:
|
|
|
|
|
|
Consolidated
Statements of Financial Condition at December 31, 2008 and
2007
|
|
104
|
|
|
|
Consolidated
Statements of Operations
For
the Years Ended December 31, 2008, 2007, and 2006
|
|
105
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
For
the Years Ended December 31, 2008, 2007, and 2006
|
|
106
|
|
|
|
Consolidated
Statements of Cash Flows
For
the Years Ended December 31, 2008, 2007, and 2006
|
|
107
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
108
|
|
|
|
Schedules
|
|
|
|
|
|
Schedule
IV - Mortgage Loans on Real Estate as of December 31,
2008
|
|
163
|
All other
schedules have been omitted because either the required information is not
applicable or the information is shown in the consolidated financial statements
or notes thereto.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
Anthracite
Capital, Inc.
New York,
New York
We have
audited the internal control over financial reporting of Anthracite Capital,
Inc. and subsidiaries (the “Company”) as of December 31, 2008, based on criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and
for the year ended December 31, 2008 of the Company and our report dated March
17, 2009 expressed an unqualified opinion on those consolidated financial
statements and included explanatory paragraphs regarding the Company’s ability
to continue as a going concern and the Company’s adoption of Financial
Accounting Standards Board Statement No. 159 , The Fair Value Option for Financial
Assets and Financial Liabilities.
DELOITTE
& TOUCHE LLP
New York,
New York
March 17,
2009
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Anthracite
Capital, Inc.
New York,
New York
We have
audited the accompanying consolidated statements of financial condition of
Anthracite Capital, Inc. and subsidiaries (the “Company”) as of December 31,
2008 and 2007, and the related consolidated statements of operations, changes in
stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2008. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Anthracite Capital, Inc. and subsidiaries as
of December 31, 2008 and 2007, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2008, in
conformity with accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements for the year ended December 31,
2008, have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements
as a result of its liquidity position, current market conditions and the
uncertainty relating to the outcome of the Company’s ongoing negotiations with
its lenders, there is substantial doubt about the Company’s ability to continue
as a going concern. Management’s plans concerning these matters are also
discussed in Note 1 to the consolidated financial statements. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As
discussed in Note 2 to the consolidated financial statements, on
January 1, 2008, the Company adopted Financial Accounting Standards Board
Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 17, 2009 expressed an unqualified
opinion on the Company’s internal control over financial reporting.
DELOITTE
& TOUCHE LLP
New York,
New York
March 17,
2009
Anthracite
Capital, Inc.
Consolidated
Statements of Financial Condition
(in
thousands, except share data)
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$ |
9,686 |
|
|
|
|
|
$ |
91,547 |
|
Restricted
cash equivalents
|
|
|
|
|
|
23,982 |
|
|
|
|
|
|
32,105 |
|
Securities
held-for-trading, at estimated fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
commercial mortgage-backed securities (“CMBS”)
|
|
$ |
257,982 |
|
|
|
|
|
|
$ |
1,380 |
|
|
|
|
|
Investment
grade CMBS
|
|
|
677,533 |
|
|
|
|
|
|
|
15,923 |
|
|
|
|
|
Residential
mortgage-backed securities (“RMBS”)
|
|
|
787 |
|
|
|
|
|
|
|
901 |
|
|
|
|
|
Total
securities held-for-trading
|
|
|
|
|
|
|
936,302 |
|
|
|
|
|
|
|
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 $165,928 in
2008)
|
|
|
|
|
|
|
754,707 |
|
|
|
|
|
|
|
983,387 |
|
Commercial
mortgage loan pools, at amortized cost
|
|
|
|
|
|
|
1,022,105 |
|
|
|
|
|
|
|
1,240,793 |
|
Equity
investments
|
|
|
|
|
|
|
78,868, |
|
|
|
|
|
|
|
108,748 |
|
Derivative
instruments, at estimated fair value
|
|
|
|
|
|
|
929,632 |
|
|
|
|
|
|
|
404,910 |
|
Other
assets (includes $384 at estimated fair value in 2008)
|
|
|
|
|
|
|
72,087 |
|
|
|
|
|
|
|
101,886 |
|
Total
Assets
|
|
|
|
|
|
$ |
3,827,369 |
|
|
|
|
|
|
$ |
5,247,710 |
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
by pledge of subordinated CMBS
|
|
$ |
193,126 |
|
|
|
|
|
|
$ |
293,287 |
|
|
|
|
|
Secured
by pledge of investment grade CMBS
|
|
|
84,997 |
|
|
|
|
|
|
|
207,829 |
|
|
|
|
|
Secured
by pledge of commercial mortgage loans
|
|
|
167,625 |
|
|
|
|
|
|
|
244,476 |
|
|
|
|
|
Secured
by pledge of equity investment
|
|
|
30,000 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Collateralized
debt obligations (“CDOs”) (at estimated fair value in
2008)
|
|
|
564,661 |
|
|
|
|
|
|
|
1,823,328 |
|
|
|
|
|
Senior
unsecured notes (at estimated fair value in 2008)
|
|
|
18,411 |
|
|
|
|
|
|
|
162,500 |
|
|
|
|
|
Senior
unsecured convertible notes (at estimated fair value in
2008)
|
|
|
24,960 |
|
|
|
|
|
|
|
80,000 |
|
|
|
|
|
Junior
unsecured notes (at estimated fair value in 2008)
|
|
|
5,726 |
|
|
|
|
|
|
|
73,103 |
|
|
|
|
|
Junior
subordinated notes to subsidiary trusts issuing preferred securities (at
estimated fair value in 2008)
|
|
|
12,643 |
|
|
|
|
|
|
|
180,477 |
|
|
|
|
|
Secured
by pledge of commercial mortgage loan pools
|
|
|
1,004,388 |
|
|
|
|
|
|
|
1,225,223 |
|
|
|
|
|
Total
borrowings
|
|
|
|
|
|
|
2,106,537 |
|
|
|
|
|
|
|
4,290,223 |
|
Payable
for investments purchased
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
4,693 |
|
Distributions
payable
|
|
|
|
|
|
|
3,019 |
|
|
|
|
|
|
|
21,064 |
|
Derivative
instruments, at estimated fair value
|
|
|
|
|
|
|
1,018,927 |
|
|
|
|
|
|
|
442,114 |
|
Other
liabilities
|
|
|
|
|
|
|
34,920 |
|
|
|
|
|
|
|
38,245 |
|
Total
Liabilities
|
|
|
|
|
|
|
3,163,403 |
|
|
|
|
|
|
|
4,796,339 |
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12%
Series E-1 Cumulative Convertible Redeemable Preferred Stock, liquidation
preference $23,375
|
|
|
|
|
|
|
23,237 |
|
|
|
|
|
|
|
- |
|
12%
Series E-2 Cumulative Convertible Redeemable Preferred Stock, liquidation
preference $23,375
|
|
|
|
|
|
|
23,237 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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;
78,371,715
shares issued and outstanding in 2008;
63,263,998
shares issued and outstanding in 2007
|
|
|
|
|
|
|
78 |
|
|
|
|
|
|
|
63 |
|
Additional
paid-in capital
|
|
|
|
|
|
|
787,678 |
|
|
|
|
|
|
|
691,071 |
|
Distributions
in excess of earnings
|
|
|
|
|
|
|
(276,558 |
) |
|
|
|
|
|
|
(122,738 |
) |
Accumulated
other comprehensive loss (“OCI”)
|
|
|
|
|
|
|
(32,400 |
) |
|
|
|
|
|
|
(255,719 |
) |
Total
Stockholders’ Equity
|
|
|
|
|
|
|
617,492 |
|
|
|
|
|
|
|
451,371 |
|
Total
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
$ |
3,827,369 |
|
|
|
|
|
|
$ |
5,247,710 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Anthracite
Capital, Inc.
Consolidated
Statements of Operations (in thousands, except share and per share
data)
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Income:
|
|
|
|
|
|
|
|
|
|
Interest
from securities
|
|
|
205,813 |
|
|
|
198,561 |
|
|
|
178,893 |
|
Interest
from commercial mortgage loans
|
|
|
90,904 |
|
|
|
69,981 |
|
|
|
41,773 |
|
Interest
from commercial mortgage loan pools
|
|
|
49,522 |
|
|
|
52,037 |
|
|
|
52,917 |
|
Earnings
(loss) from equity investments
|
|
|
(53,630 |
) |
|
|
32,093 |
|
|
|
27,431 |
|
Interest
from cash and cash equivalents
|
|
|
2,930 |
|
|
|
5,857 |
|
|
|
2,403 |
|
Total
Income
|
|
|
295,539 |
|
|
|
358,529 |
|
|
|
303,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
215,302 |
|
|
|
241,000 |
|
|
|
212,388 |
|
Management
and incentive fees
|
|
|
24,926 |
|
|
|
21,540 |
|
|
|
21,297 |
|
General
and administrative expense
|
|
|
8,162 |
|
|
|
5,981 |
|
|
|
4,533 |
|
Total
Expenses
|
|
|
248,390 |
|
|
|
268,521 |
|
|
|
238,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
gain (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
loss on securities and swaps held-for-trading, net
|
|
|
(36,949 |
) |
|
|
(906 |
) |
|
|
3,510 |
|
Unrealized
gain (loss) on securities held-for-trading
|
|
|
(1,189,965 |
) |
|
|
(1,508 |
) |
|
|
3,191 |
|
Unrealized
loss on swaps held-for-trading
|
|
|
(61,473 |
) |
|
|
(2,737 |
) |
|
|
(3,447 |
) |
Unrealized
gain on liabilities
|
|
|
1,219,779 |
|
|
|
- |
|
|
|
- |
|
Gain
on sale of securities available-for-sale, net
|
|
|
- |
|
|
|
5,316 |
|
|
|
29,032 |
|
Dedesignation
of derivative instruments
|
|
|
(7,084 |
) |
|
|
- |
|
|
|
(12,661 |
) |
Provision
for loan losses
|
|
|
(165,928 |
) |
|
|
- |
|
|
|
- |
|
Foreign
currency gain
|
|
|
3,268 |
|
|
|
6,272 |
|
|
|
2,161 |
|
Loss
on impairment of securities
|
|
|
- |
|
|
|
(12,469 |
) |
|
|
(7,880 |
) |
Total
other gain (loss)
|
|
|
(238,352 |
) |
|
|
(6,032 |
) |
|
|
13,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before taxes
|
|
|
(191,203 |
) |
|
|
83,976 |
|
|
|
79,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
(2,409 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
(193,612 |
) |
|
|
83,976 |
|
|
|
79,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
1,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(193,612 |
) |
|
|
83,976 |
|
|
|
80,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on preferred stock
|
|
|
17,267 |
|
|
|
11,656 |
|
|
|
5,392 |
|
Net
income (loss) available to Common Stockholders
|
|
$ |
(210,878 |
) |
|
$ |
72,320 |
|
|
$ |
75,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share, basic
|
|
$ |
(2.96 |
) |
|
$ |
1.18 |
|
|
$ |
1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share, diluted
|
|
$ |
(2.96 |
) |
|
$ |
1.18 |
|
|
$ |
1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations per share of Common Stock, after
preferred dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(2.96 |
) |
|
$ |
1.18 |
|
|
$ |
1.29 |
|
Diluted
|
|
$ |
(2.96 |
) |
|
$ |
1.18 |
|
|
$ |
1.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations per share of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
- |
|
|
|
- |
|
|
$ |
0.02 |
|
Diluted
|
|
|
- |
|
|
|
- |
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
71,171,455 |
|
|
|
61,136,269 |
|
|
|
57,182,434 |
|
Diluted
|
|
|
71,171,455 |
|
|
|
61,375,193 |
|
|
|
57,401,664 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Anthracite
Capital, Inc.
Consolidated
Statements of Changes in Stockholders’ Equity
for
the year ended December 31, 2008, 2007 and 2006 (in thousands)
|
|
Series
|
|
|
Series
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
C
|
|
|
D
|
|
|
Common
|
|
|
Additional
|
|
|
Distributions
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Stock,
|
|
|
Paid-In
|
|
|
In
Excess
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Par
Value
|
|
|
Capital
|
|
|
Of
Earnings
|
|
|
Income
(Loss)
|
|
|
Income
(Loss)
|
|
|
Equity
|
|
Balance
at December 31, 2005
|
|
$ |
55,435 |
|
|
|
|
|
|
$ |
56 |
|
|
$ |
612,368 |
|
|
$ |
(130,038 |
) |
|
$ |
60,197 |
|
|
|
|
|
$ |
598,018 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,471 |
|
|
|
|
|
|
$ |
80,471 |
|
|
|
80,471 |
|
Unrealized
gain on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,961 |
|
|
|
2,961 |
|
|
|
2,961 |
|
Reclassification
adjustments from cash flow hedges included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,029 |
|
|
|
5,029 |
|
|
|
5,029 |
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
204 |
|
|
|
204 |
|
|
|
204 |
|
Dedesignation
of cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,661 |
|
|
|
12,661 |
|
|
|
12,661 |
|
Change
in net unrealized gain on securities available-for-sale, net of
reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,755 |
|
|
|
10,755 |
|
|
|
10,755 |
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,610 |
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
112,081 |
|
|
|
|
|
Dividends
declared-common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66,017 |
) |
|
|
|
|
|
|
|
|
|
|
(66,017 |
) |
Dividends
on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,392 |
) |
|
|
|
|
|
|
|
|
|
|
(5,392 |
) |
Issuance
of common stock
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
17,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,419 |
|
Balance
at December 31, 2006
|
|
$ |
55,435 |
|
|
|
|
|
|
$ |
58 |
|
|
$ |
629,785 |
|
|
$ |
(120,976 |
) |
|
$ |
91,807 |
|
|
|
|
|
|
$ |
656,109 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,976 |
|
|
|
|
|
|
$ |
83,976 |
|
|
|
83,976 |
|
Unrealized
loss on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,657 |
) |
|
|
(34,657 |
) |
|
|
(34,657 |
) |
Reclassification
adjustments from cash flow hedges included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,206 |
|
|
|
1,206 |
|
|
|
1,206 |
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269 |
|
|
|
269 |
|
|
|
269 |
|
Change
in net unrealized loss on securities available-for-sale, net of
reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(314,344 |
) |
|
|
(314,344 |
) |
|
|
(314,344 |
) |
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(347,526 |
) |
|
|
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(263,550 |
) |
|
|
|
|
Dividends
declared-common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,082 |
) |
|
|
|
|
|
|
|
|
|
|
(74,082 |
) |
Dividends
on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,656 |
) |
|
|
|
|
|
|
|
|
|
|
(11,656 |
) |
Issuance
of common stock
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
61,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,291 |
|
Issuance
of preferred stock
|
|
|
|
|
|
$ |
83,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,259 |
|
Balance
at December 31, 2007
|
|
$ |
55,435 |
|
|
$ |
83,259 |
|
|
$ |
63 |
|
|
$ |
691,071 |
|
|
$ |
(122,738 |
) |
|
$ |
(255,719 |
) |
|
|
|
|
|
$ |
451,371 |
|
Cumulative
effect of adjustment from adoption of SFAS No. 159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,988 |
|
|
|
227,635 |
|
|
|
|
|
|
|
350,623 |
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(193,612 |
) |
|
|
|
|
|
$ |
(193,612 |
) |
|
|
(193,612 |
) |
Unrealized
loss on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,170 |
) |
|
|
(9,170 |
) |
|
|
(9,170 |
) |
Reclassification
adjustments from cash flow hedges included in net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,378 |
|
|
|
6,378 |
|
|
|
6,378 |
|
Dedesignation
of cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,084 |
|
|
|
7,084 |
|
|
|
7,084 |
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,608 |
) |
|
|
(8,608 |
) |
|
|
(8,608 |
) |
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,341 |
) |
|
|
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(197,928 |
) |
|
|
|
|
Dividends
declared-on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65,929 |
) |
|
|
|
|
|
|
|
|
|
|
(65,929 |
) |
Dividends
on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,267 |
) |
|
|
|
|
|
|
|
|
|
|
(17,267 |
) |
Issuance
of common stock
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
96,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,622 |
|
Balance
at December 31, 2008
|
|
$ |
55,435 |
|
|
$ |
83,259 |
|
|
$ |
78 |
|
|
$ |
787,678 |
|
|
$ |
(276,558 |
) |
|
$ |
(32,400 |
) |
|
|
|
|
|
$ |
617,492 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Anthracite
Capital, Inc.
Consolidated
Statements of Cash Flow (in thousands)
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(193,612 |
) |
|
$ |
83,976 |
|
|
$ |
80,471 |
|
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on securities held-for-trading
|
|
|
1,189,965 |
|
|
|
- |
|
|
|
- |
|
Unrealized
loss on swaps held-for-trading
|
|
|
61,473 |
|
|
|
- |
|
|
|
- |
|
Purchase
of securities held-for-trading
|
|
|
(53,515 |
) |
|
|
(42,668 |
) |
|
|
- |
|
Realized
loss (gain) on securities and swaps held-for-trading, net
|
|
|
20,242 |
|
|
|
(166 |
) |
|
|
(19,625 |
) |
Principal
payments received on securities held-for-trading
|
|
|
126 |
|
|
|
6,703 |
|
|
|
35,454 |
|
Sale
of trading securities
|
|
|
- |
|
|
|
166,932 |
|
|
|
- |
|
Unrealized
gain on liabilities
|
|
|
(1,219,779 |
) |
|
|
- |
|
|
|
- |
|
Loss
(earnings) from equity investments
|
|
|
53,630 |
|
|
|
(32,093 |
) |
|
|
(27,431 |
) |
Distributions
of earnings from equity investments
|
|
|
1,644 |
|
|
|
45,944 |
|
|
|
19,725 |
|
Provision
for loan losses
|
|
|
165,928 |
|
|
|
- |
|
|
|
- |
|
Loss
on impairment of assets
|
|
|
- |
|
|
|
12,469 |
|
|
|
7,880 |
|
(Discount
accretion) premium amortization, net
|
|
|
(21,303 |
) |
|
|
7,133 |
|
|
|
2,471 |
|
Amortization
of finance costs
|
|
|
3,786 |
|
|
|
6,273 |
|
|
|
3,901 |
|
Gain
on sale of real estate held for sale
|
|
|
- |
|
|
|
- |
|
|
|
(1,366 |
) |
Earnings
from subsidiary trust
|
|
|
(424 |
) |
|
|
(423 |
) |
|
|
(388 |
) |
Distributions
from subsidiary trust
|
|
|
423 |
|
|
|
423 |
|
|
|
363 |
|
Unrealized
net foreign currency loss (gain)
|
|
|
63,926 |
|
|
|
(56,863 |
) |
|
|
(24,051 |
) |
Non-cash
management, incentive, and director fees
|
|
|
16,851 |
|
|
|
4,165 |
|
|
|
4,601 |
|
(Disbursements)
proceeds from termination of interest rate swap agreements
|
|
|
(17,101 |
) |
|
|
17,459 |
|
|
|
(6,056 |
) |
Amortization
of terminated interest rate swaps from OCI
|
|
|
6,378 |
|
|
|
1,206 |
|
|
|
5,029 |
|
Dedesignation
of cash flow hedges
|
|
|
7,084 |
|
|
|
- |
|
|
|
12,661 |
|
(Increase)
decrease in other assets
|
|
|
(18,134 |
) |
|
|
(18,885 |
) |
|
|
32,608 |
|
(Decrease)
increase in other liabilities
|
|
|
(7,089 |
) |
|
|
16,783 |
|
|
|
(11,418 |
) |
Net
cash provided by operating activities
|
|
|
60,499 |
|
|
|
218,368 |
|
|
|
114,829 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of securities available-for-sale
|
|
|
- |
|
|
|
(614,166 |
) |
|
|
(808,477 |
) |
Proceeds
from sale of securities
|
|
|
87,943 |
|
|
|
605,281 |
|
|
|
236,945 |
|
Principal
payments received on securities
|
|
|
77,639 |
|
|
|
62,255 |
|
|
|
51,193 |
|
Repayments
received from commercial mortgage loan pools
|
|
|
205,850 |
|
|
|
17,374 |
|
|
|
9,004 |
|
Funding
of commercial mortgage loans
|
|
|
(2,286 |
) |
|
|
(781,978 |
) |
|
|
(270,362 |
) |
Repayments
received from commercial mortgage loans
|
|
|
23,853 |
|
|
|
296,724 |
|
|
|
197,094 |
|
Investment
in equity investments
|
|
|
(35,525 |
) |
|
|
(38,555 |
) |
|
|
(78,533 |
) |
Return
of capital from equity investments
|
|
|
3,206 |
|
|
|
101,403 |
|
|
|
14,742 |
|
Decrease
(increase) in restricted cash equivalents
|
|
|
8,123 |
|
|
|
27,696 |
|
|
|
(58,448 |
) |
Purchase
of real estate held-for-sale
|
|
|
- |
|
|
|
- |
|
|
|
(5,435 |
) |
Proceeds
from sale of real estate held-for-sale
|
|
|
- |
|
|
|
- |
|
|
|
6,801 |
|
Net
cash provided by (used in) investing activities
|
|
|
368,803 |
|
|
|
(323,966 |
) |
|
|
(705,476 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase in borrowings under credit facilities and reverse repurchase
agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
by pledge of subordinated CMBS
|
|
|
(100,456 |
) |
|
|
244,659 |
|
|
|
(34,760 |
) |
Secured
by pledge of investment grade CMBS
|
|
|
(123,976 |
) |
|
|
(458,446 |
) |
|
|
43,320 |
|
Secured
by pledge of commercial mortgage loans
|
|
|
(79,323 |
) |
|
|
220,946 |
|
|
|
(202,295 |
) |
Secured
by pledge of equity investment
|
|
|
30,000 |
|
|
|
- |
|
|
|
- |
|
Secured
by pledge of RMBS
|
|
|
- |
|
|
|
(127,249 |
) |
|
|
(32,191 |
) |
Repayments
of borrowings secured by commercial mortgage loan pools
|
|
|
(207,394 |
) |
|
|
(17,641 |
) |
|
|
(8,587 |
) |
Issuance
of CDOs
|
|
|
- |
|
|
|
23,875 |
|
|
|
765,388 |
|
Repayments
of CDOs
|
|
|
(62,553 |
) |
|
|
(51,707 |
) |
|
|
(20,115 |
) |
Issuance
costs for CDOs
|
|
|
- |
|
|
|
(1,537 |
) |
|
|
(11,662 |
) |
Issuance
of senior convertible notes
|
|
|
- |
|
|
|
80,000 |
|
|
|
- |
|
Issuance
costs of senior convertible notes
|
|
|
- |
|
|
|
(2,419 |
) |
|
|
- |
|
Issuance
of junior subordinated notes to subsidiary trust
|
|
|
- |
|
|
|
- |
|
|
|
100,000 |
|
Issuance
costs of junior subordinated notes
|
|
|
- |
|
|
|
- |
|
|
|
(3,208 |
) |
Issuance
of senior unsecured notes
|
|
|
- |
|
|
|
87,500 |
|
|
|
75,000 |
|
Issuance
costs of senior unsecured notes
|
|
|
- |
|
|
|
(2,760 |
) |
|
|
(1,396 |
) |
Issuance
of junior unsecured notes
|
|
|
- |
|
|
|
67,687 |
|
|
|
- |
|
Issuance
costs of junior unsecured notes
|
|
|
- |
|
|
|
(2,207 |
) |
|
|
- |
|
Issuance
of preferred stock, net of offering costs
|
|
|
69,763 |
|
|
|
83,259 |
|
|
|
- |
|
Dividends
paid on preferred stock
|
|
|
(16,334 |
) |
|
|
(10,470 |
) |
|
|
(5,392 |
) |
Proceeds
from issuance of common stock, net of offering costs
|
|
|
60,340 |
|
|
|
67,222 |
|
|
|
15,256 |
|
Repurchase
of common stock
|
|
|
- |
|
|
|
(12,100 |
) |
|
|
- |
|
Dividends
paid on common stock
|
|
|
(84,906 |
) |
|
|
(71,873 |
) |
|
|
(65,023 |
) |
Net
cash (used in) provided by financing activities
|
|
|
(514,839 |
) |
|
|
116,739 |
|
|
|
614,335 |
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
3,676 |
|
|
|
14,018 |
|
|
|
2,144 |
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(81,861 |
) |
|
|
25,159 |
|
|
|
25,832 |
|
Cash
and cash equivalents, beginning of year
|
|
|
91,547 |
|
|
|
66,388 |
|
|
|
40,556 |
|
Cash
and cash equivalents, end of year
|
|
$ |
9,686 |
|
|
$ |
91,547 |
|
|
$ |
66,388 |
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
216,934 |
|
|
$ |
226,666 |
|
|
$ |
208,879 |
|
Series
E preferred stock conversion
|
|
|
23,289 |
|
|
|
- |
|
|
|
- |
|
Incentive
fees paid by the issuance of common stock
|
|
|
12,994 |
|
|
|
6,168 |
|
|
|
2,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in subsidiary trust
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,097 |
|
Investments
purchased not settled
|
|
$ |
- |
|
|
$ |
4,693 |
|
|
$ |
23,796 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Anthracite
Capital, Inc.
Notes
to Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
1 ORGANIZATION
Anthracite
Capital, Inc., a Maryland corporation, and subsidiaries (collectively, the
“Company”) was incorporated in Maryland in November 1997 and commenced
operations on March 24, 1998. The Company’s principal business
activity is to invest in a diversified portfolio of CMBS and commercial mortgage
loans, and other real estate related assets in the U.S. and non-U.S.
markets. The Company is organized and managed as a single business
segment.
The
Company’s consolidated financial statements have been prepared on a going
concern basis of accounting which contemplates continuity of operations,
realization of assets, liabilities and commitments in the normal course of
business. There are substantial doubts that the Company will be able to continue
as a going concern and, therefore, may be unable to realize its assets and
discharge its liabilities in the normal course of business. The financial
statements do not reflect any adjustments relating to the recoverability and
classification of recorded asset amounts or to the amounts and classification of
liabilities that may be necessary should the Company be unable to continue as a
going concern.
Effect
of Market Conditions on the Company’s Business & Recent
Developments
During
2008 and particularly in the fourth quarter, global economic conditions
continued to worsen, resulting in ongoing disruptions in the credit and capital
markets, significant devaluations of assets and a severe economic downturn
globally. Assets linked to the U.S. commercial real estate finance
market have been particularly affected as demand for such assets has sharply
declined and defaults have risen, including for CMBS and commercial real estate
loans. Available liquidity, which began to decline during the second
half of 2007, became scarce in 2008 and remains depressed into
2009. Under normal market conditions, the Company relies on the
credit and equity markets for capital to finance its investments and grow its
business. However, in the current environment, the Company is focused
principally on managing its liquidity.
The
recessionary economic conditions and ongoing market disruptions have had, and
the Company expects will continue to have, an adverse effect on the Company and
the commercial real estate and other assets in which the Company has
invested. These effects include:
|
·
|
Negative
operating results. The Company incurred net income (loss)
available to common stockholders of $(210,878) for the year ended December
31, 2008 compared with $72,320 for the year ended December 31, 2007,
driven primarily by significant net realized and unrealized losses, the
incurrence of sizable provisions for loan losses (including the
establishment of a general reserve) and a loss from equity investments
compared with earnings in the prior year. The establishment of
a general reserve for loan losses was deemed necessary given the dramatic
change in the prospects for loan performance as a result of significant
property value declines in the fourth quarter. See Note 2 of the
consolidated financial statements, “Significant Accounting Policies -
Allowance for Loan Losses” for a discussion of the methodology used to
calculate the general reserve.
|
|
·
|
Adverse
impact on liquidity and access to capital. The Company’s cash
and cash equivalents sharply decreased to $9,686 at December 31, 2008 from
$91,547 at December 31, 2007 due to, among other things, an increase in
the receipt and funding of margin calls and amortization payments under
the Company’s secured credit facilities and reduced cash flow from
investments. In order to secure the amendment and
extension of its secured credit facilities (including repurchase
agreements) in 2008 with Bank of America, Deutsche Bank and Morgan
Stanley, the Company agreed not to request new borrowings under the
facilities. Financings through collateralized debt obligations
(“CDOs”), which the Company historically utilized, are no longer
available, and the Company does not expect to be able to finance
investments through CDOs for the foreseeable
future.
|
|
·
|
Change
in business objectives and dividend policy. The Company is
currently focused on managing its liquidity and, unless its liquidity
position and market conditions significantly improve, anticipates no new
investment activity in 2009. In addition, the Company’s Board
of Directors anticipates that the Company will only pay cash dividends on
its preferred and common stock to the extent necessary to maintain its
REIT status until the Company’s liquidity position has
improved.
|
These
effects have led to the following adverse consequences for the
Company:
|
·
|
Substantial
doubt about the ability to continue as a going concern. The
Company’s independent registered public accounting firm has issued an
opinion on the Company’s consolidated financial statements that states the
consolidated financial statements have been prepared assuming the Company
will continue as a going concern and further states that the Company’s
liquidity position, current market conditions and the uncertainty relating
to the outcome of the Company’s ongoing negotiations with its lenders have
raised substantial doubt about the Company’s ability to continue as a
going concern. The Company obtained agreements from its secured
credit facility lenders on March 17, 2009 that the going concern reference
in the independent registered public accounting firm’s opinion to the
consolidated financial statements is waived or does not constitute an
event of default and/or covenant breach under the applicable
facility.
|
|
·
|
Breach
of covenants. Financial covenants in certain of the Company’s
secured credit facilities include, without limitation, a covenant that the
Company’s net income (as defined in the applicable credit facility) will
not be less than $1.00 for any period of two consecutive quarters and
covenants that on any date the Company’s tangible net worth (as defined in
the applicable credit facility) will not have decreased by twenty percent
or more from the Company’s tangible net worth as of the last business day
in the third month preceding such date. The Company’s
significant net loss for the three months ended December 31, 2008 resulted
in the Company not being in compliance with these covenants. On
March 17, 2009, the secured credit facility lenders waived this covenant
breach until April 1, 2009. In addition, the Company’s secured
credit facility with BlackRock Holdco 2, Inc. (“Holdco 2”) requires the
Company to immediately repay outstanding borrowings under the facility to
the extent outstanding borrowings exceed 60% of the fair market value (as
determined by the Company’s manager) of the shares of common stock of
Carbon Capital II, Inc. (“Carbon II”) securing such
facility. As of February 28, 2009, 60% of the fair market value
of such shares declined to approximately $24,840 and outstanding
borrowings under the facility were $33,450. On March 17, 2009,
Holdco 2 waived this breach until April 1, 2009. Additionally,
in the first quarter of 2009, Anthracite Euro CRE CDO 2006-1 plc (“Euro
CDO”) failed to satisfy its Class E overcollateralization and interest
reinvestment tests. As a result of Euro CDO’s failure to
satisfy these tests, half of each interest payment due to the Company, as
the Euro CDO’s preferred shareholder, will remain in the CDO as
reinvestable cash until the tests are cured. However, since the
Euro CDO’s preferred shares were pledged to one of the Company’s secured
lenders in December 2008, the cash flow was already being diverted to pay
down that lender’s outstanding
balance.
|
|
·
|
Inability
to satisfy margin call. During the first quarter of 2009, the
Company received a margin call of $46,300 and C$5,300 from one of its
secured credit facility lenders. As part of the Company’s
ongoing discussions with this lender and the other secured credit facility
lenders, the Company has been negotiating to have the margin call waived
in consideration of certain agreements to be made by the
Company. On March 17, 2009, the lender waived this event of
default until April 1, 2009.
|
|
·
|
Reduction
or elimination of dividends. Due to current market conditions
and the Company’s current liquidity position, the Company’s Board of
Directors anticipates that the Company will pay cash dividends on its
stock only to the extent necessary to maintain its REIT status until the
Company’s liquidity position has improved and market values of commercial
real estate debt show signs of stability. The Board of
Directors did not declare a dividend on the Common Stock for the fourth
quarter of 2008 since the Company’s 2008 net taxable income distribution
requirements under REIT rules were satisfied by distributions made for the
first three quarters of 2008. The Board of Directors also did
not declare a dividend on the Common Stock and the Company’s preferred
stock for the first quarter of 2009. To the extent the Company
is required to make distributions to maintain its qualification as a REIT
in 2009, the Company anticipates it will rely upon temporary guidance that
was recently issued by the Internal Revenue Service (“IRS”), which allows
certain publicly traded REITs to satisfy their net taxable income
distribution requirements during 2009 by distributing up to 90% in stock,
with the remainder distributed in cash. See Part II, Item 5,
“Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities” for additional discussion on
dividends. The terms of the Company’s preferred stock prohibit
the Company from declaring or paying cash dividends on the Common Stock
unless full cumulative dividends have been declared and paid on the
preferred stock.
|
As
discussed and for the reasons stated above, if the Company were unable to obtain
permanent waivers or extensions of the waivers from its secured credit facility
lenders on or before April 1, 2009, an event of default will immediately or with
the passage of time occur under the applicable respective facility.An event of
default under any of the Company’s facilities, absent a waiver, would trigger
cross-default and cross-acceleration provisions in all of the Company’s other
facilities and, if such debt were accelerated, would trigger a
cross-acceleration provision in one of the Company’s indentures. In
such an event, the Company would be required to repay all outstanding
indebtedness under its secured credit facilities and the one indenture
immediately. The Company would not have sufficient liquid assets
available to repay such indebtedness and, unless the Company were able to obtain
additional capital resources or waivers, the Company would be unable to continue
to fund its operations or continue its business.
Secured
credit facilities waivers
On March
17, 2009, the Company received waivers concerning covenant breaches from its
secured credit facility lenders as described above. In addition, the
Company's secured credit facility lenders agreed to permanently waive minimum
liquidity covenants in the facilities. In connection with the waivers, the
Company has agreed to pay $6 million to each of Morgan Stanley and Bank of
America and $3 million to Deutsche Bank.
CDO
tests
In
addition to the covenants under the Company’s secured credit facilities, four of
the seven CDOs issued by the Company contain compliance tests which, if
violated, could trigger a diversion of cash flows from the Company to
bondholders of the CDOs. The Company’s three CDOs designated as its HY series do
not have any compliance tests.
Interest
Coverage and Overcollateralization Tests (“Cash Flow Triggers”)
Four of
the seven CDOs issued by the Company contain tests that measure the amount of
overcollateralization and excess interest in the transaction. Failure to satisfy
these tests would cause the principal and/or interest cash flow that would
otherwise be distributed to more junior classes of securities (including those
held by the Company) to be redirected to pay down the most senior class of
securities outstanding until the tests are satisfied. Therefore,
failure to satisfy the coverage tests could adversely affect cash flows received
by the Company from the CDOs and thereby the Company’s liquidity and operating
results. The trigger percentages in the chart below represent the first
threshold at which cash flows would be redirected.
Generally,
the overcollateralization test measures the principal balance of the specified
pool of assets in a CDO against the corresponding liabilities issued by the CDO.
However, based on ratings downgrades, the principal balance of an asset or of a
specified percentage of assets in a CDO may be deemed reduced below their
current balance to levels set forth in the related CDO documents for purposes of
calculating the overcollateralization test. As a result, ratings downgrades can
reduce the principal balance of the assets used in the overcollateralization
test relative to the corresponding liabilities in the test, thereby reducing the
overcollateralization percentage. In addition, actual defaults of an asset would
also negatively impact compliance with the overcollateralization tests. A
failure to satisfy an overcollateralization test on a payment date could result
in the redirection of cash flows.
Weighted
Average Life, Minimum Weighted Average Recovery Rate, and the Weighted Average
Rating Factor (“Collateral Quality Tests”)
The
ability of EURO CDO to trade securities within its portfolio is dependent on
passing the collateral quality tests. Collateral quality tests limit
the ability of the Company’s CDOs to trade securities within its
portfolio. These tests apply to the Euro CDO, which is actively
managed. If one of these tests fails, then any subsequent trade will
either have to maintain or improve the result of the test or the trade cannot be
executed.
The Euro
CDO’s most significant test is the weighted average rating test which is
impacted when credit rating agencies downgrade the underlying CDO
collateral. Ratings downgrades of assets in the Company’s CDOs can
negatively impact compliance with the over collateralization tests when an asset
is downgraded to Caa3 or below. The Company is permitted to actively manage the
Euro CDO collateral pool to facilitate compliance with this test through end of
February 2012, the reinvestment period. After the reinvestment
period, there are limited circumstances under which trades can be
executed. However, the Company’s ability to remain in compliance is
limited by the amount of securities held outside of the Euro CDO and also by the
Company’s inability to purchase new assets given its liquidity
position.
The chart
below is a summary of the Company’s CDO compliance tests as of December 31,
2008. During the first quarter of 2009, Anthracite Euro CRE CDO
2006-1 plc (“Euro CDO”) failed to satisfy its Class E overcollateralization and
interest reinvestment tests.
Cash Flow Triggers
|
|
CDO I
|
|
|
CDO II
|
|
|
CDO III
|
|
|
CDO Euro
|
|
Overcollateralization
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
125.1
|
% |
|
|
123.5 |
% |
|
|
116.7 |
% |
|
|
116.4
|
%
|
Trigger
|
|
|
115.6
|
% |
|
|
113.2 |
% |
|
|
108.9 |
% |
|
|
116.4
|
% |
Pass/Fail
|
|
Pass
|
|
|
Pass
|
|
|
Pass
|
|
|
Pass
|
|
Interest
Coverage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
175.4 |
% |
|
|
196.7 |
% |
|
|
254.0 |
% |
|
|
116.4 |
% |
Trigger
|
|
|
108.0
|
% |
|
|
117.0 |
% |
|
|
111.0 |
% |
|
|
116.4 |
% |
Pass/Fail
|
|
Pass
|
|
|
Pass
|
|
|
Pass
|
|
|
Pass
|
|
Collateral Quality Tests
|
|
CDO I
|
|
|
CDO II
|
|
|
CDO III
|
|
|
CDO Euro
|
|
Weighted
Average Life Test
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
3.93 |
|
Trigger
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
8.00 |
|
Pass/Fail
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
Pass
|
|
Minimum
Weighted Average Recovery Rate Test
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moody’s
|
|
Current
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
22.4 |
% |
Trigger
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
18.0 |
% |
Pass/Fail
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
Pass
|
|
Weighted
Average Rating Factor Test
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moody’s
|
|
Current
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
2721 |
|
Trigger
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
2740 |
|
Pass/Fail
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
Pass
|
|
Short-form
registration
The
failure to file in a timely manner all required periodic reports with the SEC
for a period of twelve months, to pay any dividend on preferred stock in
accordance with the “short-form" registration eligibility requirements or to
otherwise comply with such eligibility requirements would make the Company
ineligible to use “short-form" registration statements. Currently,
the Company is ineligible to use a short-form registration statement and, while
it is ineligible, the Company’s ability to raise capital may be more difficult,
more expensive and subject to delays.
Note
2 SIGNIFICANT ACCOUNTING POLICIES
A summary
of the Company’s significant accounting policies follows:
Use
of Estimates
In
preparing the consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America (“GAAP”),
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the consolidated statements of financial
condition and the reported amounts of revenues and expenses during the reporting
periods. Significant judgment is required in making these estimates
and assumptions. Actual results could differ materially from these
estimates and assumptions. Changes in these estimates and assumptions
could have a material effect on the Company's consolidated financial
statements. Significant estimates and assumptions in the consolidated
financial statements include the valuation of the Company's securities and
loans, and liabilities and estimates pertaining to credit performance related to
CMBS and commercial real estate loans.
Principles
of Consolidation
The
consolidated financial statements include the financial statements of the
Company, its majority owned subsidiaries and those variable interest entities
(“VIEs”) in which the Company is the primary beneficiary under Financial
Accounting Standards Board (“FASB”) Interpretation No. 46, Consolidation of Variable Interest
Entities (revised December 2003) (“FIN 46R”). All
inter-company balances and transactions have been eliminated in
consolidation.
Variable
Interest Entities
The
Company’s ownership of the subordinated classes of CMBS from a single issuer
gives it the right to control the foreclosure/workout process on the underlying
loans (“Controlling Class”). FIN 46R has certain scope exceptions,
one of which provides that an enterprise that holds a variable interest in a
qualifying special-purpose entity (“QSPE”) does not consolidate that entity
unless that enterprise has the unilateral ability to cause the entity to
liquidate. Statement of Financial Accounting Standards (“SFAS”)
No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
(“FAS 140”) provides the requirements for an entity to be considered a
QSPE. To maintain the QSPE exception, the trust must continue to meet the QSPE
criteria both initially and in subsequent periods. A trust’s QSPE status can be
impacted in future periods by activities by its transferors or other involved
parties, including the manner in which certain servicing activities are
performed. To the extent its CMBS investments were issued by a trust that meets
the requirements to be considered a QSPE, the Company records the investments at
the purchase price paid. To the extent the underlying trusts are not QSPEs, the
Company follows the guidance set forth in FIN 46R as the trusts would be
considered variable interest entities “(VIEs”). See Note 10 of
the consolidated financial statements, “Securitization Transactions, Transfer of
Financial Assets, Qualified Special Purpose Entities and Variable Interest
Entities” for further discussion.
The
Company has analyzed the governing pooling and servicing agreements for each of
its Controlling Class CMBS and believes that the terms are industry standard and
are consistent with the QSPE criteria. However, there is uncertainty with
respect to QSPE treatment due to ongoing review by accounting standard setters,
potential actions by various parties involved with the QSPE, as discussed above,
as well as varying and evolving interpretations of the QSPE criteria under FAS
140. Additionally, the standard setters continue to review the FIN 46R
provisions related to the computations used to determine the primary beneficiary
of a VIE. Future guidance from the standard setters may require the Company to
consolidate CMBS trusts in which the Company has invested. See
Note 10 of the consolidated financial statements, “Securitization Transactions,
Transfer of Financial Assets, Qualified Special Purpose Entities and Variable
Interest Entities” for further discussion.
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. Management 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. Management
utilizes this process to validate the prices received from brokers and
adjustments are made as deemed necessary by management to capture current market
information.
CDOs - The fair value of
these liabilities is determined by reference to 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 risks of the underlying collateral,
(iv) terms and reinvestment periods and (v) market transactions of
similar CDOs. Management performs additional analysis on prices received from
the brokers. This process includes analyzing the obligations 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 obligations of similar type, vintage year and rating. Management
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 fair value of senior unsecured convertible notes are
determined by reference to the mid-point of a bid/ask prices obtained from
certain dealers in this market. The bid/ask prices represented the prices at
which the dealer was willing to buy or sell the note on the measurement date of
December 31, 2008. Trading in these notes is done over-the-counter
and therefore requires direct communication with the dealer to execute the
transaction. The dealer 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. Dealer 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. Management performs additional analysis on prices
received based on broker quotes. This process includes analyzing the
securities in our portfolio to determine if the prices of the assets and
liabilities demonstrate a consistent pricing structure for securities the
Company deems to be similar.
Senior and junior unsecured notes
and junior subordinated notes - The estimated fair values of these
liabilities are 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.
Securities
Held-for-Trading
Securities
held-for-trading are carried at estimated fair value with net realized and
unrealized gains or losses included on the consolidated statements of
operations. Under Emerging Issues Task Force (“EITF”) Issue 99-20,
Recognition of Interest Income
and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets (“EITF 99-20”), when changes in estimated cash flows
from the cash flows previously estimated occur due to actual prepayment and
credit loss experience, and the present value of the revised cash flows using
the current expected yield is less than the present value of the previously
estimated remaining cash flows (adjusted for cash receipts during the
intervening period), an other-than-temporary impairment is deemed to have
occurred. Accordingly, the cost basis of the security is written down to fair
value with the resulting change included in income, and a new cost basis
established. In both instances, the original discount or premium is
written off when the new cost basis is established.
After
taking into account the effect of the impairment charge, income is recognized
under EITF 99-20 or FAS 91, as applicable, by applying the yield used in
establishing the write-down. Under EITF 99-20, income on these
securities is recognized based upon a number of assumptions that are subject to
uncertainties and contingencies. Examples include, among other
things, the rate and timing of principal payments (including prepayments,
repurchases, defaults and liquidations), the pass-through or coupon rate and
interest rate fluctuations. Additional factors that may affect the
Company’s reported interest income on its commercial real estate securities
include interest payment shortfalls due to delinquencies on the underlying
commercial mortgage loans, the timing and magnitude of credit losses on the
commercial mortgage loans underlying the securities that are a result of the
general condition of the real estate market (including competition for tenants
and their related credit quality) and changes in market rental
rates. These uncertainties and contingencies are difficult to predict
and are subject to future events that may alter the
assumptions.
Upon the
adoption of SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (“FAS
159”), the Company reclassified all of its securities that were previously
classified as available-for-sale as securities held-for-trading and all
unrealized gains and losses on securities-held-for-trading are reported in other
gain (loss) on the consolidated statements of operations. This
reclassification adjustment did not result in a change to the Company’s intent
as it relates to these securities. The fair value option was elected
for certain assets and liabilities to align the measurement attributes of the
assets and liabilities while mitigating volatility in stockholders’ equity from
using different measurement attributes. See Note 3 of the
consolidated financials statements, “Fair Value Disclosures” for further
discussion.
In
January 2009, the Financial Accounting Standards Board (the “FASB”) issued Staff
Position (“FSP”) EITF 99-20-1, Amendments to the Impairment
Guidance of EITF Issue No. 99-20, (“FSP EITF 99-20-1”). FSP EITF
99-20-1 amends EITF Issue No. 99-20, to allow for an entity to exercise its
own judgment in arriving at estimates of future cash flows and assess the
probability of collecting all cash flows rather than relying solely on the
assumptions used by market participants. FSP EITF 99-20-1 is effective for
interim and annual periods ending after December 15, 2008. Retroactive
application of FSP EITF 99-20-1 is prohibited. The adoption of FSP EITF 99-20-1
did not materially impact the Company’s consolidated financial
statements.
Foreign
currency translation
Assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars using foreign exchange rates at the end of the reporting
period. Income and expenses are translated at the approximate
weighted average exchange rates for each reporting period. The
effects of translating income with a functional currency other than the U.S.
dollar are included in stockholders’ equity along with the related hedge
effects. The effects of translating operations with the U.S. dollar
as the functional currency are included in foreign currency gain (loss) on the
accompanying consolidated statements of operations along with the related hedge
effects.
Cash
and Cash Equivalents
Cash and
cash equivalents consist of cash and short-term, highly liquid investments with
original maturities of three months or less. Cash and cash
equivalents are held at major financial institutions, to which the Company is
exposed to credit risk.
Restricted
Cash
At
December 31, 2008, the Company had restricted cash of $23,982, consisting of
$2,869 on deposit with the trustees for the Company’s CDOs, $3,100 pledged as
collateral for interest rate swap agreements and $18,013 required by financial
covenants under the Company’s credit facilities. At December 31,
2007, the Company had restricted cash of $32,105, consisting of $3,955 on
deposit with the trustees for the Company’s CDOs and $28,150 pledged as
collateral for interest rate swap agreements.
Securities
Available-for-Sale
Prior to
the adoption of SFAS 159, the Company had designated certain investments in
mortgage-backed securities, mortgage-related securities and certain other
securities as assets available-for-sale because the Company may have disposed of
them prior to maturity and did not hold them principally for the purpose of
selling them in the near term. Securities available-for-sale were
carried at estimated fair value with the net unrealized gains or losses reported
as a component of accumulated other comprehensive income (loss) in stockholders’
equity. Unrealized losses on securities that reflect a decline in
value that is judged by management to be other than temporary, if any, were
charged to earnings. At disposition, the realized net gain or loss
was included in income on a specific identification basis.
In
accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities (“FAS 115”), when the estimated fair value
of a security classified as available-for-sale has been below amortized cost for
a significant period of time and the Company concludes that it no longer has the
ability or intent to hold the security for the period of time over which the
Company expects the value to recover to amortized cost, the investment was
written down to its fair value. The resulting charge is included in
income, and a new cost basis established.
Deferred
Financing Costs
Deferred
financing costs, which are included in other assets on the Company’s
consolidated statements of financial condition, includes issuance costs related
to the Company’s debt for which the fair value option under FAS 159 was not
elected. These costs are amortized by applying the effective interest
rate method and the amortization is reflected in interest
expense. Deferred financing costs associated with long-term
liabilities for which the fair value option was elected under FAS 159 on the
date of adoption (January 1, 2008) are expensed as incurred.
Revenue
Recognition
The
Company recognizes interest income from its purchased beneficial interests in
securitized financial interests (“beneficial interests”) (other than beneficial
interests of high credit quality, sufficiently collateralized to ensure that the
possibility of credit loss is remote, or that cannot contractually be prepaid or
otherwise settled in such a way that the Company would not recover substantially
all of its recorded investment) in accordance with EITF 99-20. Accordingly, on a
quarterly basis, when changes in estimated cash flows from the cash flows
previously estimated occur due to actual prepayment and credit loss experience,
the Company calculates a revised yield based on the current amortized cost of
the investment (including any other-than-temporary impairments recognized to
date.) The revised yield is then applied prospectively to recognize
interest income.
For other
mortgage-backed and related mortgage securities, the Company accounts for
interest income under SFAS No. 91, Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases (“FAS 91”), by applying the effective yield method which
includes the amortization of discount or premium arising at the time of purchase
and the stated or coupon interest payments. Actual prepayment
experience is reviewed quarterly and effective yields are recalculated when
differences arise between prepayments and originally anticipated and amounts
actually received plus anticipated future prepayments.
Securitizations
When the
Company sells assets in securitizations, it retains certain tranches which are
considered retained interests in the securitization. Gain or loss on
the sale of assets depends in part on the previous carrying amount of the
financial assets securitized, allocated between the assets sold and the retained
interests based on their relative fair value at the date of
securitization. To obtain fair values, quoted market prices are
used. Gain or loss on securitizations of financial assets that were
completed in 2004 and 2005 were reported as a component of sale of securities
available-for-sale on the consolidated statements of
operations. Retained interests are carried at estimated fair value on
the consolidated statements of financial condition. Prior to be
designated as securities held-for-trading upon the adoption of SFAS 159,
adjustments to estimated fair value for retained interests classified as
securities available-for-sale were included in accumulated other comprehensive
income (loss) on the consolidated statements of financial
condition.
Commercial
Mortgage Loans and Loan Pools
The
Company purchases and originates certain commercial mortgage loans to be held as
long-term investments. In accordance with SFAS No. 65, Accounting for Certain Mortgage
Banking Activities, commercial mortgage loans and loan pools are
classified as long term investments because the Company has the ability and the
intent to hold these loans to maturity. Loans are recorded at cost at
the date of purchase. Premiums and discounts related to these loans
are amortized over their estimated lives using the effective interest
method. Any origination fee income and application fee income, net of
direct costs, associated with originating or purchasing commercial mortgage
loans are deferred and included in the basis of the loans on the consolidated
statements of financial condition. The net fees on originated loans
are amortized over the life of the loans using the effective interest method and
fees recognized on purchased loans are expense as incurred.
The
Company recognizes impairment on the loans when it is probable that the Company
will not be able to collect all amounts due according to the contractual terms
of the loan agreement. The Company measures impairment (both interest
and principal) based on the present value of expected future cash flows
discounted at the loan’s effective interest rate or the fair value of the
collateral if the loan is collateral dependent. Income recognition is
suspended for loans when, in the opinion of management, a full recovery of
income and principal becomes doubtful. Income recognition is resumed when the
loan becomes contractually current and performance is demonstrated to be
resumed. Several of the loans provide for accrual of interest at specified
rates, which differ from current payment terms. Interest is recognized on such
loans at the accrual rate subject to management’s determination that accrued
interest and outstanding principal are ultimately collectible, based on the
underlying collateral and operations of the borrower. If management cannot make
this determination regarding collectability, interest income above the current
pay rate is recognized only upon actual receipt.
Allowance
for Loan Losses
The
Company’s allowance for estimated loan losses represents its estimate of
probable credit losses inherent in its commercial mortgage loan portfolio held
for investment as of the date of the consolidated statement of financial
condition. When determining the adequacy of the allowance for loan losses the
Company considers historical and industry loss experience, economic conditions
and trends, the estimated fair values of its loans, credit quality trends and
other factors that it determines are relevant. Increases to the allowance for
loan losses are charged to current period earnings through the provision for
loan losses. The Company’s allowance for loan losses consists of two components,
a loan specific component and a general component. Amounts determined to be
uncollectible are charged directly to the allowance for loan
losses.
The loan
specific component of the Company’s allowance for loan losses consists of
individual loans that are impaired and for which the estimated allowance for
loan losses is determined in accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. The Company performs an analysis of each
loan in accordance with paragraph 8 of SFAS 114 by assessing whether “it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement”. The Company considers a
loan to be impaired when, based on current information and events, it believes
it is probable that it will be unable to collect all amounts due to it based on
the contractual terms of the loan.
The
general component of the Company’s allowance for loan losses is determined in
accordance with SFAS No. 5, Accounting for Contingencies.
This component of the allowance for loan losses represents the Company’s
estimate of losses inherent, but unidentified, in its portfolio as of the date
of the consolidated statement of financial condition. The general component of
the allowance for loan losses is estimated using a formula-based method based
upon a review of the Company’s loan portfolio’s risk characteristics, risk
grouping of loans in the portfolio based upon estimated probability of default
and severity of loss as well as consideration of general economic conditions and
trends. The Company’s general component excludes loans that have been fully and
partially reserved for in the loan specific component. The formula-based general
component is developed by calculating estimated losses based on the probability
of default given historical default trends in the commercial real estate market
and the Company’s judgment concerning those trends and other relevant factors.
The severity of the loss the Company would incur if the loan defaulted is based
on several factors including historical trends in the commercial real estate
industry, the estimated decline in the market value of the underlying collateral
since the date of purchase and the Company’s position in the capital structure
that owns the underlying collateral (e.g., the Company expects mezzanine loans
to suffer a greater loss than a B note given mezzanine positions are
subordinated to B notes in a commercial real estate capital
structure).
Equity
Investments
For those
investments in real estate entities where the Company does not control the
investee, or is not the primary beneficiary of a VIE, but can exert significant
influence over the financial and operating policies of the investee, the Company
uses the equity method of accounting. The Company recognizes its
share of each investee’s income or loss, and reduces its investment balance by
distributions received. The Company owned an equity method investment
in a privately held real estate investment trust (“REIT”) that maintained its
financial records on a fair value basis. The Company had retained
such accounting relative to its investment in this REIT pursuant to EITF Issue
85-12, Retention of
Specialized Accounting for Investments in
Consolidation. During 2007, the Company redeemed its entire
investment in the aforementioned REIT.
Derivative
Instruments
As part
of its asset/liability risk management activities, the Company may enter into
interest rate swap agreements, forward currency exchange contracts and other
financial instruments to hedge interest rate and foreign currency exposures or
to modify the interest rate or foreign currency characteristics of related items
on its consolidated statements of financial condition.
Income
and expense from interest rate swap agreements that are designated for
accounting purposes as cash flow hedges are recognized as a net adjustment to
the interest expense of the hedged item and changes in fair value are recognized
as a component of accumulated other comprehensive income (loss) in stockholders’
equity, to the extent effective. Ineffective portions of changes in
the fair value of cash flow hedges are recognized as a component of interest
expense on the consolidated statements of operations. If the
underlying hedged items are sold, the amount of unrealized gain or loss in
accumulated other comprehensive income (loss) relating to the corresponding
interest rate swap agreement is included in the determination of gain or loss on
the sale of the securities. If interest rate swap agreements are
terminated, the associated gain or loss is deferred and amortized over the
shorter of the remaining term of the original swap agreement, or the underlying
hedged item, provided that the underlying hedged item has not been
sold.
Income
and expense from interest rate swap agreements that are, for accounting
purposes, designated as trading derivatives are recognized as a net adjustment
to realized loss on securities and swaps held-for-trading on the consolidated
statements of operations. During the term of the interest rate swap
agreement, changes in fair value are recognized as a component of unrealized
loss on swaps held-for-trading on the consolidated statements of
operations.
Gains and
losses from forward currency exchange contracts and swaps are recognized as a
net adjustment to foreign currency gain or loss on the consolidated statements
of operations. During the term of the forward currency exchange
contracts and swaps, changes in fair value are recognized on the consolidated
statements of financial condition and included in derivative instruments at fair
value.
The
Company monitors its hedging instruments throughout their terms to ensure that
they remain effective for their intended purpose. The Company is
exposed to interest rate and/or currency risk on these hedging instruments, as
well as to credit loss in the event of nonperformance by any other party to the
Company’s hedging instruments. The Company’s policy is to enter into
hedging agreements with counterparties rated A or better.
Share-Based
Compensation
In
December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (“FAS 123R”)
. This statement is a revision to SFAS No. 123,
Accounting for Stock-Based
Compensation, and superseded APB Opinion No. 25, Accounting for Stock Issued to
Employees. This statement establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services, primarily focusing on the accounting for transactions in
which an entity obtains employee services in share-based payment
transactions. Entities are required to measure the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award (with limited exceptions). That
cost is recognized over the period during which an employee is required to
provide service (usually the vesting period) in exchange for the
award. The grant-date fair value of employee share options and
similar instruments will be estimated using option-pricing models. If
an equity award is modified after the grant date, incremental compensation cost
will be recognized in an amount equal to the excess of the fair value of the
modified award over the fair value of the original award immediately before the
modification. The Company adopted FAS 123R, effective January 1,
2006 with no impact on the consolidated financial statements as there were no
unvested options at December 31, 2005, and the Company applied the fair value
method to all options issued after January 1, 2003.
Income
Taxes
The
Company has elected to be taxed as a REIT and to comply with the provisions of
the United States Internal Revenue Code of 1986, as amended (the “Code”) with
respect thereto. Accordingly, the Company generally will not be
subject to federal, state or local income tax as long as distributions to
stockholders are equal to or greater than taxable income and as long as certain
asset, income and stock ownership tests are met.
The
Company adopted the provisions of FIN No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”) on January 1, 2007. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in a company’s financial statements in
accordance with SFAS No. 109, Accounting for Income Taxes (“FAS
109”). FIN 48 prescribes a threshold for measurement and recognition
in the financial statements of an asset or liability resulting from a tax
position taken or expected to be taken in an income tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
Recent
Accounting Pronouncements
Fair
Value Measurements
In
September 2006, 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. 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 had 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 December 31, 2008.
Fair
Value Accounting
SFAS No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities (“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 other gain (loss) on the consolidated statements of
operations. 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
statements of financial condition from those instruments measured using another
measurement attribute. 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
|
Upon
adoption, with an adjustment to opening retained earnings, total stockholders’
equity increased by $350,623, 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
distributions in excess of earnings. Subsequent to January 1, 2008,
all changes in the estimated fair value of the Company’s securities
held-for-trading, CDO liabilities, senior unsecured notes, senior unsecured
convertible notes, junior unsecured notes and junior subordinated notes are
recorded in other gain (loss) on the consolidated statements of
operations.
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 for periods beginning after December 31,
2008. 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 will be effective for financial statements
issued for fiscal years beginning after November 15, 2008 and interim periods
within those years and is applicable to new transactions entered into after the
adoption date. 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 FAS No.
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 will 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 statements of financial condition, and the corresponding interest
income and interest expense gross on its consolidated statements 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 statements 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 on the consolidated statements 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
does not expect the adoption of FSP 140-3 to have a material impact on its
financial condition and cash flows.
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 VIEs in which the Company is the primary
beneficiary under FIN 46R. FIN 46R requires a VIE to be consolidated
by its primary beneficiary. The primary beneficiary is the party that
absorbs the majority of the VIE’s anticipated losses and/or the majority of the
expected returns. All 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. The Company has analyzed the governing pooling and servicing
agreements for each of its Controlling Class CMBS and believes that the terms
are industry standard and are consistent with the QSPE criteria. 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.
Disclosures
about Transfers of Financial Assets and Interests in Variable Interest
Entities
In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities (“FAS 140-4 and FIN 46(R)-8”). FAS 140-4 and
FIN 46(R)-8 amends FAS No. 140, to require public entities to provide additional
disclosures about transferors’ continuing involvements with transferred
financial assets. It also amends FIN 46(R) to require public enterprises,
including sponsors that have a variable interest in a variable interest entity,
to provide additional disclosures about its involvement with variable interest
entities. The FSP is effective for reporting periods ending after December 15,
2008. The adoption of the additional disclosure requirements of FAS
140-4 and FIN 46(R)-8 did not materially impact the Company’s consolidated
financial statements.
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
and as long as the conversion option is “indexed to the Company’s own stock” as
defined in EITF Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’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. The retrospective impact of adopting FSP APB 14-1 to
diluted EPS for common shares in 2007 and 2008 is a decline of less than $0.01
in each year resulting
from an increase in interest expense.
Reclassifications
Certain
items previously reported have been reclassified to conform to the current
year’s presentation.
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. The Company does not include any financial instruments
in Level 1.
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. 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 December 31, 2008 due to the lack of current market activity.
The Company believes that it may be appropriate to transfer these assets and
liabilities to Level 2 in subsequent periods if market activity returns to
normalized levels and observable inputs become available.
The
Company’s assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment and considers factors specific to
the investment. The Company’s financial assets that were classified
as Level 3 due to market inactivity consist primarily of commercial real estate
securities. The Company’s financial liabilities that were classified
as Level 3 consist primarily of long-term liabilities used to finance the
commercial real estate securities. Market activity for commercial real estate
securities and long-term liabilities declined dramatically from 2007 to 2008 due
to the ongoing turmoil in the credit markets. New issuance volume for commercial
real estate securities was a record $230 billion in 2007. For the year ended
2008, new issuance volume for commercial real estate securities was $12.2
billion, a 95% decline from prior year activity. The secondary market activity
for CMBS and long-term liabilities that were used to finance such securities
similarly declined significantly in 2008 with minimal trading activity for
investment grade commercial real estate securities and no trading activity for
non-investment grade CMBS. Based on the guidance in paragraph 28 of Statement of
Financial Accounting Standards No. 157, Fair Value Measurements, the
Company determined there were very few transactions for similar assets and
liabilities and no specific transactions for the Company’s assets and
liabilities and prices among brokers who make a market in this sector have
varied significantly. The Company concluded that the market was inactive based
on the items above as well as the fact that transactions for these assets and
liabilities did not occur with sufficient frequency and volume to provide
pricing information at the measurement date and on an ongoing basis. The Company
continues to monitor the activity of the market to determine if the market
becomes active. If in the future transactions for these assets and liabilities
occur with sufficient frequency and volume to provide pricing information on an
ongoing basis, the Company will re-evaluate the classification of these
financial instruments as Level 3.
The
estimated fair value of the Company’s commercial real estate securities and
related long-term liabilities is determined by reference to index pricing and
market prices provided by dealers who make a market in these financial
instruments. The Company uses index pricing for these assets and liabilities
because this is the method most commonly used by the market for these types of
assets and liabilities.
A decline
in trading volume as noted above has resulted in reduced liquidity for the
Company’s financial instruments. The quotes received from these dealers are only
indicative of estimated fair value and do not necessarily represent what the
Company would receive in an actual trade. The Company performs an additional
analysis to validate the prices received from dealers. This process
includes analyzing the securities based on vintage year, rating and asset type
and converting the price received to a spread to a particular
index. 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 dealers and
adjustments are made as deemed necessary by management to capture current market
information. The spread information available in the market captures the
illiquidity in the market for these assets and liabilities which is evidenced by
the difference between the present value of the loss adjusted cash flows for a
particular security and the price received from the dealer for this security.
Over the past eighteen months, the Company has continued to see declines in the
prices received from dealers for these assets and liabilities and continued to
see market information indicating that spreads for these assets and liabilities
have continued to widen as a result of market illiquidity.
The
following table summarizes the valuation of our financial instruments by the
above FAS 157 pricing observability levels as of December 31, 2008. Assets and
liabilities measured at fair value on a recurring basis are categorized below
based upon the lowest level of significant input to the valuations.
|
|
Assets at Fair Value as of December 31, 2008
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Subordinated
CMBS
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
257,982 |
|
|
$ |
257,982 |
|
Investment
grade CMBS
|
|
|
- |
|
|
|
- |
|
|
|
677,533 |
|
|
|
677,533 |
|
RMBS
|
|
|
- |
|
|
|
- |
|
|
|
787 |
|
|
|
787 |
|
Derivative
instruments
|
|
|
- |
|
|
|
929,632 |
|
|
|
- |
|
|
|
929,632 |
|
Investments
in equity of subsidiary trusts*
|
|
|
- |
|
|
|
- |
|
|
|
384 |
|
|
|
384 |
|
Total
|
|
$ |
- |
|
|
$ |
929,632 |
|
|
$ |
936,686 |
|
|
$ |
1,866,318 |
|
*
Included as a component of other assets on the consolidated statements of
financial condition.
|
|
Liabilities at Fair Value as of December 31, 2008
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Senior
unsecured notes
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
18,411 |
|
|
$ |
18,411 |
|
Senior
unsecured convertible notes
|
|
|
- |
|
|
|
- |
|
|
|
24,960 |
|
|
|
24,960 |
|
Junior
unsecured notes
|
|
|
- |
|
|
|
- |
|
|
|
5,726 |
|
|
|
5,726 |
|
Junior
subordinated notes
|
|
|
- |
|
|
|
- |
|
|
|
12,643 |
|
|
|
12,643 |
|
CDOs
|
|
|
- |
|
|
|
- |
|
|
|
564,661 |
|
|
|
564,661 |
|
Derivative
instruments
|
|
|
- |
|
|
|
1,018,927 |
|
|
|
- |
|
|
|
1,018,927 |
|
Total
|
|
$ |
- |
|
|
$ |
1,018,927 |
|
|
$ |
626,401 |
|
|
$ |
1,645,328 |
|
The
following table presents the changes in Level 3 assets for the year ended
December 31, 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)
|
|
|
(3,312 |
) |
|
|
(123,991 |
) |
|
|
(9,426 |
) |
|
|
- |
|
Net
transfers in (out)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Gains
(losses) included in earnings
|
|
|
(762,288 |
) |
|
|
(442,692 |
) |
|
|
30 |
|
|
|
(2,751 |
) |
Losses
included in OCI
(1)
|
|
|
(4,572 |
) |
|
|
(1,781 |
) |
|
|
- |
|
|
|
- |
|
Balance
at December 31, 2008
|
|
$ |
257,981 |
|
|
$ |
677,534 |
|
|
$ |
787 |
|
|
$ |
384 |
|
Amount
of total gains (losses) for the year included in earnings attributable to
the change in unrealized gains or losses relating to assets still held at
December 31, 2008 (2)
|
|
$ |
(742,325 |
) |
|
$ |
(442,426 |
) |
|
$ |
(26 |
) |
|
$ |
(2,751 |
) |
Amount
of total gains for the year included in earnings attributable to the
change in unrealized gains or losses relating to assets still held at
December 31, 2008 (3)
|
|
$ |
(20,472 |
) |
|
$ |
(10,967 |
) |
|
$ |
- |
|
|
$ |
- |
|
(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” on the
consolidated statements of operations.
(3)
Recorded in “foreign currency gain (loss)” on the consolidated statements
of operations.
The
following table presents the changes in Level 3 liabilities for the year ended
December 31, 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
|
|
|
(62,553 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
transfers in (out)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Gains
included in earnings
|
|
|
(952,316 |
) |
|
|
(96,062 |
) |
|
|
(45,226 |
) |
|
|
(39,107 |
) |
|
|
(90,669 |
) |
Gains
included in OCI (1)
|
|
|
(18,972 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balance
at December 31, 2008
|
|
$ |
564,661 |
|
|
$ |
18,411 |
|
|
$ |
24,960 |
|
|
$ |
5,726 |
|
|
$ |
12,643 |
|
Amount
of total losses for the year included in earnings attributable to the
change in unrealized gains or losses relating to liabilities still held at
December 31, 2008 (2)
|
|
$ |
(949,238 |
) |
|
|
(96,062 |
) |
|
|
(45,226 |
) |
|
|
(35,507 |
) |
|
|
(90,669 |
) |
Amount
of total losses for the year included in earnings attributable to the
change in unrealized gains relating to liabilities still held at December
31, 2008 (3)
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(3,600 |
) |
|
$ |
- |
|
(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” on the consolidated
statements of operations.
(3)
Recorded in “foreign currency gain (loss)” on the consolidated statements
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 statements of financial condition by caption and by
level within the FAS 157 valuation hierarchy as of December 31, 2008, for which
a nonrecurring change in fair value has been recorded during the year ended
December 31, 2008:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Commercial
mortgage loans(1)
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
89,228 |
|
Total
assets at fair value on a nonrecurring basis
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
89,228 |
|
|
(1)
|
The
Company recorded a provision for loan loss in the amount of $165,928 for
the year ended December 31, 2008. There is a specific loan loss
provision related to eight loans with a principal balance of $224,774 and
accrued interest of $2,506 as well as a general loan loss provision of
$21,033. See Note 6 of the consolidated financial statements, “Commercial
Mortgage Loans”.
|
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
stockholders’ equity 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
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.
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 years ended December 31, 2008 and 2007,
respectively, $1,189,965 and $1,508 were recorded as unrealized losses on the
securities and is included in unrealized loss on securities held-for-trading on
the consolidated statements of operations. The estimated fair value
of securities held-for-trading at December 31, 2008 and 2007 is summarized as
follows:
Security Description
|
|
December
31, 2008
|
|
|
December
31, 2007
|
|
U.S.
Dollar Denominated:
|
|
|
|
|
|
|
CMBS:
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
$ |
433,225 |
|
|
$ |
15,924 |
|
Non-investment
grade rated subordinated CMBS
|
|
|
143,400 |
|
|
|
450 |
|
Non-rated
subordinated CMBS
|
|
|
22,280 |
|
|
|
929 |
|
CMBS
interest only securities (“CMBS IOs”)
|
|
|
4,085 |
|
|
|
- |
|
Credit
tenant leases
|
|
|
20,175 |
|
|
|
- |
|
Investment
grade REIT debt
|
|
|
155,864 |
|
|
|
- |
|
CDO
investments - investment grade
|
|
|
1,920 |
|
|
|
- |
|
CDO
investments - non-investment grade
|
|
|
24,176 |
|
|
|
- |
|
Total
CMBS
|
|
|
805,125 |
|
|
|
17,303 |
|
|
|
|
|
|
|
|
|
|
RMBS:
|
|
|
|
|
|
|
|
|
Residential
CMOs
|
|
|
387 |
|
|
|
472 |
|
Hybrid
adjustable rate mortgages (“ARMs”)
|
|
|
400 |
|
|
|
429 |
|
Total
RMBS
|
|
|
787 |
|
|
|
901 |
|
Total
U.S. dollar denominated
|
|
|
805,912 |
|
|
|
18,204
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
Dollar Denominated:
|
|
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
|
62,264 |
|
|
|
- |
|
Non-investment
grade rated subordinated CMBS
|
|
|
59,854 |
|
|
|
- |
|
Non-rated
subordinated CMBS
|
|
|
8,272 |
|
|
|
- |
|
Total
non-U.S. dollar denominated
|
|
|
130,390 |
|
|
|
- |
|
Total
securities held-for-trading
|
|
$ |
936,302 |
|
|
$ |
18,204 |
|
At
December 31, 2008, an aggregate of $904,491 in estimated fair value of the
Company’s securities held-for-trading was pledged to secure its collateralized
borrowings. There were no securities held-for-trading pledged to secure
collateralized borrowings at December 31, 2007.
The CMBS
held by the Company include subordinated securities collateralized by fixed and
adjustable rate commercial and multifamily mortgage loans. The CMBS
provide credit support to the more senior classes of the related commercial
securitization. Cash flow from the mortgages underlying the CMBS
generally is allocated first to the senior classes, with the most senior class
having a priority entitlement to cash flow. Any remaining cash flow
is allocated generally among the other CMBS classes in order of their relative
seniority. To the extent there are defaults and unrecoverable losses
on the underlying mortgages resulting in reduced cash flows, the most
subordinated CMBS class will bear this loss first. To the extent
there are losses in excess of the most subordinated class’ stated entitlement to
principal and interest, the remaining CMBS classes will bear such losses in
order of their relative subordination.
At
December 31, 2008 and 2007, the anticipated weighted average unlevered yield
based on the adjusted cost of the Company’s entire subordinated CMBS portfolio
was 16.33% and 10.53% per annum, respectively, and of the Company’s other
securities held-for-trading was 7.45% and 6.7% per annum,
respectively. The Company’s anticipated yields to maturity on its
subordinated CMBS and other securities held-for-trading are based on a number of
assumptions that are subject to certain business and economic uncertainties and
contingencies. Examples of these include, among other things, the
rate and timing of principal payments (including prepayments, repurchases,
defaults, recoveries, liquidations and related expenses), the pass-through or
coupon rate and interest rate fluctuations. Additional factors that
may affect the Company’s anticipated yields to maturity on its Controlling Class
CMBS include interest payment shortfalls due to delinquencies on the underlying
mortgage loans, the timing and magnitude of credit losses on the mortgage loans
underlying the Controlling Class CMBS that are a result of the general condition
of the real estate market (including competition for tenants and their related
credit quality) and changes in market rental rates. As these
uncertainties and contingencies are difficult to predict and are subject to
future events that may alter these assumptions, no assurance can be given that
the anticipated yields to maturity, discussed above and elsewhere, will be
achieved.
Note
5 SECURITIES
AVAILABLE-FOR-SALE
As noted
previously, there are no securities classified as available-for-sale at December
31, 2008. The amortized cost and estimated fair value of U.S. dollar
denominated and non-U.S. dollar denominated securities available-for-sale at
December 31, 2007 are summarized as follows:
Security
Description
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gain
|
|
|
Gross
Unrealized
Loss
|
|
|
Estimated
Fair
Value
|
|
U.S.
Dollar Denominated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
$ |
743,790 |
|
|
$ |
32,475 |
|
|
$ |
(25,192 |
) |
|
$ |
751,073 |
|
Non-investment
grade rated subordinated CMBS
|
|
|
761,103 |
|
|
|
24,255 |
|
|
|
(155,670 |
) |
|
|
629,688 |
|
Non-rated
subordinated CMBS
|
|
|
130,940 |
|
|
|
1,331 |
|
|
|
(22,719 |
) |
|
|
109,552 |
|
Credit
tenant leases
|
|
|
23,867 |
|
|
|
1,082 |
|
|
|
- |
|
|
|
24,949 |
|
CMBS
IOs
|
|
|
14,725 |
|
|
|
1,190 |
|
|
|
- |
|
|
|
15,915 |
|
Investment
grade REIT debt
|
|
|
247,602 |
|
|
|
3,664 |
|
|
|
(5,171 |
) |
|
|
246,095 |
|
Multifamily
agency securities
|
|
|
36,815 |
|
|
|
547 |
|
|
|
(239 |
) |
|
|
37,123 |
|
CDO
investments
|
|
|
67,470 |
|
|
|
20,711 |
|
|
|
(38,551 |
) |
|
|
49,630 |
|
Total
CMBS
|
|
|
2,026,312 |
|
|
|
85,255 |
|
|
|
(247,542 |
) |
|
|
1,864,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
adjustable rate securities
|
|
|
1,196 |
|
|
|
- |
|
|
|
(3 |
) |
|
|
1,193 |
|
Residential
CMOs
|
|
|
76 |
|
|
|
79 |
|
|
|
- |
|
|
|
155 |
|
Hybrid
ARMs
|
|
|
7,991 |
|
|
|
- |
|
|
|
(57 |
) |
|
|
7,934 |
|
Total
RMBS
|
|
|
9,263 |
|
|
|
79 |
|
|
|
(60 |
) |
|
|
9,282 |
|
Total
U.S. dollar denominated
|
|
|
2,035,575 |
|
|
|
85,334 |
|
|
|
(247,602 |
) |
|
|
1,873,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
Dollar Denominated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade CMBS
|
|
|
153,384 |
|
|
|
2,837 |
|
|
|
(4,689 |
) |
|
|
151,532 |
|
Non-investment
grade rated subordinated CMBS
|
|
|
217,046 |
|
|
|
6,406 |
|
|
|
(11,018 |
) |
|
|
212,434 |
|
Non-rated
subordinated CMBS
|
|
|
27,772 |
|
|
|
1,211 |
|
|
|
(126 |
) |
|
|
28,857 |
|
Total
non-U.S. dollar denominated
|
|
|
398,202 |
|
|
|
10,454 |
|
|
|
(15,833 |
) |
|
|
392,823 |
|
Total
securities available-for-sale
|
|
$ |
2,433,777 |
|
|
$ |
95,788 |
|
|
$ |
(263,435 |
) |
|
$ |
2,266,130 |
|
At
December 31, 2007, an aggregate of $2,209,820 in estimated fair value of the
Company’s securities available-for-sale was pledged to secure its collateralized
borrowings.
The
following table shows the Company's fair value and gross unrealized losses,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, at December 31,
2007.
|
|
Less
than 12 Months
|
|
|
12
Months or More
|
|
|
Total
|
|
|
|
Estimated
Fair
Value
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Fair
Value
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Fair
Value
|
|
|
Gross
Unrealized Losses
|
|
Investment
grade CMBS
|
|
$ |
223,133 |
|
|
$ |
(24,011 |
) |
|
$ |
118,965 |
|
|
$ |
(5,870 |
) |
|
$ |
342,098 |
|
|
$ |
(29,881 |
) |
Non-investment
grade rated CMBS
|
|
|
455,892 |
|
|
|
(114,235 |
) |
|
|
141,466 |
|
|
|
(52,453 |
) |
|
|
597,358 |
|
|
|
(166,688 |
) |
Non-rated
subordinated CMBS
|
|
|
85,194 |
|
|
|
(21,865 |
) |
|
|
1,611 |
|
|
|
(980 |
) |
|
|
86,805 |
|
|
|
(22,845 |
) |
Investment
grade REIT debt
|
|
|
934 |
|
|
|
(62 |
) |
|
|
78,117 |
|
|
|
(5,109 |
) |
|
|
79,051 |
|
|
|
(5,171 |
) |
Multifamily
agency securities
|
|
|
20,239 |
|
|
|
(85 |
) |
|
|
363 |
|
|
|
(154 |
) |
|
|
20,602 |
|
|
|
(239 |
) |
CDO
investments
|
|
|
14,520 |
|
|
|
(7,795 |
) |
|
|
5,750 |
|
|
|
(30,756 |
) |
|
|
20,270 |
|
|
|
(38,551 |
) |
Agency
adjustable rate securities
|
|
|
1,193 |
|
|
|
(3 |
) |
|
|
- |
|
|
|
- |
|
|
|
1,193 |
|
|
|
(3 |
) |
Hybrid
ARMs
|
|
|
- |
|
|
|
- |
|
|
|
7,934 |
|
|
|
(57 |
) |
|
|
7,934 |
|
|
|
(57 |
) |
Total
temporarily impaired securities
|
|
$ |
801,105 |
|
|
$ |
(168,056 |
) |
|
$ |
354,206 |
|
|
$ |
(95,379 |
) |
|
$ |
1,155,311 |
|
|
$ |
(263,435 |
) |
The
temporary impairment of the available-for-sale securities results from the fair
value of the securities falling below the amortized cost basis. These unrealized
losses are primarily the result of market factors other than credit impairment
and the Company believes the carrying value of the securities are fully
recoverable over their expected holding period. Management possesses both the
intent and the ability to hold the securities until the Company has recovered
the amortized cost. As such, management does not believe any of the securities
are other than temporarily impaired.
During
2007, the Company sold securities available-for-sale for total proceeds of
$605,281, resulting in a gross realized gain of $8,025 and a gross realized loss
of $(13,742). This loss was from the sale of the majority of the
Company’s CMBS IOs and multifamily agency securities. The loss was
caused by higher Treasury rates since the time of purchase. In
addition, the Company incurred a charge of $1,514 related to the impairment of
remaining CMBS IOs and multifamily agency securities that were not sold during
the year which is included in loss on impairments of assets on the consolidated
statements of operations. During 2006, the Company sold securities
available-for-sale for total proceeds of $236,945, resulting in a gross realized
gain of $30,884 and a gross realized loss of $(1,852). The Company
sold the securities with unrealized losses prior to maturity due to changes in
the underlying collateral which were expected to significantly impact the market
value of the securities.
Note
6 COMMERCIAL MORTGAGE
LOANS
The
following table summarizes the Company’s commercial real estate loan portfolio
by property type at
December 31, 2008 and 2007:
|
|
Loan Outstanding
|
|
|
Weighted
Average
|
|
|
|
December 31,
2008
|
|
|
December
31, 2007
|
|
|
Yield
|
|
Property Type
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
52,584 |
|
|
|
6.8 |
% |
|
$ |
52,209 |
|
|
|
5.3 |
% |
|
|
9.6 |
% |
|
|
9.6 |
% |
Office
|
|
|
45,227 |
|
|
|
5.9 |
|
|
|
45,640 |
|
|
|
4.6 |
|
|
|
10.3 |
|
|
|
10.3 |
|
Multifamily(1)
|
|
|
77,083 |
|
|
|
9.9 |
|
|
|
174,873 |
|
|
|
17.8 |
|
|
|
10.3 |
|
|
|
9.7 |
|
Storage
|
|
|
31,989 |
|
|
|
4.1 |
|
|
|
32,307 |
|
|
|
3.3 |
|
|
|
9.1 |
|
|
|
9.1 |
|
Land(2)
|
|
|
- |
|
|
|
- |
|
|
|
25,000 |
|
|
|
2.5 |
|
|
|
- |
|
|
|
9.6 |
|
Hotel
|
|
|
12,481 |
|
|
|
1.6 |
|
|
|
12,208 |
|
|
|
1.2 |
|
|
|
13.0 |
|
|
|
10.9 |
|
Other
Mixed Use
|
|
|
3,984 |
|
|
|
0.5 |
|
|
|
3,983 |
|
|
|
0.5 |
|
|
|
8.5 |
|
|
|
8.5 |
|
Total
U.S.
|
|
|
223,348 |
|
|
|
28.8 |
|
|
|
346,220 |
|
|
|
35.2 |
|
|
|
10.1 |
|
|
|
9.7 |
|
Non
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail(3)
|
|
|
256,069 |
|
|
|
33.0 |
|
|
|
278,669 |
|
|
|
28.3 |
|
|
|
9.1 |
|
|
|
8.9 |
|
Office(4)
|
|
|
202,797 |
|
|
|
26.1 |
|
|
|
238,691 |
|
|
|
24.3 |
|
|
|
9.1 |
|
|
|
8.8 |
|
Multifamily(5)
|
|
|
36,903 |
|
|
|
4.8 |
|
|
|
41,403 |
|
|
|
4.2 |
|
|
|
9.0 |
|
|
|
8.6 |
|
Storage
|
|
|
37,304 |
|
|
|
4.8 |
|
|
|
51,272 |
|
|
|
5.2 |
|
|
|
9.5 |
|
|
|
9.5 |
|
Industrial(6)
|
|
|
12,359 |
|
|
|
1.6 |
|
|
|
17,274 |
|
|
|
1.8 |
|
|
|
10.7 |
|
|
|
10.6 |
|
Hotel
|
|
|
2,794 |
|
|
|
0.4 |
|
|
|
5,016 |
|
|
|
0.5 |
|
|
|
11.0 |
|
|
|
10.1 |
|
Other
Mixed Use
|
|
|
4,166 |
|
|
|
0.5 |
|
|
|
4,842 |
|
|
|
0.5 |
|
|
|
10.3 |
|
|
|
9.0 |
|
Total
Non U.S.
|
|
|
552,392 |
|
|
|
71.2 |
|
|
|
637,167 |
|
|
|
64.8 |
|
|
|
9.3 |
|
|
|
8.9 |
|
Total
loans
|
|
|
775,740 |
|
|
|
100.0 |
% |
|
|
983,387 |
|
|
|
100.0 |
% |
|
|
9.5 |
% |
|
|
9.2 |
% |
General
loan loss reserve
|
|
|
(21,033 |
) |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
754,707 |
|
|
|
|
|
|
$ |
983,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Net
of a loan loss reserve of $98,664 at December 31, 2008.
(2) Net of
a loan loss reserve of $25,000 at December 31, 2008.
(3) Net of
a loan loss reserve of $299 at December 31, 2008.
(4) Net of
a loan loss reserve of $17,614 at December 31, 2008.
(5) Net of
a loan loss reserve of $1,434 at December 31, 2008.
(6) Net of
a loan loss reserve of $239 at December 31, 2008.
As of
December 31, 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)
|
|
|
1 |
|
|
$ |
25,689 |
|
|
|
3.3 |
% |
2009
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
2010
|
|
|
3 |
|
|
|
24,827 |
|
|
|
3.2 |
|
2011
|
|
|
15 |
|
|
|
247,232 |
|
|
|
31.9 |
|
2012
|
|
|
16 |
|
|
|
164,680 |
|
|
|
21.2 |
|
2013
|
|
|
8 |
|
|
|
144,901 |
|
|
|
18.7 |
|
Thereafter
|
|
|
15 |
|
|
|
168,411 |
|
|
|
21.7 |
|
Total
|
|
|
58 |
|
|
$ |
775,740 |
|
|
|
100.0 |
% |
*
Does not include potential extension options.
|
(1)
In default as of 12/31/08
|
|
Activity
for the year ended December 31, 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
|
|
|
(23,853 |
) |
Provision
for loan loss
|
|
|
(164,283 |
) |
Foreign
currency translation
|
|
|
(49,882 |
) |
Discount
accretion, net
|
|
|
7,052 |
|
Balance
at December 31, 2008
|
|
$ |
754,707 |
|
The
Company recorded a provision for specific loan losses of $144,895 for the year
ended December 31, 2008. This provision relates to eight loans with
an aggregate principal balance of $224,774 and accrued interest of
$2,506. 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
$12,150. The third loan is a €32,087 ($44,602) junior mezzanine loan
secured by a portfolio of office buildings in the Netherlands which required a
provision totaling €9,790 ($13,609). The fourth is a $20,189
subordinate mortgage loan secured by a portfolio of apartment communities
located in Houston, Texas which required a provision totaling $20,927 (includes
accrued interest of $770). The fifth is a $50,000 senior mezzanine loan secured
by a portfolio of apartment communities located in Phoenix, Arizona which
required a provision totaling $50,955 (includes accrued interest of $621). The
sixth is a $9,729 subordinate mortgage loan secured by a portfolio of apartment
communities located in Austin, Texas which required a provision of $9,787
(includes accrued interest of $64). The seventh is a $23,600 subordinate
mezzanine loan secured by a portfolio of apartment buildings located in San
Francisco, CA which required a provision totaling $6,300. The eighth is a
€22,412 ($31,154) mezzanine loan secured by a portfolio of properties located
throughout Germany which required a provision totaling €4,300
($5,977). 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 does not believe the full
collectability of the loans is probable.
The
Company recorded a general loan loss reserve of $21,033 for the year ended
December 31, 2008 based on its formula-based method as more fully described in
Note 2, “Significant Accounting Policies – Allowance for Loan
Losses.”
On
December 12, 2008, the Company received a letter from the Staff (the “Staff”) of
the Division of Corporation Finance of the SEC in which the Staff provided
written comments on the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007. The Company responded to the most recently issued
SEC correspondence on March 17, 2009. Currently, two comments remain
open. One comment relates to a general loan loss reserve for the Company’s
commercial real estate loans. The
Company has provided additional information regarding its conclusions reached
relating to a general loan loss reserve.
Changes
in the reserve for loan losses were as follows:
Reserve
for loan losses, December 31, 2007
|
|
$ |
- |
|
Reserve
for loan losses- specific (including accrued interest of
$1,645)
|
|
|
144,895 |
|
Reserve
for loan losses- general
|
|
|
21,033 |
|
Reserve
for loan losses, December 31, 2008
|
|
$ |
165,928 |
|
Note
7 COMMERCIAL MORTGAGE
LOAN POOLS
During
the second quarter of 2004, the Company acquired subordinated CMBS in a trust
establishing a Controlling Class interest. This Controlling Class
CMBS did not qualify as a QSPE because the special servicer has more discretion
over sales of defaulted loans than is typically permitted to qualify as a
QSPE.
Over the
life of the commercial mortgage loan pools, the Company reviews and updates its
loss assumptions to determine the impact on expected cash flows to be
collected. A decrease in estimated cash flows will reduce the amount
of interest income recognized in future periods and would result in an
impairment charge recorded on the consolidated statements of
operations. An increase in estimated cash flows will increase the
amount of interest income recorded in future periods.
Note
8 IMPAIRMENTS -
CMBS
The
Company updates its estimated cash flows for securities subject to EITF 99-20 on
a quarterly basis. The Company compares the yields resulting from the
updated cash flows to the current accrual yields. An impairment
charge is required under EITF 99-20 if the updated yield is lower than the
current accrual yield and the security has an estimated fair value less than its
adjusted purchase price. The Company carries all these securities at
their estimated fair value on its consolidated statements of financial
condition.
During
2008 the market value of the Company’s CMBS declined significantly. Due to
changes in the timing and extent of credit losses expected, the Company
increased the loss assumptions on its Controlling Class CMBS from 1.3% to 1.8%
of the total underlying loan pools. For the year ended December 31,
2008, changes in loss assumptions on the Company’s 2005 through 2007 vintage
Controlling Class CMBS required an impairment totaling $456,620. At
January 1, 2008, the Company’s subordinated Controlling Class CMBS portfolio had
a total adjusted purchase price of $881,475 and a loss adjusted yield of
10.41%. At December 31, 2008, the Company had reduced the adjusted
issue price of those same securities to $509,071 and currently records a loss
adjusted yield of 17.99%.
For 2007,
changes in timing of assumed credit loss and prepayments on fourteen CMBS
required an impairment charge totaling $9,634. The Company also
increased its underlying loss expectations for one below investment grade
European CMBS during 2007, resulting in an additional impairment charge of
$1,321. In addition, the Company incurred a charge of $1,514 related
to the impairment of its remaining high credit quality securities because
similar securities were sold at a loss during the third quarter of 2007 and the
Company could not demonstrate its ability and intent to hold remaining
securities to forecasted recovery. During the quarter ended December
31, 2007, 70 of the Company’s Controlling Class CMBS with an aggregate adjusted
purchase price of $408,201 experienced a weighted average yield increase of 58
basis points, and 30 Controlling Class CMBS with an aggregate adjusted purchase
price of $182,941 experienced a weighted average yield decrease of 12 basis
points.
During
2006, the Company had sixteen CMBS that required an impairment charge of $7,880,
of which $6,133 was attributed to higher prepayment rates on a pool of Small
Business Administration commercial mortgages. The decline in the
updated yields that caused the remaining impairment charge of $1,747 is not
related to increases in losses but rather accelerated prepayments and changes in
the timing of credit losses.
Note
9 EQUITY INVESTMENTS
The
following table is a summary of the Company’s equity investments for the year
ended December 31, 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 |
|
|
|
30,872 |
|
|
|
32,223 |
|
Equity
earnings (loss)
|
|
|
77 |
|
|
|
(55,398 |
) |
|
|
- |
|
|
|
(903 |
) |
|
|
2,593 |
|
|
|
(52,631 |
) |
Foreign
currency translation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,622 |
) |
|
|
(3,622 |
) |
Return
of capital
|
|
|
- |
|
|
|
(3,206 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,206 |
) |
Distributions
of earnings
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,644 |
) |
|
|
(1,644 |
) |
Balance
at December 31, 2008
|
|
$ |
1,713 |
|
|
$ |
39,158 |
|
|
$ |
9,350 |
|
|
$ |
448 |
|
|
$ |
28,199 |
|
|
$ |
78,868 |
|
* 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
December 31, 2008, the Company owned approximately 20% of Carbon Capital, Inc.
(“Carbon I”). The Company also owned approximately 26% of Carbon
Capital II, Inc. (“Carbon II”, and collectively with Carbon I, the “Carbon
Funds”) at December 31, 2008. Collectively, the Carbon Funds are
private commercial real estate income opportunity funds managed by the Manager.
See Note 17 of the consolidated financial statements, “Transactions with the
Manager and Certain Other Parties”. The Company’s investment period
in Carbon I expired on July 12, 2004.
The
following table summarizes the loan investments held by the Carbon Funds at
December 31, 2008 and 2007:
|
|
Weighted
Average
|
|
|
|
|
|
|
December
31, 2008
|
|
|
December
31, 2007
|
|
|
Yield
|
|
Property
Type
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
2008
|
|
|
2007
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
11,560 |
|
|
|
2.6 |
% |
|
$ |
58,162 |
|
|
|
8.7 |
% |
|
|
7.1 |
% |
|
|
8.1 |
% |
Office
|
|
|
69,229 |
|
|
|
15.5 |
|
|
|
181,495 |
|
|
|
27.2 |
|
|
|
7.6 |
|
|
|
9.7 |
|
Multifamily
|
|
|
185,209 |
|
|
|
41.5 |
|
|
|
189,152 |
|
|
|
28.4 |
|
|
|
11.5 |
|
|
|
12.1 |
|
Residential
|
|
|
6,580 |
|
|
|
1.5 |
|
|
|
12,000 |
|
|
|
1.8 |
|
|
|
- |
|
|
|
0.1 |
|
Land
|
|
|
45,000 |
|
|
|
10.1 |
|
|
|
45,000 |
|
|
|
6.8 |
|
|
|
6.5 |
|
|
|
11.4 |
|
Hotel
|
|
|
128,671 |
|
|
|
28.8 |
|
|
|
180,298 |
|
|
|
27.1 |
|
|
|
6.9 |
|
|
|
12.0 |
|
Total
loans(1)
|
|
|
446,250 |
|
|
|
100.0 |
% |
|
|
666,107 |
|
|
|
100.0 |
% |
|
|
8.8 |
% |
|
|
10.8 |
% |
General
loan loss reserve
|
|
|
(4,838 |
) |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
441,412 |
|
|
|
|
|
|
$ |
666,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Net of
a loan loss provision of $237,090.
On
December 22, 2005, the Company entered into an $11,000 commitment to acquire
shares of Dynamic India Fund IV. At December 31, 2008, the Company’s
capital committed 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 December 31, 2008, the carrying value of the Company’s
investment in AHR JV was $448. 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 17 of the consolidated financial
statements, “Transactions with the Manager and Certain Other
Parties”.
On June
26, 2008, the Company invested $30,872 in RECP Anthracite International JV
Limited (“AHR International JV”). As of December 31, 2008, the carrying value of
the Company’s investment in AHR International JV was $28,199. AHR International
JV invests in investments backed by non-U.S. real estate assets and is managed
by the Manager. See Note 17 of the consolidated financial statements,
“Transactions with the Manager and Certain Other Parties”. The other
shareholder in AHR International JV, RECP IV Cite CMBS Equity, L.P. (“RECP”), is
managed by or otherwise associated with an affiliate of Credit
Suisse. RECP holds the Company’s 12% Series E Cumulative Convertible
Redeemable Preferred Stock. Moreover, one of the Company’s directors, Andrew
Rifkin, was appointed by RECP. In January 2009, in connection with
the amendment and extension of the Company’s credit facility with Morgan
Stanley, the Company transferred its entire interest in Anthracite International
JV’s sole investment, a non- U.S. commercial mortgage loan, to AHR Capital MS
Limited, a wholly owned subsidiary of the Company, which then posted the asset
as additional collateral under the facility.
Combined
summarized financial information of the unconsolidated equity investments of the
Company is as follows:
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Combined
Statements of Financial Condition:
|
|
|
|
|
|
|
Commercial
mortgage loans, net
|
|
$ |
419,979 |
|
|
$ |
666,101 |
|
Securities
available-for-sale, at fair value
|
|
|
18,578 |
|
|
|
23,500 |
|
Real
estate property, at fair value
|
|
|
30,721 |
|
|
|
43,221 |
|
Other
assets
|
|
|
24,666 |
|
|
|
64,990 |
|
Total
assets
|
|
$ |
493,944 |
|
|
$ |
797,812 |
|
|
|
|
|
|
|
|
|
|
Secured
borrowings
|
|
$ |
278,239 |
|
|
$ |
414,467 |
|
Other
liabilities
|
|
|
2,042 |
|
|
|
5,474 |
|
Stockholders’
equity
|
|
|
213,663 |
|
|
|
377,871 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
493,944 |
|
|
$ |
797,812 |
|
|
|
|
|
|
|
|
|
|
The
Company’s share of equity
|
|
$ |
70,776 |
|
|
$ |
99,398 |
|
|
|
For the year ended December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Combined
Statements of Operations:
|
|
|
|
|
|
|
|
|
|
Income
|
|
$ |
65,499 |
|
|
$ |
109,094 |
|
|
$ |
95,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
15,813 |
|
|
|
41,654 |
|
|
|
42,483 |
|
Operating
expenses
|
|
|
(5,041 |
) |
|
|
26,317 |
|
|
|
22,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
10,772 |
|
|
|
67,971 |
|
|
|
64,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized/unrealized
gain (loss)
|
|
|
(10,140 |
) |
|
|
117,738 |
|
|
|
57,677 |
|
Provisions
for loan losses
|
|
|
(255,835 |
) |
|
|
(6,326 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(211,248 |
) |
|
$ |
152,535 |
|
|
$ |
88,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company’s share of net (loss) income
|
|
$ |
(52,373 |
) |
|
$ |
32,093 |
|
|
$ |
27,431 |
|
Note
10 SECURITIZATION TRANSACTIONS,
TRANSFER OF FINANCIAL ASSETS, QUALIFIED SPECIAL PURPOSE ENTITIES AND VARIABLE
INTEREST ENTITIES
Securitization
Transactions
The
Company has completed seven securitization transactions related to commercial
real estate securities and loans. The Company achieved sale treatment
for transfers to two of these special purpose entities (“SPEs”), Anthracite
2004-HY1 Ltd. (“CDO HY1”) and Anthracite 2005-HY2 Ltd. (“CDO HY2”), which also
qualify as QSPEs as they meet the necessary criteria regarding the types of
assets they may hold and the range of discretion they may exercise in connection
with the assets they hold. The determination of whether a SPE meets
the criteria to be a QSPE requires considerable judgment, particularly in
evaluating whether the permitted activities of the SPE are significantly limited
and in determining whether derivatives held by the SPE are passive and
nonexcessive. See Note 2 of the consolidated financial statements, “Significant
Accounting Policies”, for further information on QSPEs.
The
portfolios of CDO HY1 and CDO HY2 consist primarily of non-investment grade
CMBS. The Company is in the first loss position and controls the
foreclosure/workout process. The following table presents the total assets
(unpaid principal amount) as of December 31, 2008 and 2007 of CDO HY1 and CDO
HY2 to which the Company has transferred assets and received sale
treatment:
|
|
For
the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Investment
grade CMBS
|
|
$ |
57,087 |
|
|
$ |
57,675 |
|
Investment
grade REIT debt
|
|
|
42,885 |
|
|
|
42,885 |
|
CMBS
rated BB+ to B
|
|
|
165,081 |
|
|
|
167,529 |
|
CMBS
rated B- or lower
|
|
|
502,740
|
|
|
|
523,382
|
|
Total
|
|
$ |
767,793
|
|
|
$ |
791,471
|
|
|
|
|
|
|
|
|
|
|
Cash
flows received on retained interests
|
|
$ |
14,442 |
|
|
$ |
27,266 |
|
The key
economic assumptions used to determine the estimated fair value of the retained
interests at December 31, 2008 and 2007 are the underlying projected future cash
flows to be received. Those cash flows include estimates of future credit losses
on loans that comprise the underlying collateral for the retained interests.
Once a set of cash flows has been determined, a discount rate is applied to
those cash flows to calculate the net present value of the cash flows. There has
been a great degree of instability in the current markets and making such
estimates has been difficult and fluid. The Company reviews the market data and
specific loan criteria to determine the best estimate for these assumptions
using specific underlying collateral data as well as information on particular
borrowers.
The
discount rate used to net present value the cash flows is determined by
reference to yields on non-investment grade CMBS because the underlying
collateral for the retained interest is a pool of non-investment grade CMBS. The
discount rate for the retained interest is typically higher than the yield on
the non-investment grade CMBS to reflect the market perception that the retained
interest has increased risk as compared to a single non-investment grade
security.
The
following table sets forth the weighted average key economic assumptions used in
measuring the fair value of the Company’s retained interests and the sensitivity
of this fair value to immediate adverse changes in those
assumptions:
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Fair
value of retained interest
|
|
$ |
16,176 |
|
|
$ |
35,055 |
|
Weighted
average life (years)
|
|
|
3.9 |
|
|
|
5.1
|
|
Anticipated
credit losses
|
|
|
|
|
|
|
|
|
Impact
of the Company’s loss assumptions
|
|
$ |
13,120 |
|
|
$ |
28,423
|
|
Impact
of doubling the Company’s loss assumptions
|
|
$ |
10,953 |
|
|
$ |
17,372
|
|
Discount
rate
|
|
|
95.7 |
% |
|
|
% |
Impact
of 10% increase in discount rate
|
|
$ |
11,989 |
|
|
$ |
22,819
|
|
Impact
of 20% increase in discount rate
|
|
$ |
11,037 |
|
|
$ |
19,137
|
|
When
measuring the fair value of the retained interests, the Company estimates credit
losses and the timing of losses for each loan underlying the
CMBS. The securities comprising the retained interests are
predominately first loss CMBS with the lowest or no ratings assigned by the
credit rating agencies. These securities not only absorb the first
losses of all the mortgages underlying each transaction they are also the last
to receive principal payments, if any. Therefore any cash from principal
paydowns received will not flow to the benefit of the owners of these
securities. In the current environment prepayments of mortgages has virtually
halted. The Company does not believe it is reasonable to project that
prepayments of underlying mortgages will have any significant effect on the cash
flows of these securities and therefore on the value or cash flows on the
retained interests. At December 31, 2008 and 2007, the amortized
costs of the retained interests were $14,259 and $61,205, with an estimated fair
value of $16,176 and $35,055, respectively, based on key economic
assumptions.
These
sensitivities are hypothetical and changes in fair value based on a variation in
key assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be
linear. This non-linear relationship exists because the Company
applies its key assumptions on a loan-by-loan basis to the assets underlying the
CMBS collateral. The Company reviews all major assumptions
periodically using the most recent empirical and market data available and makes
adjustments where warranted.
Transfer
of Financial Assets Accounted for as a Secured Borrowing
The
transfer of financial assets accounted for as secured borrowings consists of the
five Company securitization transactions in which the Company was the transferor
of CMBS and commercial mortgage loans. The following table presents information
about the assets transferred in connection with the secured borrowings that
continue to be recognized in the Company’s statement of financial position
as of December 31, 2008 and 2007:
Assets:
|
|
2008
|
|
|
2007
|
|
Investment
grade CMBS
|
|
$ |
443,469 |
|
|
$ |
768,670 |
|
Investment
grade REIT debt
|
|
|
155,773 |
|
|
|
226,059 |
|
CMBS
rated BB+ to B
|
|
|
120,935 |
|
|
|
466,564 |
|
CMBS
rated B- or lower
|
|
|
13,022 |
|
|
|
54,342 |
|
CDO
investment
|
|
|
1,920 |
|
|
|
3,390 |
|
Credit
tenant lease
|
|
|
20,175 |
|
|
|
24,949 |
|
Total
(at estimated fair value)
|
|
|
755,294 |
|
|
|
1,543,974 |
|
Commercial
mortgage loans (at amortized cost)
|
|
|
439,286 |
|
|
|
464,456 |
|
Total
|
|
$ |
1,194,580 |
|
|
$ |
2,008,430 |
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
CDOs
(at estimated fair value in 2008)
|
|
$ |
564,661 |
|
|
$ |
1,823,328 |
|
The
assets above are restricted soley to satisfy the related liabilities of the
specific entity.
Qualified
Special Purpose Entities
In
addition to the retained interest described above, the Company also holds
interests in 38 U.S. and Canadian dollar denominated Controlling Class CMBS that
were purchased in connection with the Company’s commercial real estate investing
activities and qualify as QSPEs. The estimated fair value of the U.S. and
Canadian dollar denominated Controlling Class CMBS that qualify as QSPE’s were
approximately $312,477 and $977,054 as of December 31, 2008 and 2007,
respectively. The underlying collateral for the Company’s U.S. and
Canadian dollar denominated Controlling Class CMBS is comprised of 4,480
commercial mortgage loans with a total balance of $57,048,888. The
Company maintains the right to control the foreclosure/workout process of the
underlying loans.
The
Company also holds interests in eight European and two Japanese Controlling
Class CMBS in which it maintains the right to control the foreclosure/workout
process of the underlying loans. The estimated fair values of the
European Controlling Class CMBS that qualify as QSPEs were approximately $35,875
and $101,211 at December 31, 2008 and 2007, respectively. The
underlying collateral for the European Controlling Class CMBS is comprised of
commercial mortgage loans with a total outstanding balance of $7,477,760 at
December 31, 2008. The estimated fair values of the Japanese
Controlling Class CMBS that qualify as QSPEs were approximately $4,845 and
$20,969 at December 31, 2008 and 2007, respectively. The underlying
collateral for the Japanese Controlling Class CMBS is comprised of commercial
mortgage loans with a total outstanding balance of $26,034 at December 31,
2008.
The
Company also owns all of the preferred equity and a debt security of LEAFs CMBS
I Ltd. (“LEAF”). LEAF is a CDO and its underlying collateral for the
structure is $2,674,875 and $2,930,665 of investment grade CMBS as of December
31, 2008 and December 31, 2007, respectively. At December 31, 2008
and 2007, the estimated fair value of LEAF on the Company’s consolidated
statements of financial condition was $9,920 and $14,576,
respectively.
Variable
Interest Entities
FIN 46R
applies to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The primary
beneficiary of a VIE is the party that absorbs a majority of the entity’s
expected losses, receives a majority of its expected residual returns or both as
a result of holding variable interests. The Company consolidates
entities of which it is the primary beneficiary. For those entities deemed to be
QSPEs, the Company does not consolidate the entity.
The
Company is involved with two entities that the Company has deemed to be VIEs,
one in which the Company is the primary beneficiary and one in which the company
holds a significant variable interest. The Company’s variable interests in these
VIEs include debt and equity interests. The Company does not have any
future obligation to provide financial support to these entities. The
Company’s involvement with VIEs arises from:
|
1)
|
A
Controlling Class CMBS that did not qualify as a QSPE because the special
servicer has more discretion over sales of defaulted loans than is
typically permitted to qualify as a QSPE. The Company is the
primary beneficiary and consolidates the VIE. The Company’s
maximum exposure to loss associated with the Company’s investment in this
entity is $22,301 and $21,698 as of December 31, 2008 and 2007,
respectively. The carrying amounts of the VIE’s assets and
liabilities included in the Company’s consolidated financial statement of
financial condition related to this VIE at December 31, 2008 was
$1,022,105 and $999,804, respectively. The carrying amounts of
the VIE’s assets and liabilities included in the Company’s consolidated
financial statement of financial condition related to this VIE at December
31, 2007 was $1,240,793 and $1,219,095, respectively. The
assets of the consolidated VIE may only be used to settle the obligation
of the VIE and creditors of the consolidated VIE have no recourse beyond
the VIE’s assets. The assets associated with this VIE are
included in commercial mortgage loan pools and the liabilities are
included in secured by pledge of commercial loan pools on the consolidated
statements of financial condition.
|
|
2)
|
A
10% significant variable interest in AHR JV in which substantially all of
the economics of the entity are absorbed by one other investor, but for
which the Company has a 50% voting right. The Company’s maximum exposure
to loss associated with AHR JV as of December 31, 2008 was $448 related to
its equity investment. This amount is included in equity investments on
the consolidated statements of financial condition. The Company did not
have an investment in AHR JV as of December 31, 2007. The total assets of
AHR JV at December 31, 2008 were
$4,479.
|
Note
11 REAL ESTATE,
HELD-FOR-SALE
SFAS No.
144, Accounting for the
Impairment or Disposal of Long-Lived Assets, specifies that long-lived
assets to be disposed by sale, which meet certain criteria, should be classified
as real estate held-for-sale and measured at the lower of its carrying amount or
fair value less costs to sell. In addition, depreciation is not
recorded on real estate held-for-sale.
On March
6, 2006, the Company purchased a defaulted loan from a Controlling Class CMBS
trust. The loan was secured by a first mortgage on a multi-family property in
Texas. Subsequent to the loan purchase, the property was acquired by
the Company at foreclosure. The Company sold the property during the
second quarter of 2006 and recorded a gain from discontinued operations of
$1,366 on the consolidated statements of operations.
Note
12 BORROWINGS
The
Company’s borrowings consist of: reverse repurchase agreements; credit
facilities, including facilities structured as repurchase agreements, that are
secured by various Company assets, CDOs; senior unsecured notes, including
senior unsecured convertible notes; junior unsecured notes, including junior
subordinated notes issued in connection with trust preferred securities; and
commercial mortgage loan pools.
Information
with respect to the Company’s borrowings at December 31, 2008 is summarized as
follows:
Borrowing Type
|
|
Carrying
Value
|
|
|
Adjusted
Issuance
Price
|
|
|
Weighted
average
borrowing rate
|
|
Weighted average
remaining maturity
|
|
Estimated fair
value of assets
pledged
|
|
Credit
facilities (1)
|
|
$ |
480,332 |
|
|
$ |
480,332 |
|
|
|
4.7 |
% |
|
1.1
years
|
|
$ |
450,271 |
|
Commercial
mortgage loan pools
|
|
|
999,804 |
|
|
|
999,804 |
|
|
|
4.2 |
% |
|
4.7
years
|
|
|
1,022,105 |
|
CDOs
(2)
|
|
|
564,661 |
|
|
|
1,743,161
|
|
|
|
6.8 |
% |
|
4.6
years
|
|
|
1,046,584 |
|
Senior
unsecured notes (2)
|
|
|
18,411 |
|
|
|
162,500 |
|
|
|
7.6 |
% |
|
8.3
years
|
|
Unsecured
|
|
Senior
unsecured convertible notes (2)
|
|
|
24,960 |
|
|
|
80,000 |
|
|
|
11.8 |
% |
|
18.7
years
|
|
Unsecured
|
|
Junior
unsecured notes (2)
|
|
|
5,726 |
|
|
|
69,502 |
|
|
|
6.6 |
% |
|
13.3
years
|
|
Unsecured
|
|
Junior subordinated notes
(2)
|
|
|
12,643 |
|
|
|
180,477 |
|
|
|
7.6 |
% |
|
27.1 years
|
|
Unsecured
|
|
Total
borrowings
|
|
$ |
2,106,537 |
|
|
$ |
3,715,776 |
|
|
|
6.0 |
% |
|
5.9 years
|
|
$ |
2,518,960 |
|
(1)
Includes $4,584 of borrowings related to commercial mortgage loan
pools.
(2) As a
result of the adoption of FAS 159 on January 1, 2008, the Company records the
above liabilities at fair value. Changes in fair value are recorded
in unrealized gain on liabilities on the consolidated statements of
operations. For the year ended December 31, 2008, the Company
recorded an unrealized gain of $1,219,779 due to the reduction of the fair value
of such liabilities.
At
December 31, 2008, the Company’s borrowings had the following remaining
maturities:
Borrowing Type
|
|
Within 30
days
|
|
|
31 to 59
days
|
|
|
60 days to
less than 1
year
|
|
|
1 year to 3
years
|
|
|
3 years to 5
years
|
|
|
Over 5 years
|
|
|
Total
|
|
Credit
facilities (1)
|
|
$ |
25,104 |
|
|
$ |
40,253 |
|
|
$ |
25,104 |
|
|
$ |
389,872 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
480,332 |
|
Commercial
mortgage loan pools (2)
|
|
|
- |
|
|
|
85,630 |
|
|
|
62,807 |
|
|
|
103,035 |
|
|
|
172,170 |
|
|
|
576,162 |
|
|
|
999,804 |
|
CDOs
(2)
|
|
|
287 |
|
|
|
16,561 |
|
|
|
37,791 |
|
|
|
341,302 |
|
|
|
755,682 |
|
|
|
591,537 |
|
|
|
1,743,161 |
|
Senior
unsecured notes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
162,500 |
|
|
|
162,500 |
|
Senior
unsecured convertible notes
(3)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
80,000 |
|
|
|
80,000 |
|
Junior
unsecured notes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
69,502 |
|
|
|
69,502 |
|
Junior subordinated notes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
180,477 |
|
|
|
180,477 |
|
Total
borrowings
|
|
$ |
25,391 |
|
|
$ |
142,443 |
|
|
$ |
125,702 |
|
|
$ |
834,208 |
|
|
$ |
927,852 |
|
|
$ |
1,660,179 |
|
|
$ |
3,715,776 |
|
(1)
Includes $4,584 of borrowings 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.
(3)
Assumes holders of senior convertible notes do not exercise their right to
require the Company to repurchase their notes on September 1, 2012, September 1,
2017 and September 1, 2022.
Information
with respect to the Company’s borrowings at December 31, 2007 is summarized as
follows:
Borrowing
Type
|
|
Carrying
Value
|
|
|
Adjusted
Issuance
Price
|
|
|
Weighted
average
borrowing rate
|
|
Weighted average
remaining maturity
|
|
Estimated
fair
value
of assets
pledged
|
|
Reverse
repurchase agreements
|
|
$ |
80,119 |
|
|
$ |
80,119 |
|
|
|
5.4 |
% |
7
days
|
|
$ |
93,116 |
|
Credit
facilities (1)
|
|
|
671,601 |
|
|
|
671,601 |
|
|
|
6.1 |
|
1.2
years
|
|
|
969,140 |
|
Commercial
mortgage loan pools
|
|
|
1,219,095 |
|
|
|
1,219,095 |
|
|
|
3.9 |
|
4.9
years
|
|
|
1,240,793 |
|
CDOs
|
|
|
1,823,328 |
|
|
|
1,823,328 |
|
|
|
6.1 |
|
4.8
years
|
|
|
2,014,047 |
|
Senior
unsecured notes
|
|
|
162,500 |
|
|
|
162,500 |
|
|
|
7.6 |
|
9.3
years
|
|
Unsecured
|
|
Senior
unsecured convertible notes
|
|
|
80,000 |
|
|
|
80,000 |
|
|
|
11.8 |
|
19.7
years
|
|
Unsecured
|
|
Junior
unsecured notes
|
|
|
73,103 |
|
|
|
73,103 |
|
|
|
6.6 |
|
14.3
years
|
|
Unsecured
|
|
Junior
subordinated notes
|
|
|
180,477 |
|
|
|
180,477 |
|
|
|
7.6 |
|
28.1
years
|
|
Unsecured
|
|
Total
borrowings
|
|
$ |
4,290,223 |
|
|
$ |
4,290,223 |
|
|
|
5.7 |
% |
6.4
years
|
|
$ |
4,317,096 |
|
|
(1)
|
Includes
$6,128 of borrowings related to commercial mortgage loan
pools.
|
At
December 31, 2007, the Company’s borrowings had the following remaining
maturities:
Borrowing Type
|
|
Within 30
days
|
|
|
31 to 59
days
|
|
|
60 days to
less than 1
year
|
|
|
1 year to 3
years
|
|
|
3 years to 5
years
|
|
|
Over 5 years
|
|
|
Total
|
|
Reverse
repurchase agreements
|
|
$ |
80,119 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
80,119 |
|
Credit
facilities (1)
|
|
|
- |
|
|
|
- |
|
|
|
261,892 |
|
|
|
409,709 |
|
|
|
- |
|
|
|
- |
|
|
|
671,601 |
|
Commercial
mortgage loan pools (2)
|
|
|
- |
|
|
|
17,932 |
|
|
|
44,270 |
|
|
|
368,433 |
|
|
|
130,683 |
|
|
|
657,777 |
|
|
|
1,219,095 |
|
CDOs
(2)
|
|
|
- |
|
|
|
16,736 |
|
|
|
16,433 |
|
|
|
149,544 |
|
|
|
548,800 |
|
|
|
1,091,815 |
|
|
|
1,823,328 |
|
Senior
unsecured notes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
162,500 |
|
|
|
162,500 |
|
Senior
unsecured convertible notes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
80,000 |
|
|
|
80,000 |
|
Junior
unsecured notes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
73,103 |
|
|
|
73,103 |
|
Junior subordinated notes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
180,477 |
|
|
|
180,477 |
|
Total borrowings
|
|
$ |
80,119 |
|
|
$ |
34,668 |
|
|
$ |
322,595 |
|
|
$ |
927,686 |
|
|
$ |
679,483 |
|
|
$ |
2,245,672 |
|
|
$ |
4,290,223 |
|
(1)
Includes
$6,128 of borrowings 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.
Debt
Covenants
Due to
the significant net loss it incurred in the fourth quarter of 2008, current
market conditions, its liquidity position and the uncertain outcome of the
Company’s ongoing negotiations with its secured credit facility lenders as of
the date of this report, the Company was unable to conclude, by the time of the
due date of this report, that it has sufficient sources of liquidity to fund
operations for the next twelve months. In conjunction with the
Company’s current inability to make such conclusion, the Company’s independent
registered public accounting firm issued an opinion on the Company’s
consolidated financial statements that states substantial doubt exists as to the
Company’s ability to continue as a going concern.
Financial
covenants in certain of the Company’s secured credit facilities include, without
limitation, a covenant that the Company’s net income (as defined in the
applicable credit facility) will not be less than $1.00 for any period of two
consecutive quarters and covenants that on any date the Company’s
tangible net worth (as defined in the applicable credit facility) will not have
decreased by twenty percent or more from the Company’s tangible net worth as of
the last business day in the third month preceding such date. The
Company’s significant net loss for the three months ended December 31, 2008
resulted in the Company not being in compliance with these
covenants. On March 17, 2009, the secured credit facility lenders
waived this covenant breach until April 1, 2009. In addition, the
Company’s secured credit facility with BlackRock Holdco 2, Inc. (“Holdco 2”)
requires the Company to immediately repay outstanding borrowings under the
facility to the extent outstanding borrowings exceed 60% of the fair market
value (as determined by the Company’s manager) of the shares of common stock of
Carbon Capital II, Inc. (“Carbon II”) securing such facility. As of
February 28, 2009, 60% of the fair market value of such shares declined to
approximately $24,840 and outstanding borrowings under the facility were
$33,450. On March 17, 2009, Holdco 2 waived this breach until April
1, 2009. Additionally, in the first quarter of 2009, Anthracite Euro
CRE CDO 2006-1 plc (“Euro CDO”) failed to satisfy its Class E
overcollateralization and interest reinvestment tests. As a result of
Euro CDO’s failure to satisfy these tests, half of each interest payment due to
the Company, as the Euro CDO’s preferred shareholder, will remain in the CDO as
reinvestable cash until the tests are cured. However,
since the Euro CDO’s preferred shares were pledged to one of the Company’s
secured lenders in December 2008, the cash flow was already being diverted to
pay down that lender’s outstanding balance.
During
the first quarter of 2009, the Company received a margin call of $46,300 and
C$5,300 from one of its secured credit facility lenders. As part of
the Company’s ongoing discussions with this lender and the other secured credit
facility lenders, the Company has been negotiating to have the margin call
waived in consideration of certain agreements to be made by the
Company. On March 17, 2009, the lender waived this event of default
until April 1, 2009.
On March
17, 2009, the Company received waivers concerning covenant breaches from its
secured credit facility lenders as described above. In addition, the
Company's secured credit facility lenders agreed to permanently waive minimum
liquidity covenants in the facilities. In connection with the waivers, the
Company has agreed to pay $6 million to each of Morgan Stanley and Bank of
America and $3 million to Deutsche Bank.
As
discussed and for the reasons stated above, if the Company were unable to obtain
permanent waivers or extensions of the waivers from its secured credit facility
lenders on or before April 1, 2009, an event of default will immediately or with
the passage of time occur under the applicable respective facility.An event of
default under any of the Company’s facilities, absent a waiver, would trigger
cross-default and cross-acceleration provisions in all of the Company’s other
facilities and, if such debt were accelerated, would trigger a
cross-acceleration provision in one of the Company’s indentures. In
such an event, the Company would be required to repay all outstanding
indebtedness under its secured credit facilities and the one indenture
immediately. The Company would not have sufficient liquid assets
available to repay such indebtedness and, unless the Company were able to obtain
additional capital resources or waivers, the Company would be unable to continue
to fund its operations or continue its business.
In
addition to the covenants under the Company’s secured facilities, certain of the
seven CDOs issued by the Company contain compliance tests which, if violated,
could trigger a diversion of cash flows from the Company to bondholders of the
CDOs. The Company’s first three CDOs contain certain interest
coverage and overcollateralization tests. At December 31, 2008, these
CDOs were in compliance with all such tests. The Company’s three CDOs
designated as its high yield (“HY”) series do not have any compliance
tests. A significant test in Euro CDO is the weighted average rating
test which is affected by credit rating agency downgrades to underlying CDO
collateral. In the first quarter of 2009, Euro CDO failed to satisfy
its Class E overcollateralization and interest reinvestment test. As
a result of Euro CDO’s failure to satisfy these tests, half of each interest
payment due to its preferred shareholder will remain in the CDO as reinvestable
cash until the test is cured. However, since the Euro CDO’s preferred
shares were pledged to one of the Company’s secured lenders in December 2008,
the cash flow was already being diverted to pay down that lender’s outstanding
balance. As of December 31, 2008, the Company’s other applicable CDOs
met all coverage tests.
Credit
Facilities and Reverse Repurchase Agreements
Under the
credit facilities and the reverse repurchase agreements, the respective lender
retains the right to mark the underlying collateral to estimated fair value.
Outstanding borrowings bear interest at a LIBOR-based variable rate. A reduction
in the value of pledged assets would require the Company to provide additional
collateral or fund margin calls. From time to time, the Company may
be required to provide additional collateral or fund margin
calls. The Company received and funded margin calls and amortization
payments totaling $82,570 during 2007, $216,969 during 2008, and $17,056 since
January 1, 2009.
The
following table summarizes the Company’s credit facilities at December 31, 2008
and 2007.
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Maturity
Date
|
|
Facility
Amount
|
|
|
Total
Borrowings
|
|
|
Unused
Borrowing
Capacity(4)
|
|
|
Facility
Amount
|
|
|
Total
Borrowings
|
|
|
Unused
Borrowing
Capacity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of America, N.A. and Banc of America Mortgage Capital Corporation (1)
|
9/18/10
|
|
$ |
275,000 |
|
|
$ |
127,889 |
|
|
$ |
- |
|
|
$ |
275,000 |
|
|
$ |
211,088 |
|
|
$ |
63,912 |
|
Deutsche
Bank, AG, Cayman Islands Branch (2)
|
7/08/10
|
|
|
83,570 |
|
|
|
83,570 |
|
|
|
- |
|
|
|
200,000 |
|
|
|
174,186 |
|
|
|
25,814 |
|
Bank
of America, N.A.(3)
|
9/17/10
|
|
|
100,000 |
|
|
|
44,009 |
|
|
|
- |
|
|
|
100,000 |
|
|
|
87,706 |
|
|
|
12,294 |
|
Morgan
Stanley Bank (3)
|
2/17/10
|
|
|
300,000 |
|
|
|
194,864 |
|
|
|
- |
|
|
|
300,000 |
|
|
|
198,621 |
|
|
|
101,379 |
|
BlackRock
Holdco 2, Inc. (1)
|
3/05/10
|
|
|
39,356 |
|
|
|
30,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
$ |
797,926 |
|
|
$ |
480,332 |
|
|
$ |
- |
|
|
$ |
875,000 |
|
|
$ |
671,601 |
|
|
$ |
203,399 |
|
(1) USD
only.
(2)
Multicurrency (USD and Non-USD).
(3)
Non-USD only.
(4) The
Company can no longer draw on facilities due to amendments to the Bank of
America, N.A. loan agreements and a decline in the loan collateral in the case
of BlackRock Holdco 2, Inc.
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) the Company’s tangible
net worth may not decline 20% or more from its tangible net worth as of the last
business day in the third month preceding such date, (iii) the Company’s
tangible net worth may not decline 40% or more from its tangible net worth as of
the last business day in the twelfth month preceding such date, (iv) the
Company’s tangible net worth may 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 may not be greater than 3:1, (vi) on any date the Company’s liquid
assets (as defined in the related guaranty) may 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 December 31, 2008 amounted to $480,332) 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.
On
December 31, 2008, Morgan Stanley Bank extended its $300,000 non-USD facility
agreement (the “Agreement”) until February 17, 2010. Pursuant to the
Agreement, the Applicable Margin (as defined in the Agreement) on outstanding
borrowings increased to 3.50%, a Borrowing Base Deficiency (as defined in the
Agreement) was satisfied and the Company will no longer be entitled to request
new borrowings under the Agreement after the effectiveness of the Agreement. The
Agreement also incorporated ongoing amortization payments, an upfront balance
reduction of $15,000 and a second balance reduction payment of $15,000 required
by August of 2009. The Company is required to use all cash flow from collateral
under the Agreement to make ongoing amortization payments. In
connection with the extension of the facility (including but not limited to the
satisfaction of a margin call under the Agreement), the Company posted
additional assets as collateral under the Agreement comprised of notes and debt
in an aggregate principal amount of €99,600 ($138,449). The Company may be
required in the future to make additional prepayments or post additional
collateral pursuant to the Agreement. Certain financial covenants
were added or modified so that: (i) on any date, the Company’s tangible net
worth may not be less than the sum of $550,000 plus 75% of any equity offering
proceeds from and after December 31, 2008, (ii) the Company’s total indebtedness
to tangible net worth may not be greater than 2.5:1 and (iii) the Company may
not make, modify, amend or supplement any covenant to any that is more
restrictive on the Company without providing the same covenant to Morgan Stanley
Bank.
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) made 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
January 28, 2009, the Company and Bank of America N.A. amended its agreements.
The Company can no longer draw on additional funds under both Bank of America
facilities.
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 had 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 an amount 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 December 31 2008, based on the fair market value of the Carbon II
shares on a mark-to-market basis, the maximum principal amount of the BlackRock
Facility has declined to $39,356 and the Company has remaining unused borrowing
capacity of $3,352. As of February 28, 2009, the maximum principal
amount from the BlackRock Facility declined to approximately $24,840 due to a
decline in the fair market value of the shares of Carbon II that are pledged to
secure the BlackRock Facility. Due to the current value of Carbon II
and the amount of the Company’s outstanding borrowings under the BlackRock
Facility, the Company is currently not able to make new borrowings under this
facility. All of the shares of Carbon II common stock owned by the
Company are pledged under the Company’s credit facility with Holdco. Pursuant to
such facility’s credit agreement, Holdco 2 has the option to purchase such
shares.
The
BlackRock Facility initially bore interest at a variable rate equal to LIBOR or
prime 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
purchase price and reduce the BlackRock Facility’s commitment amount
accordingly, which may require termination of the BlackRock
Facility. If the Lenders were to purchase portions of Carbon II in
this manner, the BlackRock Facility’s commitment amount will be reduced by the
purchase price and the purchase price paid will 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,
will 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 outstanding at
December 31, 2008. On January 9, 2009, the Company borrowed an
additional $3,450 from Holdco 2.
On
December 22, 2008, Holdco 2 agreed to renew the BlackRock Facility until March
5, 2010. In addition, the interest rate was increased by 1% to LIBOR or prime
plus 3.5%. The Company paid an extension fee of $150 to the Manager in relation
to this extension.
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.
CDOs
On May
23, 2006, the Company issued nine tranches of secured debt through its sixth CDO
(“CDO HY3”). In this transaction, a wholly owned subsidiary of the
Company issued secured debt in the par amount of $417,000 secured by the
subsidiary’s assets. The adjusted issue price of the CDO HY3 debt at
December 31, 2008 was $321,533. Three tranches were issued at a fixed rate
coupon and six tranches were issued at a floating rate coupon with a combined
weighted average remaining maturity of 6.07 years at December 31,
2008. All floating rate coupons were swapped to fixed rate coupons
resulting in a total fixed rate cost of funds for CDO HY3 of approximately
7.1%. CDO HY3 was structured to match fund the cash flows from a
significant portion of the Company’s CMBS and commercial real estate
loans. The par amount at December 31, 2008 of the collateral securing
CDO HY3 consisted of 74.9% CMBS rated B or higher and 25.1% commercial real
estate loans. At December 31, 2008, the collateral securing CDO HY3
had a fair value of $143,102.
On
December 14, 2006, the Company closed its seventh CDO (“Euro
CDO”). The Euro CDO sold €263,500 of non-recourse debt at a weighted
average spread to Euro Libor of 60 basis points. The €263,500
consists of €251,000 of investment grade debt at a weighted average spread to
Euro Libor of 50 basis points and €12,500 of below investment grade
debt. The Company retained an additional €12,500 of below investment
grade debt and all of Euro CDO’s preferred shares. The Company
incurred €3,489 of issuance costs that will be amortized over the weighted
average life of the Euro CDO. At December 31, 2008, the collateral
securing The Euro CDO had a fair value of $209,412.
Senior
Unsecured Notes (Recourse)
In
October 2006, the Company issued $50,000 principal amount of 7.22% Senior Notes
due 2016 and $25,000 principal amount of 7.20% Senior Notes due
2016. The weighted average cost of funds for the notes is
7.21%. The 7.22% Senior Notes have a final maturity date of October
30, 2016 and the 7.20% Senior Notes have a final maturity date of December 30,
2016. The Company, at its option, may redeem the notes in whole only
at the optional redemption prices set forth in the notes. The
indentures governing the notes also include covenants that restrict the
Company’s ability to take certain action if an event of default has occurred and
is continuing and that restrict the amount of subordinated debt the Company may
issue.
In May
2007, the Company issued $50,000 principal amount of fixed-to-floating rate
senior notes due July 30, 2017 and, in June 2007, the Company issued $37,500
principal amount of fixed-to-floating rate senior notes due July 30,
2017. The notes bear interest at a weighted average fixed rate of
7.92% until July 30, 2012 and thereafter at a rate equal to 3-month LIBOR plus
2.55%. On any interest payment date on or after July 30, 2012, the
Company, at its option, may redeem the notes in whole or in part at a redemption
price equal to 100% of the principal amount of the notes plus accrued and unpaid
interest to but excluding the date fixed as the redemption date. In
addition, before July 30, 2012, the Company, at its option, may redeem the notes
in whole only upon the occurrence and during the continuation of certain special
tax and investment company events at a redemption price equal to 105% of the
principal amount of the notes plus accrued and unpaid interest to but excluding
the date fixed as the redemption date. The indentures governing the
notes also include covenants that restrict the Company’s ability to take certain
action if an event of default has occurred and is continuing. The
indentures also contain a covenant that requires the Company to maintain, as of
the end of each fiscal quarter during which the notes are outstanding, a minimum
tangible net worth of $400,000 and a debt-to-total capitalization ratio of 95%
or less.
Senior
Unsecured Convertible Notes (Recourse)
On August
29, 2007 and September 10, 2007, the Company issued a total of $80,000 aggregate
principal amount of 11.75% Convertible Senior Notes due 2027. The
notes bear interest at a rate of 11.75% per annum and are convertible only under
certain conditions, including a 20-day period of trading above $14.02 per share,
as adjusted. The initial conversion rate of 92.7085 shares of Common
Stock per $1,000 principal amount of notes (equal to an initial conversion price
of approximately $10.79 per share) represented a premium of 17.5% to the last
reported sale price of the Company’s Common Stock on August 23, 2007 of
$9.18.
Holders
of convertible senior notes have the right to require the Company to repurchase
their notes on September 1, 2012, September 1, 2017 and September 1, 2022 for a
cash price equal to 100% of the principal amount of the notes to be purchased,
plus accrued and unpaid interest to but excluding the repurchase
date. No notes may be repurchased by the Company at the option of the
holders if there has occurred and is continuing an event of default with respect
to the notes, other than a default in the payment of the repurchase price with
respect to the notes.
On or
after September 1, 2012, the Company, at its option, may redeem the notes in
whole or in part at a cash redemption price equal to 100% of the principal
amount of the notes plus accrued and unpaid interest to but excluding the
redemption date. In addition, at any time, the Company, at its
option, may redeem the notes in whole only to preserve its status as a REIT at
100% of the principal amount of the notes plus accrued and unpaid interest to
but excluding the redemption date.
Junior
Unsecured Notes (Recourse)
In April
2007, the Company issued €50,000 aggregate principal amount of floating rate
junior subordinated notes due April 30, 2022. The notes bear interest
at a rate equal to 3-month Euribor plus 2.60%. On any interest
payment date on or after April 30, 2012, the Company, at its option, may redeem
the notes in whole or in part at a redemption price equal to 100% of the
principal amount of the notes plus accrued and unpaid interest to but excluding
the date fixed as the redemption date. In addition, at any time, the
Company, at its option, may redeem the notes in whole only upon the occurrence
and during the continuation of certain special tax and investment company events
at a redemption price equal to 107.5% of the principal amount of the notes plus
accrued and unpaid interest to but excluding the date fixed as the redemption
date. The indentures governing the notes also include covenants that
restrict the Company’s ability to take certain action if an event of default has
occurred and is continuing. The indentures also contain covenants
that require the Company to maintain, as of the end of each fiscal quarter, a
debt service coverage ratio of not less than 1.20:1.0 and not sell unsecured
debt securities substantially similar to the notes unless certain conditions
have been satisfied.
Junior
Subordinated Notes to Subsidiary Trusts Issuing Preferred Securities
(Recourse)
On
January 31, 2006, Anthracite Capital Trust II, a Delaware statutory trust
(“Trust II”) and wholly owned subsidiary of the Company, issued $50,000
aggregate liquidation amount of trust preferred securities. Each
trust preferred security represents an undivided beneficial interest in the
assets of Trust II. The only assets of Trust II are the
fixed-to-floating rate junior subordinated notes issued by the Company to Trust
II. The notes have a stated maturity date of April 30, 2036 and bear
interest at a fixed rate of 7.73% until April 30, 2016 and thereafter at a rate
equal to three-month LIBOR plus 2.70%. On any interest payment date
on or after April 30, 2011, the Company, at its option, may redeem the notes in
whole or in part at a redemption price equal to 100% of the principal amount of
the notes plus accrued and unpaid interest to but excluding the date fixed as
the redemption date. In addition, before April 30, 2011, the Company,
at its option, may redeem the notes in whole only upon the occurrence and during
the continuation of certain special tax and investment company events at a
redemption price equal to 107.5% of the principal amount of the notes plus
accrued and unpaid interest to but excluding the date fixed as the redemption
date. Trust II also issued $1,550 aggregate liquidation amount of
common securities, representing 100% of the voting common securities of Trust
II, to the Company for a purchase price of $1,550. The Company realized
net proceeds from the offering of the trust preferred securities and the sales
of the junior subordinated notes to Trust II of approximately
$48,491.
On March
16, 2006, Anthracite Capital Trust III, a Delaware statutory trust (“Trust III”
and, together with Trust I and Trust II, the “Trusts”) and wholly owned
subsidiary of the Company, issued $50,000 aggregate liquidation amount of trust
preferred securities. Each trust preferred security represents an
undivided beneficial interest in the assets of Trust III. The only
assets of Trust III are the fixed-to-floating rate junior subordinated notes
issued by the Company to Trust III. The notes have a stated maturity
date of March 30, 2036 and bear interest at a fixed rate of 7.77% until March
30, 2016 and thereafter at a rate equal to three-month LIBOR plus
2.70%. On any interest payment date on or after March 30, 2011, the
Company, at its option, may redeem the notes in whole or in part at a redemption
price equal to 100% of the principal amount of the notes plus accrued and unpaid
interest to but excluding the date fixed as the redemption date. In
addition, before March 30, 2011, the Company, at its option, may redeem the
notes in whole only upon the occurrence and during the continuation of certain
special tax and investment company events at a redemption price equal to 107.5%
of the principal amount of the notes plus accrued and unpaid interest to but
excluding the date fixed as the redemption date. Trust III also
issued $1,547 aggregate liquidation amount of common securities, representing
100% of the voting common securities of Trust III, to the Company for a purchase
price of $1,547. The Company realized net proceeds from the offering of
the trust preferred securities and the sales of the junior subordinated notes to
Trust III of approximately $48,435.
The
Trusts used the proceeds from the sale of the trust preferred securities and the
common securities to purchase the Company’s junior subordinated notes. The
terms of the junior subordinated notes are substantially similar to the terms of
the trust preferred securities. The notes are subordinate and junior in
right of payment to all present and future senior indebtedness of the Company
and certain other financial obligations of the Company.
The
Company’s interests in the Trusts are accounted for using the equity method and
the assets and liabilities of the Trusts are not consolidated into the Company’s
financial statements. Interest on the junior subordinated notes is
included in interest expense on the consolidated statements of operation while
the common securities are included as a component of other assets on the
Company’s consolidated statements of financial condition.
Note
13
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
The
following table presents the notional amount, carrying value and estimated fair
value of financial instruments at December 31, 2008 and 2007:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Notional
Amount
|
|
|
Carrying
Value
|
|
|
Estimated
Fair Value
|
|
|
Notional
Amount
|
|
|
Carrying
Value
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
- |
|
|
$ |
33,668 |
|
|
$ |
33,668 |
|
|
|
- |
|
|
$ |
123,652 |
|
|
$ |
123,652 |
|
Securities
available-for-sale
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,266,130 |
|
|
|
2,266,130 |
|
Securities
held-for-trading
|
|
|
- |
|
|
|
936,302 |
|
|
|
936,302 |
|
|
|
- |
|
|
|
18,204 |
|
|
|
18,204 |
|
Commercial
mortgage loan pools(1)
|
|
|
|
|
|
|
1,018,927 |
|
|
|
1,018,927 |
|
|
|
- |
|
|
|
1,240,793 |
|
|
|
1,240,793 |
|
Commercial
mortgage loans
|
|
|
- |
|
|
|
754,707 |
|
|
|
555,536 |
|
|
|
- |
|
|
|
983,387 |
|
|
|
973,750 |
|
Secured
borrowings
|
|
|
- |
|
|
|
480,332 |
|
|
|
480,332 |
|
|
|
- |
|
|
|
751,721 |
|
|
|
751,721 |
|
CDO
borrowings
|
|
|
- |
|
|
|
564,661 |
|
|
|
564,661 |
|
|
|
- |
|
|
|
1,823,328 |
|
|
|
1,598,526 |
|
Commercial
mortgage loan pool borrowings(1)
|
|
|
- |
|
|
|
999,804 |
|
|
|
999,804 |
|
|
|
- |
|
|
|
1,219,094 |
|
|
|
1,219,094 |
|
Senior
unsecured notes
|
|
|
- |
|
|
|
18,411 |
|
|
|
18,411 |
|
|
|
- |
|
|
|
162,500 |
|
|
|
114,473 |
|
Senior
convertible notes
|
|
|
- |
|
|
|
24,960 |
|
|
|
24,960 |
|
|
|
- |
|
|
|
80,000 |
|
|
|
70,186 |
|
Junior
unsecured notes
|
|
|
- |
|
|
|
5,726 |
|
|
|
5,726 |
|
|
|
- |
|
|
|
73,103 |
|
|
|
44,833 |
|
Junior
subordinated notes
|
|
|
- |
|
|
|
12,643 |
|
|
|
12,643 |
|
|
|
- |
|
|
|
180,477 |
|
|
|
103,312 |
|
Currency
forward contracts
|
|
|
- |
|
|
|
4,530 |
|
|
|
4,530 |
|
|
|
- |
|
|
|
4,041 |
|
|
|
4,041 |
|
Currency
swap agreements
|
|
|
- |
|
|
|
(612 |
) |
|
|
(612 |
) |
|
|
- |
|
|
|
(2,093 |
) |
|
|
(2,093 |
) |
Interest
rate swap agreements
|
|
|
1,291,798 |
|
|
|
(99,249 |
) |
|
|
(99,249 |
) |
|
|
2,605,194 |
|
|
|
(39,347 |
) |
|
|
(39,347 |
) |
LIBOR
cap
|
|
|
85,000 |
|
|
|
53 |
|
|
|
53 |
|
|
|
85,000 |
|
|
|
195 |
|
|
|
195 |
|
(1) Represents a controlling
class CMBS that is consolidated for accounting purposes (see Note 7 of the
consolidated financial statements, “Commercial Mortgage Loan Pools”). On an
unconsolidated basis, the fair market value of the net equity is $6,166 and
$14,744 at December 31, 2008 and 2007, respectively.
Notional
amounts are a unit of measure specified in a derivative
instrument. See Note 2 of the Consolidate Financial Statements,
“Significant Accounting Policies”, “Valuation of Financial Instruments”, for a
discussion of the valuation methodology used by the Company.
Note
14
|
CONVERTIBLE
REDEEMABLE PREFERRED STOCK
|
At
December 31, 2008, the Company had 90,874,178 authorized and un-issued shares of
preferred stock.
On April
4, 2008, the Company issued $23,375 of 12% Series E-1 Cumulative Convertible
Redeemable Preferred Stock (the “Series E-1
Preferred Stock”), $23,375 of 12% Series E-2 Cumulative Convertible Redeemable
Preferred Stock (the “Series E-2 Preferred Stock”) and $23,375 12% Series E-3
Cumulative Convertible Redeemable Preferred Stock (the “Series E-3 Preferred
Stock” and, together with the Series E-1 Preferred Stock and Series E-2
Preferred Stock, the “Series E Preferred Stock”). Aggregate net
proceeds to the Company were $69,839. The holder of each of the three
series of Series E Preferred Stock has the right to convert the preferred stock
into Common Stock at $7.49 per share (a 12% premium to the closing price Common
Stock on March 28, 2008, the pricing date).
On or
after April 4, 2012, the 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, the 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 all 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. In connection with the conversion,
the Company paid the holder $390 for accumulated but unpaid dividends and
fractional shares remaining after conversion in accordance with the terms of the
Series E-3 Preferred Stock.
The
holder is a subsidiary of a fund managed by an affiliate of Credit Suisse.
Whenever dividends on the preferred stock are in arrears for six or more
quarterly periods (whether or not consecutive), then the holder of the Series E
Preferred Stock, together with the holders of the Company’s Series C and Series
D Preferred Stock which rank equally with the Series E Preferred Stock, will 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.
On
February 12, 2007, the Company issued $86,250 of 8.25% Series D Cumulative
Redeemable Preferred Stock (“Series D Preferred Stock”), including $11,250 of
Series D Preferred Stock sold to underwriters pursuant to an over-allotment
option. Net proceeds from the offering were $83,259.
The
redemption provisions of the Series C & D Cumulative Redeemable Preferred
Stock (“Preferred Stock”) are as follows:
|
1)
|
The
Preferred Stock has no stated maturity date and the Company is not
required to redeem the shares at any time. The Company has the option to
redeem the Preferred Stock after an agreed-upon date (Series C is May 29,
2008 and Series D is February 12, 2012). On or after such date, the
Company may redeem the Preferred Stock, in whole or in part, for cash at
$25.00 per share, plus accumulated and unpaid dividends, if
any.
|
|
2)
|
The
Preferred Stock is not subject to any sinking fund that contains dollars
set aside for redemption.
|
|
3)
|
The
Preferred Stock is not subject to any mandatory redemption by the
holder.
|
|
4)
|
The
Preferred Stock cannot be converted into any other
securities.
|
In
accordance with Rule 5-02.28 of Regulation S-X and Emerging Issues Task Force
(“EITF”) Topic D-98, the Company concluded that the Preferred Stock should be
classified as permanent equity.
The
following table summarizes Common Stock transactions for the years ended
December 31, 2008 and 2007:
|
|
2008
|
|
|
2007
|
|
|
|
Shares
|
|
|
Net Proceeds
|
|
|
Shares
|
|
|
Net Proceeds
|
|
Dividend
Reinvestment and Stock Purchase Plan (the “Dividend Reinvestment
Plan”)
|
|
|
241,585 |
|
|
$ |
1,401 |
|
|
|
327,928 |
|
|
$ |
3,087 |
|
Sales
agency agreement
|
|
|
5,386,125 |
|
|
|
35,784 |
|
|
|
147,700 |
|
|
|
1,723 |
|
Director
compensation
|
|
|
81,958 |
|
|
|
286 |
|
|
|
5,000 |
|
|
|
42 |
|
Management
and incentive fees*
|
|
|
2,083,503 |
|
|
|
9,619 |
|
|
|
220,440 |
|
|
|
2,657 |
|
Incentive
fees – stock based*
|
|
|
700,864 |
|
|
|
3,089 |
|
|
|
289,155 |
|
|
|
3,470 |
|
Series
E-3 preferred stock conversion
|
|
|
3,119,661 |
|
|
|
23,289 |
|
|
|
- |
|
|
|
- |
|
Private
transaction (see details below)
|
|
|
3,494,021 |
|
|
|
23,154 |
|
|
|
- |
|
|
|
- |
|
Follow-on
offerings
|
|
|
- |
|
|
|
- |
|
|
|
5,750,000 |
|
|
|
62,412 |
|
Share
repurchase
|
|
|
- |
|
|
|
- |
|
|
|
(1,307,189 |
) |
|
|
(12,100 |
) |
Total
|
|
|
15,107,717 |
|
|
$ |
96,622 |
|
|
|
5,433,034 |
|
|
$ |
61,291 |
|
|
·
|
See
Note 17 of 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 $23,154.
On June
12, 2007, the Company completed a follow-on offering of 5,750,000 shares of the
Common Stock at a price of $11.75, which included a 15% option to purchase
additional shares exercised by the underwriter. Net proceeds (after
deducting underwriting fees and expenses) were approximately
$62,412.
Utilizing
a portion of the net proceeds from the convertible senior notes offering, the
Company repurchased 1,307,189 shares of Common Stock on August 29, 2007 with a
value of $12,100.
The
following table summarizes dividends declared and paid by the Company for the
years ended December 31, 2008, 2007 and 2006:
Year
|
|
Dividend
Declared
|
|
|
Dividend
Declared
per Share
|
|
|
Paid in
Current
Year
|
|
|
Paid in
Subsequent
Year
|
|
2008
|
|
$ |
65,928 |
|
|
$ |
0.92 |
|
|
$ |
65,928 |
|
|
$ |
- |
|
2007
|
|
$ |
74,082 |
|
|
$ |
1.19 |
|
|
$ |
55,104 |
|
|
$ |
18,979 |
(1) |
2006
|
|
$ |
66,017 |
|
|
$ |
1.15 |
|
|
$ |
49,246 |
|
|
$ |
16,771 |
(2) |
(1) Paid
on January 31, 2008
(2) Paid
on February 1, 2007
Dividends
related to 2008, 2007 and 2006 were 100% ordinary income.
Note
17
|
TRANSACTIONS
WITH THE MANAGER AND CERTAIN OTHER
PARTIES
|
The
Company has a Management Agreement, an administration agreement and an
accounting services agreement with the Manager, the employer, with its
affiliates, of certain directors and all of the officers of the Company, under
which the Manager and the Company’s officers manage the Company’s day-to-day
investment operations, subject to the direction and oversight of the Company’s
Board of Directors. Pursuant to the Management Agreement and these
other agreements, the Manager and the Company’s officers formulate investment
strategies, arrange for the acquisition of assets, arrange for financing,
monitor the performance of the Company’s assets and provide certain other
advisory, administrative and managerial services in connection with the
operations of the Company. For performing certain of these services,
the Company pays the Manager under the Management Agreement a base management
fee equal to 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 for the applicable
quarter.
The
Manager is entitled 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 ($10.55 per common share at
December 31, 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 provides that the incentive fee
payable to the Manager will be subject to a rolling four-quarter high
watermark.
On March
11, 2009, the Company’s unaffiliated directors approved the First Amendment and
Extension to the 2008 Management Agreement, and the parties entered into the
First Amendment and Extension as of such date.
For the
full one-year term of the renewed contract, the Manager has agreed to receive
all management fees and any incentive fees in Common Stock subject to
(i) the Common Stock continuing to be listed on the NYSE and (ii)
if stockholder approval is required for any issuance of the Common Stock, such
required stockholder approval has been obtained. If the Common Stock is
at any time not listed on the NYSE or if
stockholder approval is required for any issuance of the Common Stock and such
required stockholder approval has not been obtained, such fees will be
payable in cash. The Company’s unaffiliated directors and the Manager
may also mutually agree to defer the payment of any management fee and incentive
fee, in whole or in part. Such deferred fees will be payable in cash
unless the Company’s unaffiliated directors and the Manager mutually agree
otherwise.
The
Common Stock issued and to be issued to the Manager has not been registered
under the Securities Act of 1933, as amended (the “Securities Act”), and may not
be sold by the Manager except pursuant to an effective registration statement or
an exemption from registration. For example, the Manager may sell
such shares pursuant to Rule 144 under the Securities Act subject to compliance
with the terms of such rule, including the six-month holding
period.
The
following is a summary of management and incentive fees incurred for the years
ended December 31, 2008, 2007, and 2006:
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Management
fee
|
|
$ |
11,919 |
|
|
$ |
13,468 |
|
|
$ |
12,617 |
|
Incentive
fee
|
|
|
11,879 |
|
|
|
5,645 |
|
|
|
5,919 |
|
Incentive
fee- stock based
|
|
|
1,128 |
|
|
|
2,427 |
|
|
|
2,761 |
|
Total
management and incentive fees
|
|
$ |
24,926 |
|
|
$ |
21,540 |
|
|
$ |
21,297 |
|
At
December 31, 2008, 2007, and 2006, respectively, management and incentive fees
of $9,666 (payable in Common Stock), $7,067, and $8,989 remain payable to the
Manager and are included on the consolidated statements of financial condition
as a component of other liabilities.
The
Company has administration and accounting services agreements with the
Manager. Under the terms of the administration agreement, the Manager
provides financial reporting, audit coordination and accounting oversight
services to the Company. Under the terms of the accounting services
agreement, the Manager provides investment accounting services to the
Company. For the years ended December 31, 2008, 2007, and 2006, the
Company paid administration and accounting service fees of $920, $473, and $234,
respectively, which are included in general and administrative expense on the
consolidated statements of operations.
The
special servicer for 33 of the Company’s 39 Controlling Class trusts is Midland,
a wholly owned indirect subsidiary of PNC Bank, and therefore a related party to
the Manager. The Company’s fees for Midland’s services are at market
rates.
As
disclosed in Note 11 of the consolidated financial statements, “Borrowings”, on
March 7, 2008, the Company entered into a credit facility with a subsidiary of
BlackRock, Inc. BlackRock, Inc. is the parent of the Manager.
The
Company invested $100,000 in the BlackRock Diamond Fund. The Company
redeemed $25,000 of its investment in BlackRock Diamond on June 30, 2007 and
redeemed the remaining $75,000 plus accumulated earnings on September 30,
2007. Over the life of this investment, the Company recognized a
cumulative profit of $34,853, an annualized return of 20.8%. The
Company did not incur any additional management or incentive fees to the Manager
or its affiliates related to its investment in BlackRock Diamond.
During
2001, the Company entered into a $50,000 commitment to acquire shares in Carbon
I, a private commercial real estate income opportunity fund managed by the
Manager. The Carbon I investment period ended on July 12, 2004 and
the carrying value of the Company’s investment in Carbon I at December 31, 2008
was $1,713. The Company does not incur any additional management or
incentive fees to the Manager related to its investment in Carbon
I. At December 31, 2008, the Company owned approximately 20% of the
outstanding shares in Carbon I.
The
Company entered into an aggregate commitment of $100,000 to acquire shares in
Carbon II, a private commercial real estate income opportunity fund managed by
the Manager. The final obligation to fund capital of $13,346 was
called on July 13, 2007. At December 31, 2008, the carrying value of
the Company’s investment in Carbon II was $40,416. The Company does
not incur any additional management or incentive fees to the Manager related to
its investment in Carbon II. At December 31, 2008, the Company owned
approximately 26% of the outstanding shares in Carbon II.
The
Company is committed to invest up to $5,000, for up to a 10% interest, in AHR
JV. AHR JV invests in U.S. CMBS rated higher than BB. As
of December 31, 2008, the carrying value of the Company’s investment of AHR JV
was $448. 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 $30,872 in AHR International JV. As of December
31, 2008, the carrying value of the Company’s investment in AHR International JV
was $28,199. AHR International JV invests in non-U.S. commercial
mortgage loans and is managed by the Manager. The other shareholder
in AHR International JV, RECP, is managed by or otherwise associated with an
affiliate of Credit Suisse. RECP holds the Company’s 12% Series E
Cumulative Convertible Redeemable Preferred Stock. Moreover, one of the
Company’s directors, Andrew Rifkin, was appointed by RECP.
During
2000, the Company completed the acquisition of CORE Cap, Inc. At the
time of the CORE Cap, Inc. acquisition, the Manager agreed to pay GMAC (CORE
Cap, Inc.’s external advisor) $12,500 over a ten-year period (“Installment
Payment”) to purchase the right to manage the Core Cap, Inc. assets under the
existing management contract (“GMAC Contract”). The GMAC Contract had
to be terminated in order to allow the Company to complete the merger, as the
Company’s management agreement with the Manager did not provide for multiple
managers. As a result the Manager offered to buy out the GMAC
Contract as the Manager estimated it would receive incremental fees above and
beyond the Installment Payment, and thus was willing to pay for, and separately
negotiate, the termination of the GMAC Contract. Accordingly, the value of the
Installment Payment was not considered in the Company’s allocation of its
purchase price to the net assets acquired in the acquisition of CORE Cap,
Inc. The Company agreed that should the Management Agreement with its
Manager be terminated, not renewed or not extended for any reason other than for
cause, the Company would pay to the Manager for services to be performed an
amount equal to the remaining Installment Payment less the sum of all payments
made by the Manager to GMAC. At December 31, 2008, the Installment
Payment is $2,000 payable over two years. The Company is not required
to accrue for this contingent liability.
The
Company has adopted a stock option plan (the “1998 Stock Option Plan”) that
provides for the grant of both qualified incentive stock options that meet the
requirements of Section 422 of the Code and non-qualified stock options, stock
appreciation rights and dividend equivalent rights. Stock options may
be granted to the Manager, directors and officers of the Company and directors,
officers and key employees of the Manager and to any other individual or entity
performing services for the Company.
The
exercise price for any stock option granted under the 1998 Stock Option Plan may
not be less than 100% of the fair market value of the shares of Common Stock at
the time the option is granted. Each option must terminate no more
than ten years from the date it is granted and have vested over either a two or
three-year period. Subject to anti-dilution provisions for stock
splits, stock dividends and similar events, the 1998 Stock Option Plan
authorizes the grant of options to purchase up to an aggregate of 2,470,453
shares of Common Stock.
The
following table summarizes information about options outstanding under the 1998
Stock Option Plan:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding
at January 1
|
|
|
1,312,401 |
|
|
$ |
14.96 |
|
|
|
1,392,151 |
|
|
$ |
14.98 |
|
|
|
1,417,851 |
|
|
$ |
14.87 |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(24,700 |
) |
|
|
8.45 |
|
Retired
|
|
|
1,302,401 |
|
|
|
15.01 |
|
|
|
79,750 |
|
|
|
15.34 |
|
|
|
(1,000 |
) |
|
|
11.81 |
|
Outstanding
at December 31
|
|
|
10,000 |
|
|
$ |
9.11 |
|
|
|
1,312,401 |
|
|
$ |
14.96 |
|
|
|
1,392,151 |
|
|
$ |
14.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at December 31
|
|
|
10,000 |
|
|
$ |
9.11 |
|
|
|
1,312,401 |
|
|
$ |
14.96 |
|
|
|
1,392,151 |
|
|
$ |
14.98 |
|
The
following table summarizes information about options outstanding under the 1998
Stock Option Plan at December 31, 2008:
Exercise Price
|
|
Options
Outstanding
|
|
|
Weighted
Average
Remaining Life
(Years)
|
|
|
Options Exercisable
|
|
$8.44
|
|
|
8,000 |
|
|
|
0.2 |
|
|
|
8,000 |
|
11.81
|
|
|
2,000 |
|
|
|
5.4 |
|
|
|
2,000 |
|
$8.44-$11.81
|
|
|
10,000 |
|
|
|
1.3 |
|
|
|
10,000 |
|
There
were no options granted in 2008, 2007 or 2006. Shares of Common Stock
available for future grant under the 1998 Stock Option Plan at December 31, 2008
were 2,157,653.
The
Company adopted the 2006 Stock Award and Incentive Plan (the “2006 Stock Plan”)
which enables a committee of the Board of Directors of the Company to make
discretionary grants of stock options, stock appreciation rights, shares of
restricted stock, performance shares, performance units or other share-based
awards to selected employees and independent contractors of the Company and its
subsidiaries and of the Manager, and to the Manager.
A total
of 2,816,927 shares of the Common Stock are reserved for issuance under the 2006
Stock Plan. Shares issued under the 2006 Stock Plan may be authorized
but unissued shares. If any shares of Common Stock subject to an
award granted under the 2006 Stock Plan are forfeited, cancelled, exchanged or
surrendered, or if an award terminates or expires without a distribution of
shares, or if shares of Common Stock are surrendered or withheld as payment of
either the exercise price of an award and/or withholding taxes in respect of an
award, those shares of Common Stock will again be available for awards under the
2006 Stock Plan. The 2006 Stock Plan will terminate on February 24,
2016.
The
following table summarizes shares that have been issued under the 2006 Stock
Plan during 2008, 2007 and 2006:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Shares
|
|
|
Net
Proceeds
|
|
|
Shares
|
|
|
Net
Proceeds
|
|
|
Shares
|
|
|
Net
Proceeds
|
|
Management
and incentive fees
|
|
|
513,503 |
|
|
$ |
1,315 |
|
|
|
220,440 |
|
|
$ |
2,657 |
|
|
|
189,077 |
|
|
$ |
2,100 |
|
lncentive
fees - stock based
|
|
|
316,320 |
|
|
|
2,116 |
|
|
|
289,155 |
|
|
|
3,470 |
|
|
|
- |
|
|
|
|
|
Director
compensation
|
|
|
81,958 |
|
|
|
285 |
|
|
|
5,000 |
|
|
|
42 |
|
|
|
5,000 |
|
|
|
64 |
|
Total
shares issued
|
|
|
911,781 |
|
|
$ |
3,716 |
|
|
|
514,595 |
|
|
$ |
6,169 |
|
|
|
194,077 |
|
|
$ |
2,164 |
|
Shares of
Common Stock available for future grant under the 2006 Stock Plan at December
31, 2008 were 1,196,474.
The
Company adopted the 2008 Manager Equity Plan (the “2008 Manager Equity Plan”)
under which the Company issues Common Stock to the Manager as payment of
specified fees earned by the Manager under the Company’s Management
Agreement. A total of 1,570,000 shares of Common Stock are reserved
for issuance under the 2008 Manager Equity Plan. Shares issued under the Plan
may be authorized but unissued shares of Common Stock or authorized and issued
shares of Common Stock held in the Company’s treasury. The 2008
Manager Equity Plan will terminate on May 15, 2018. At December
31, 2008, all of the 1,570,000 available shares had been issued to the Manager
(resulting in net proceeds of $8,309).
Note
19
|
DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES
|
The
Company accounts for its derivative investments under FAS 133, as amended, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
All derivatives, whether designated in hedging relationships or not, are
required to be recorded on the consolidated statements of financial condition at
estimated fair value. If the derivative is designated as a cash flow
hedge, the effective portions of any change in the estimated fair value of the
derivative are recorded in other comprehensive income (“OCI”) and are recognized
on the consolidated statements 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 and as trading derivatives
intended to offset changes in estimated fair value related to securities held as
trading assets. On the date on which the derivative contract is
entered, the Company designates the derivative as either a cash flow hedge or a
trading derivative.
The
reverse repurchase agreements bear interest at a LIBOR-based variable
rate. Increases in the LIBOR rate could negatively impact
earnings. The interest rate swap agreements allow the Company to
receive a variable rate cash flow based on LIBOR and pay a fixed rate cash flow,
mitigating the impact of this exposure.
Interest
rate swap agreements contain an element of risk in the event that the
counterparties to the agreements do not perform their obligations under the
agreements. The Company minimizes its risk exposure by entering into
agreements with parties rated at least A or better by credit rating
agencies. Furthermore, the Company has interest rate swap agreements
established with several different counterparties in order to reduce the risk of
credit exposure to any one counterparty. Management does not expect
any counterparty to default on their obligations.
Where the
Company elects to apply hedge accounting, it formally documents all
relationships between hedging instruments and hedged items, as well as its
risk-management objectives and strategies for undertaking various hedge
transactions. The Company assesses, both at the inception of the
hedge and on an on-going basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash
flows of hedged items. When it is determined that a derivative is not highly
effective as a hedge, the Company discontinues hedge accounting
prospectively.
Occasionally,
counterparties will require the Company or the Company will require
counterparties to provide collateral for the interest rate swap agreements in
the form of margin deposits. Such deposits are recorded as a
component of other assets, other liabilities or restricted
cash. Should the counterparty fail to return deposits paid, the
Company would be at risk for the value of that asset. At December 31,
2008 and 2007, respectively, the balance of such net deposits pledged to
counterparties as collateral under these agreements totaled $33,579 and $35,965
and are recorded as a component of other assets on the consolidated statements
of financial condition.
2008
At
December 31, 2008, the Company had interest rate swaps with notional amounts
aggregating $87,573 designated as cash flow hedges of borrowings under credit
facilities. Cash flow hedges with an estimated fair value of $4,579
were included in derivative liabilities on the consolidated statements of
financial condition. For the year ended December 31, 2008, the net
change in the estimated fair value of the interest rate swaps was a decrease of
$8,981, of which $189 was deemed ineffective and is included as a reduction of
interest expense and $9,170 was recorded as a reduction of OCI. At
December 31, 2008, the $87,573 of notional swaps designated as cash flow hedges
had a weighted average remaining term of 3.0 years.
During
the year ended December 31, 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 December 31, 2008, the
Company had, in aggregate, $11,570 of net losses related to terminated swaps
recorded in OCI. For the year ended December 31, 2008, $2,403 and
$7,084 were reclassified as an increase to interest expense and other gain
(loss), respectively, on the consolidated statements of operations and $2,557 is
expected to be reclassified as an increase to interest expense over the next
twelve months.
On
January 1, 2008, the Company dedesignated CDO interest rate swaps which were
previously classified as hedging 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 year ended December 31, 2008, $4,155 was reclassified
as an increase to interest expense and $5,176 will be reclassified as an
increase to interest expense over the next twelve months.
At
December 31, 2008, the Company had interest rate swaps with notional amounts
aggregating $1,204,225 designated as trading derivatives. Trading
derivatives with an estimated fair value of $3,994 were included in derivative
assets on the consolidated statements of financial condition and trading
derivatives with an estimated fair value of $92,681 were included in derivative
liabilities on the consolidated statements of financial
condition. For the year ended December 31, 2008, the net change in
estimated fair value for these trading derivatives was a decrease of $66,299
which is included as a component of gain (loss) on securities held-for-trading
on the consolidated statements of operations. At December 31, 2008,
the $74,748 notional of swaps designated as trading derivatives had a weighted
average remaining term of 4.8 years.
At
December 31, 2008, the Company had a forward LIBOR cap with a notional amount of
$85,000 and an estimated fair value of $53 which is included in derivative
assets, and the reduction in estimated fair value related to this derivative of
$142 for the year ended December 31, 2008 is included as a component of gain
(loss) in securities held-for-trading on the consolidated statements of
operations.
2007
During
2007, the Company sold a majority of its high credit quality, liquid securities.
The sales of these securities and margin calls resulted in a significant
reduction in 90-day repurchase agreements. As a result of the reduction in the
balance of 90-day repurchase agreements, the forecasted transactions in relation
to certain interest rate swaps that were hedging 90-day repurchase agreements
were deemed probable of not occurring. As a result, the Company
reclassified $10,899 out of OCI which is included in gain (loss) on sale of
available-for-sale securities on the consolidated statements of operations. Of
this amount, $5,369 was previously recorded in OCI and was being reclassified to
interest expense over the weighted average remaining term of the swaps at the
time the swaps were closed. The balance of $5,530 relates to gains associated
with interest rate swaps that were closed in the third quarter of
2007.
At
December 31, 2007, the Company had interest rate swaps with notional amounts
aggregating $1,107,048 designated as cash flow hedges of borrowings under
reverse repurchase agreements and the floating rate debt of its CDOs which had a
weighted average remaining term of 6.4 years. Cash flow hedges with
an estimated fair value of $2,721 are included in derivative instrument assets
on the consolidated statements of financial condition and cash flow hedges with
an estimated fair value of $40,777 are included in derivative instrument
liabilities on the consolidated statements of financial
condition. This liability was collateralized with $14,860 of
restricted cash equivalents recorded on the Company’s consolidated statements of
financial condition. For the year ended December 31, 2007, the net
decrease in the estimated fair value of the interest rate swaps was $35,145, of
which $488 was deemed ineffective and is included as an increase of interest
expense and $34,657 was recorded as a decrease of OCI.
During
the year ended December 31, 2007, the Company terminated 15 of its interest rate
swaps with a notional amount of $778,620 that were designated as cash flow
hedges of borrowings under reverse repurchase agreements. The Company
will reclassify the $4,366 gain in value from OCI to interest expense over 7.58
years, which was the weighted average remaining term of the swaps at the time
they were closed out. At December 31, 2007, the Company has, in
aggregate, $2,804 of net losses related to terminated swaps recorded in
OCI. For the year ended December 31, 2007, $1,206 was reclassified as
an increase to interest expense and $1,122 will be reclassified as an increase
to interest expense for the next twelve months.
At
December 31, 2007, the Company had interest rate swaps with notional amounts
aggregating $1,498,146 designated as trading derivatives which had a weighted
average remaining term of 1.9 years. Trading derivatives with an
estimated fair value of $615 are included in derivative instrument assets on the
consolidated statements of financial condition and trading derivatives with a
fair value of $1,906 are included in derivative instrument liabilities on the
consolidated statements of financial condition. For the year ended
December 31, 2007, the net decrease in the fair value for these trading
derivatives was a $1,295 and is included as an addition to loss on securities
held-for-trading on the consolidated statements of operations.
At
December 31, 2007, the Company had a forward LIBOR cap with a notional amount of
$85,000 and a fair value of $195 that is included in derivative instrument
assets on the consolidated statements of financial condition. The
change in estimated fair value related to this derivative is included as a
component of gain (loss) on securities held-for-trading on the consolidated
statements of operations.
Foreign
Currency
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) on the consolidated statements of
operations. Gains and losses on foreign currency forward commitments
are included in foreign currency gain (loss) on the consolidated statements of
operations. These contracts are recorded at their estimated fair
value at December 31, 2008 and are included in derivative instruments on the
consolidated statement of financial conditions. The Company recorded
foreign currency gain of $3,268, $6,272, and $2,161 for the years ended December
31, 2008, 2007 and 2006, respectively.
Foreign
currency agreements at December 31, 2008 and 2007 consisted of the
following:
|
|
At December 31, 2008
|
|
|
Estimated Fair
Value
|
|
|
Unamortized
Cost
|
|
Average Remaining
Term
|
Currency
swaps
|
|
$ |
(30,236 |
) |
|
|
- |
|
8.3
years
|
CDO
currency swaps
|
|
|
29,624 |
|
|
|
- |
|
8.6
years
|
Forwards
|
|
|
4,530 |
|
|
|
- |
|
30 days
|
Total
|
|
$ |
3,918 |
|
|
|
|
|
|
|
|
At December 31, 2007
|
|
|
Estimated Fair
Value
|
|
|
Unamortized
Cost
|
|
Average Remaining
Term
|
Currency
swaps
|
|
$ |
(12,060 |
) |
|
|
- |
|
7.5
years
|
CDO
currency swaps
|
|
|
9,967 |
|
|
|
- |
|
9.9
years
|
Forwards
|
|
|
4,041 |
|
|
|
- |
|
23 days
|
Total
|
|
$ |
1,948 |
|
|
|
|
|
|
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 year ended
December 31, 2008, the foreign currency translation loss included in accumulated
OCI was $8,608. 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.
As of
January 2009, the Company no longer uses various currency instruments to hedge
the capital portion of its foreign currency risk. The Company
discontinued the use of such instruments in an effort to avoid cash outlays on
the mark to market of these instruments. The Company has been
primarily focused on preserving cash to pay down secured lenders and maintaining
these hedges creates unpredictable cash flows as currency values move in
relation to each other.
The
Company adopted the provisions of FIN 48 on January 1, 2007. As a result of
the adoption of FIN 48, the Company recognized approximately $2,409 in income
tax reserves related to uncertain tax positions during the year ended December
31, 2008. These uncertain tax positions have affected the Company’s
effective tax rate.
The
following table presents the total amounts of unrecognized tax
liabilities:
|
|
2008
|
|
|
2007
|
|
Balance
at January 1
|
|
$ |
- |
|
|
$ |
- |
|
Additions
for tax positions of prior years
|
|
|
(488 |
) |
|
|
- |
|
Reductions
for tax positions of prior years
|
|
|
- |
|
|
|
- |
|
Additions
based on tax positions related to current year
|
|
|
(1,921 |
) |
|
|
- |
|
Lapse
of statute of limitations
|
|
|
- |
|
|
|
- |
|
Settlements
|
|
|
- |
|
|
|
- |
|
Foreign
exchange translation
|
|
|
- |
|
|
|
- |
|
Balance
at December 31
|
|
$ |
(2,409 |
) |
|
$ |
- |
|
The
Company recognizes interest and penalties related to income tax matters as a
component of income tax expense. Related to the unrecognized tax liabilities
noted above, the Company accrued interest of $35 during the year ended December
31, 2008.
The
Company files tax returns in multiple U.S jurisdictions, including New York
state and New York City, as well as foreign jurisdictions. The tax years after
2004 remain open to U.S. federal, state, local, and foreign income tax
examinations,
Note
21
|
NET
INTEREST INCOME
|
The
following is a presentation of the Company net interest income for the year
ended December 31, 2008, 2007 and 2006:
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Interest
Income:
|
|
|
|
|
|
|
|
|
|
Interest
from securities
|
|
$ |
205,813 |
|
|
$ |
198,561 |
|
|
$ |
178,893 |
|
Interest
from commercial mortgage loans
|
|
|
90,904 |
|
|
|
69,981 |
|
|
|
41,773 |
|
Interest
from commercial mortgage loan pools
|
|
|
49,522 |
|
|
|
52,037 |
|
|
|
52,917 |
|
Interest
from cash and cash equivalents
|
|
|
2,930 |
|
|
|
5,857 |
|
|
|
2,403 |
|
Total
interest income
|
|
|
349,169 |
|
|
|
326,436 |
|
|
|
275,986 |
|
Interest
Expense
|
|
|
215,302 |
|
|
|
241,000 |
|
|
|
212,388 |
|
Net
interest income
|
|
$ |
133,866 |
|
|
$ |
85,436 |
|
|
$ |
63,598 |
|
Note
22
|
NET
INCOME PER SHARE
|
Net
income per share is computed in accordance with SFAS No. 128, Earnings Per Share (“FAS
128”). Basic income per share is calculated by dividing net income available to
common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted income per share is calculated
using the weighted average number of shares of common stock outstanding during
the period plus the additional dilutive effect of common stock
equivalents. The dilutive effect of outstanding stock options is
calculated using the treasury stock method, and the dilutive effect of preferred
stock is calculated using the “if converted” method.
|
|
For the year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Numerator
for basic earnings per share
|
|
$ |
(210,878 |
) |
|
$ |
72,320 |
|
|
$ |
75,079 |
|
Interest
expense on convertible senior notes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Dividends
on Series E convertible preferred stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Numerator
for diluted earnings per share
|
|
|
(210,878 |
) |
|
|
72,320 |
|
|
|
75,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share—weighted average common shares
outstanding
|
|
|
71,171,455 |
|
|
|
61,136,269 |
|
|
|
57,182,434 |
|
Dilutive
effect of stock options
|
|
|
- |
|
|
|
1,684 |
|
|
|
2,364 |
|
Assumed
conversion of convertible senior notes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Assumed
conversion of Series E convertible preferred
stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Dilutive
effect of stock based incentive fee
|
|
|
- |
|
|
|
237,240 |
|
|
|
216,866 |
|
Denominator
for diluted earnings per share—weighted average common shares outstanding
and common stock equivalents outstanding
|
|
|
71,171,455 |
|
|
|
61,375,193 |
|
|
|
57,401,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per weighted average common share:
|
|
$ |
(2.96 |
) |
|
$ |
1.18 |
|
|
$ |
1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per weighted average common stock and common stock
equivalents:
|
|
$ |
(2.96 |
) |
|
$ |
1.18 |
|
|
$ |
1.31 |
|
Total
anti-dilutive stock options and warrants excluded from the calculation of net
income per share were 10,000, 1,304,401 and 1,380,151 for the years ended
December 31, 2008, 2007 and 2006, respectively.
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 12,692,829 and 2,458,680 for the years ended December 31, 2008
and 2007, respectively. Total anti-dilutive interest expense related
to convertible senior notes and Series E convertible preferred stock excluded
from the calculation of diluted net income per share was $14,167 and $3,219 for
the years ended December 31, 2008 and 2007, respectively.
Note
23
|
SUMMARIZED
QUARTERLY RESULTS (UNAUDITED)
|
The
following is a presentation of quarterly results of operations:
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Total
Income
|
|
$ |
91,939 |
|
|
$ |
83,358 |
|
|
$ |
84,857 |
|
|
$ |
94,093 |
|
|
$ |
92,465 |
|
|
$ |
91,434 |
|
|
$ |
26,278 |
|
|
$ |
89,644 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
56,854 |
|
|
|
55,839 |
|
|
|
50,683 |
|
|
|
60,085 |
|
|
|
56,652 |
|
|
|
62,525 |
|
|
|
51,113 |
|
|
|
62,551 |
|
Management
fee and Other
|
|
|
16,033 |
|
|
|
8,258 |
|
|
|
6,806 |
|
|
|
9,248 |
|
|
|
5,457 |
|
|
|
5,594 |
|
|
|
4,792 |
|
|
|
4,421 |
|
Total
Expenses
|
|
|
72,887 |
|
|
|
64,097 |
|
|
|
57,489 |
|
|
|
69,333 |
|
|
|
62,109 |
|
|
|
68,119 |
|
|
|
55,905 |
|
|
|
66,972 |
|
Gain
(loss) on sale of securities available-for-sale
|
|
|
- |
|
|
|
6,750 |
|
|
|
- |
|
|
|
158 |
|
|
|
- |
|
|
|
(1,331 |
) |
|
|
- |
|
|
|
(261 |
) |
Dedesignation
of derivative instruments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(7,084 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Gain
(loss) on securities held-for-trading
|
|
|
(4,977 |
) |
|
|
(17 |
) |
|
|
(4,860 |
) |
|
|
388 |
|
|
|
(5,005 |
) |
|
|
(4,435 |
) |
|
|
(22,107 |
) |
|
|
(1,087 |
) |
Unrealized
gain (loss) on securities held-for-trading
|
|
|
(369,780 |
) |
|
|
- |
|
|
|
44,453 |
|
|
|
- |
|
|
|
(247,348 |
) |
|
|
- |
|
|
|
(612,449 |
) |
|
|
- |
|
Unrealized
gain (loss) on swaps classified as held-for-trading
|
|
|
(32,524 |
) |
|
|
- |
|
|
|
37,572 |
|
|
|
- |
|
|
|
(5,859 |
) |
|
|
- |
|
|
|
(65,440 |
) |
|
|
- |
|
Unrealized
gain (loss) on liabilities
|
|
|
478,318 |
|
|
|
- |
|
|
|
(72,061 |
) |
|
|
- |
|
|
|
261,723 |
|
|
|
- |
|
|
|
551,799 |
|
|
|
- |
|
Provision
for loan loss
|
|
|
(25,190 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(18,752 |
) |
|
|
- |
|
|
|
(121,986 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency gain (loss)
|
|
|
(8,041 |
) |
|
|
1,484 |
|
|
|
(2,145 |
) |
|
|
1,371 |
|
|
|
7,273 |
|
|
|
775 |
|
|
|
6,163 |
|
|
|
2,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on impairment of securities
|
|
|
- |
|
|
|
(1,198 |
) |
|
|
- |
|
|
|
(2,900 |
) |
|
|
- |
|
|
|
(2,938 |
) |
|
|
- |
|
|
|
(5,433 |
) |
Net
income (loss) before taxes
|
|
|
56,858 |
|
|
|
26,280 |
|
|
|
30,327 |
|
|
|
23,777 |
|
|
|
15,304 |
|
|
|
15,386 |
|
|
|
(293,697 |
) |
|
|
18,533 |
|
Income
taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,409 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on preferred stock
|
|
|
3,127 |
|
|
|
2,277 |
|
|
|
5,083 |
|
|
|
3,127 |
|
|
|
4,529 |
|
|
|
3,127 |
|
|
|
4,528 |
|
|
|
3,125 |
|
Net
income (loss)available to common stockholders
|
|
$ |
53,731 |
|
|
$ |
24,003 |
|
|
$ |
25,244 |
|
|
$ |
20,650 |
|
|
$ |
10,775 |
|
|
$ |
12,259 |
|
|
$ |
(300,634 |
) |
|
$ |
15,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$ |
0.85 |
|
|
$ |
0.41 |
|
|
$ |
0.36 |
|
|
$ |
0.35 |
|
|
$ |
0.14 |
|
|
$ |
0.19 |
|
|
$ |
(3.89 |
) |
|
$ |
0.24 |
|
Diluted
|
|
$ |
0.79 |
|
|
$ |
0.41 |
|
|
$ |
0.34 |
|
|
$ |
0.34 |
|
|
$ |
0.14 |
|
|
$ |
0.19 |
|
|
$ |
(3.89 |
) |
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from continuing operations per share of Common Stock, after
preferred dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$ |
0.85 |
|
|
$ |
0.41 |
|
|
$ |
0.36 |
|
|
$ |
0.35 |
|
|
$ |
0.14 |
|
|
$ |
0.19 |
|
|
$ |
(3.89 |
) |
|
$ |
0.24 |
|
Diluted
|
|
$ |
0.79 |
|
|
$ |
0.41 |
|
|
$ |
0.34 |
|
|
$ |
0.34 |
|
|
$ |
0.14 |
|
|
$ |
0.19 |
|
|
$ |
(3.89 |
) |
|
$ |
0.24 |
|
Schedule IV - Mortgage Loans on Real Estate
|
December 31, 2008
|
|
Description
|
|
Property
Type
|
|
Location
|
|
Interest rate
|
|
Final Maturity
Date
|
|
Periodic
Payment
Terms
|
|
Face Amount
of Loans
|
|
|
Carrying
Amount of
Loans(1)
|
|
US
Dollar:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Family
|
|
USA
|
|
7.77%
|
|
February
2012
|
|
Interest
only
|
|
$ |
25,000 |
|
|
$ |
25,029 |
|
|
|
Office
|
|
USA
|
|
7.17%
|
|
April
2015
|
|
|
|
|
28,561 |
|
|
|
26,376 |
|
|
|
Storage
|
|
USA
|
|
9.08%
|
|
August
2015
|
|
|
|
|
31,965 |
|
|
|
31,989 |
|
|
|
Retail
|
|
USA
|
|
7.95%
|
|
November
2015
|
|
|
|
|
39,958 |
|
|
|
36,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,484 |
|
|
|
120,204 |
|
USD
<3%
|
|
Various
|
|
Various
US
Cities
|
|
6.2%
- 11.8%
1M
LIBOR +4% -
3M
LIBOR +4.50%
|
|
June
2010 -
December
2018
|
|
|
|
|
228,913 |
|
|
|
103,142 |
|
Total
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
354,397 |
|
|
|
223,346 |
|
Non
US Dollar:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GBP:
|
|
Storage
|
|
UK
|
|
3M
GBP Libor +3.20%
|
|
October
2013
|
|
Interest
Only
|
|
|
35,944 |
|
|
|
35,819 |
|
GBP
<3%
|
|
Various
|
|
UK
|
|
3M
GBP LIBOR+3.50%-
3M
GBP LIBOR + 4.35%
|
|
January
2010 -
July
2015
|
|
|
|
|
38,894 |
|
|
|
26,956 |
|
EUR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
Germany
|
|
3M
Euribor + 3.75%
|
|
July
2011
|
|
|
|
|
67,341
|
|
|
|
67,246 |
|
|
|
Office
|
|
Germany
|
|
3M
Euribor +3.75%
|
|
January
2012
|
|
|
|
|
55,602 |
|
|
|
55,345 |
|
|
|
Office
|
|
Netherlands
|
|
3M
Euribor + 3.90%
|
|
April
2012
|
|
|
|
|
44,602 |
|
|
|
30,905 |
|
|
|
Various
|
|
Europe
|
|
3M
Euribor + 4.85%
|
|
May
2014
|
|
|
|
|
45,980 |
|
|
|
43,135 |
|
|
|
Retail
|
|
Germany
|
|
6.16%
|
|
July
2011
|
|
|
|
|
37,508 |
|
|
|
37,341 |
|
|
|
Retail
|
|
Germany
|
|
11.05%
|
|
January
2012
|
|
|
|
|
41,764 |
|
|
|
36,665 |
|
|
|
Various
|
|
Germany
|
|
3M
Euribor + 5.00%
|
|
March
2009
|
|
|
|
|
31,154 |
|
|
|
25,690 |
|
|
|
Retail
|
|
Germany
|
|
7.63%
|
|
November
2011
|
|
|
|
|
31,642 |
|
|
|
31,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
355,593 |
|
|
|
327,574 |
|
EUR
<3%
|
|
Various
|
|
Various
European
Cities
|
|
3M
Euribor +2.25% -
3M
Euribor + 3.75%
7.50%
|
|
January
2011 -
October
2013
|
|
|
|
|
134,866 |
|
|
|
134,427 |
|
CHF
|
|
Retail
|
|
Switzerland
|
|
3M
CHF LIBOR + 3.00%
|
|
October
2013
|
|
Interest
Only
|
|
|
22,477 |
|
|
|
22,527 |
|
CAD
<3%
|
|
Various
|
|
Canada
|
|
12.25%
- 13.15%
|
|
March
2011 -
April
2017
|
|
Interest
Only
|
|
|
5,293 |
|
|
|
5,091 |
|
Total
Non U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
593,067 |
|
|
|
552,394 |
|
Total
loans
|
|
|
|
|
|
|
|
|
|
|
|
$ |
947,464 |
|
|
|
775,740 |
|
General
loan loss reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,003 |
) |
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
754,737 |
|
(1) The
carrying amount of the loans is net of a $165,928 reserve for possible loan
losses at December 31, 2008.
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
The
Company’s management, under the supervision and with the participation of the
Company’s Chief Executive Officer and the Chief Financial Officer, evaluated the
effectiveness of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)) as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective at December 31, 2008.
Changes
in Internal Control over Financial Reporting
No change
in internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) occurred during the quarter ended December 31, 2008 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
Management’s
Report on Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company’s internal
control over financial reporting is a process designed under the supervision of
the Company’s Chief Executive Officer and Chief Financial Officer and effected
by the Company’s Board of Directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
|
·
|
pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company; and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting at December 31, 2008. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in “Internal
Control-Integrated Framework”.
Based on
its assessment, the Company’s management concluded that, at December 31, 2008,
the Company’s internal control over financial reporting was
effective.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008 has been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report set forth in Part
II, Item 8 of this Annual Report on Form 10-K.
ITEM 9B.
|
OTHER
INFORMATION
|
On March
11, 2009, the Company’s unaffiliated directors approved the First Amendment and
Extension to the 2008 Management Agreement, and the parties entered into the
First Amendment and Extension as of such date.
For the
full one-year term of the renewed contract, the Manager has agreed to receive
all management fees and any incentive fees in the Company’s common stock subject
to (i) the common stock continuing to be listed on the New York Stock
Exchange and (ii)
if stockholder approval is required for any issuance of the Common Stock, such
required stockholder approval has been obtained. If the
Company’s common stock is at any time not listed on the New York Stock Exchange
or
if stockholder approval is required for any issuance of the Common Stock and
such required stockholder approval has not been obtained, such fees will
be payable in cash. The Company’s Board of Directors and the Manager
may also mutually agree to defer the payment of any management fee and incentive
fee, in whole or in part. Such deferred fees will be payable in cash
unless the Company’s Board of Directors and the Manager mutually agree
otherwise.
PART
III
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Information
regarding the Company’s directors, including the audit committee and audit
committee financial experts, and executive officers and compliance with Section
16(a) of the Exchange Act will be included in the Company’s definitive proxy
statement for the 2009 Annual Meeting of Stockholders (the “Proxy Statement”)
and is incorporated herein by reference.
The
Company has adopted Codes of Business Conduct and Ethics that govern both the
Company’s senior officers, including the Company’s chief executive officer and
chief financial officer, and employees. Copies of the Company’s Codes
of Business Conduct and Ethics are available on the Company’s website at
www.anthracitecapital.com and may also be obtained upon request without charge
by writing to the Secretary of the Company, Anthracite Capital, Inc., 40 East
52nd Street, New York, NY 10022. The Company will post to its website
any amendments to the Codes of Business Conduct and Ethics, and any waivers that
are required to be disclosed by the rules of either the SEC or the
NYSE.
Copies of
the Company’s Corporate Governance Guidelines and the charters of the Company’s
Audit Committee, Compensation Committee and Nominating and Corporate Governance
Committee are available on the Company’s website and may also be obtained upon
request without charge as described in the preceding paragraph.
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The
information required by this item will be included in the Proxy Statement and is
incorporated herein by reference.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
information required by this item, including information relating to security
ownership of certain beneficial owners of the Company’s Common Stock and of the
Company’s management, will be included in the Proxy Statement and is
incorporated herein by reference.
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The
information required by this item, including information under the caption
“Certain Relationships and Related Transactions” in the Proxy Statement and
information regarding director independence, will be included in the Proxy
Statement and is incorporated herein by reference.
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The
information required by this item, including information under the caption
“Independent Registered Public Accounting Firm Fees and Services” in the Proxy
Statement, will be included in the Proxy Statement and is incorporated herein by
reference.
PART
IV
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
|
(a)
|
List
of documents filed as part of this
report:
|
|
(1)
|
Consolidated
Financial Statements and Report of Independent Registered Public
Accounting Firm
|
See the
Index to Financial Statements and Schedule set forth in Part II, Item 8 of this
report.
|
(2)
|
Financial
Statement Schedules
|
See the
Index to Financial Statements and Schedule set forth in Part II, Item 8 of this
report.
Please
note that the agreements included as exhibits to this Form 10-K are included to
provide information regarding their terms and are not intended to provide any
other factual or disclosure information about Anthracite Capital, Inc. or the
other parties to the agreements. The agreements contain
representations and warranties by each of the parties to the applicable
agreement that have been made solely for the benefit of the other parties to the
applicable agreement and may not describe the actual state of affairs as of the
date they were made or at any other time.
Exhibit
No.
|
|
Description
|
3.1
|
|
Articles
of Amendment and Restatement of the Company (incorporated by reference to
Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 1999, filed on March 29, 2000)
|
3.2
|
|
Articles
Supplementary of the Company establishing 9.375% Series C Cumulative
Redeemable Preferred Stock (incorporated by reference to Exhibit 3.1 to
the Company’s Current Report on Form 8-K, filed on May 30,
2003)
|
3.3
|
|
Articles
Supplementary of the Company establishing 8.25% Series D Cumulative
Redeemable Preferred Stock (incorporated by reference to Exhibit 3.2 to
the Company’s Registration Statement on Form 8-A, filed on February 12,
2007)
|
3.4
|
|
Articles
Supplementary of the Company establishing 12% Series E-1 Cumulative
Convertible Redeemable Preferred Stock (incorporated by reference to
Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on
April 7, 2008)
|
3.5
|
|
Articles
Supplementary of the Company establishing 12% Series E-2 Cumulative
Convertible Redeemable Preferred Stock (incorporated by reference to
Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed on
April 7, 2008)
|
3.4
|
|
Amended
and Restated Bylaws of the Company (incorporated by reference to Exhibit
3.1 to the Company’s Current Report on Form 8-K, filed on December 12,
2007)
|
4.1
|
|
Junior
Subordinated Indenture, dated as of September 26, 2005, between the
Company and Wells Fargo Bank, National Association, as trustee
(incorporated by reference to Exhibit 4.1 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2005, filed on
March 16, 2006)
|
4.2
|
|
Junior
Subordinated Indenture, dated as of January 31, 2006, between the Company
and JPMorgan Chase Bank, National Association, as trustee (incorporated by
reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2005, filed on March 16,
2006)
|
4.3
|
|
Junior
Subordinated Indenture, dated as of March 16, 2006, between the Company
and Wilmington Trust Company, as trustee (incorporated by reference to
Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2006, filed on May 10, 2006)
|
4.4
|
|
Amended
and Restated Trust Agreement, dated as of September 26, 2005, among the
Company, as depositor, Wells Fargo Bank, National Association, as property
trustee, Wells Fargo Delaware Trust Company, as Delaware trustee, and
three administrative trustees (incorporated by reference to Exhibit 4.4 to
the Company’s Annual Report on Form 10-K for the year ended December 31,
2005, filed on March 16, 2006)
|
4.5
|
|
Amended
and Restated Trust Agreement, dated as of January 31, 2006, among the
Company, as depositor, JPMorgan Chase Bank, National Association, as
property trustee, Chase Bank USA, National Association, as Delaware
trustee, and three administrative trustees (incorporated by reference to
Exhibit 4.5 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2005, filed on March 16, 2006)
|
4.6
|
|
Amended
and Restated Trust Agreement, dated as of March 16, 2006, among the
Company, as depositor, Wilmington Trust Company, as property trustee,
Wilmington Trust Company, as Delaware trustee, and the three
administrative trustees (incorporated by reference to Exhibit 4.2 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2006, filed on May 10, 2006)
|
4.7
|
|
Indenture,
dated as of October 4, 2006, between the Company and Wells Fargo Bank,
N.A. (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2007, filed on May 10,
2007)
|
4.8
|
|
Indenture,
dated as of October 17, 2006, between the Company and Wells Fargo Bank,
N.A. (incorporated by reference to Exhibit 4.2 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2007, filed on
May 10, 2007)
|
4.9
|
|
Junior
Subordinated Indenture, dated as of April 17, 2007, between the Company
and Wells Fargo Bank, N.A., as trustee (incorporated by reference to
Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2007, filed on August 9, 2007)
|
4.10
|
|
Junior
Subordinated Indenture, dated as of April 18, 2007, between the Company
and Wells Fargo Bank, N.A., as trustee (incorporated by reference to
Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2007, filed on August 9, 2007)
|
4.11
|
|
Indenture,
dated as of May 29, 2007, between the Company and Wilmington Trust
Company, as trustee (incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K, filed on May 29,
2007)
|
4.12
|
|
Indenture,
dated as of June 15, 2007, between the Company and Wells Fargo Bank, N.A.,
as trustee (incorporated by reference to Exhibit 4.12 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2007,
filed on March 13, 2008)
|
4.13
|
|
Indenture,
dated as of August 29, 2007, between the Company and Wells Fargo Bank,
N.A., as trustee (incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K, filed on August 29,
2007)
|
10.1a
|
|
Amended
and Restated Investment Advisory Agreement, dated as of March 31, 2008,
between the Company and BlackRock Financial Management, Inc. (incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
filed on April 4, 2008)
|
10.1b*
|
|
First
Amendment and Extension, dated as of March 11, 2009, to the Amended and
Restated Investment Advisory Agreement, dated as of March 31, 2008,
between Anthracite Capital, Inc. and BlackRock Financial Management,
Inc.
|
10.2
|
|
Amended
and Restated Accounting Services Agreement, dated as of March 15, 2007,
between the Company and BlackRock Financial Management, Inc. (incorporated
by reference to Exhibit 10.2 of the Company’s Annual Report on Form 10-K
for the year ended December 31, 2006, filed on March 16,
2007)
|
10.3
|
|
Amended
and Restated Administration Agreement, dated as of March 15, 2007, between
the Company and BlackRock Financial Management, Inc. (incorporated by
reference to Exhibit 10.3 of the Company’s Annual Report on Form 10-K for
the year ended December 31, 2006, filed on March 16,
2007)
|
10.4
|
|
Form
of 1998 Stock Option Incentive Plan (incorporated by reference to Exhibit
10.6 to the Company’s Registration Statement on Form S-11 (File No.
333-40813), filed on March 18, 1998)
|
10.5
|
|
Form
of 2006 Stock Award and Incentive Plan (incorporated by reference to
Exhibit 10.5 of the Company’s Annual Report on Form 10-K for the year
ended December 31, 2006, filed on March 16, 2007)
|
10.6
|
|
Form
of Anthracite Capital, Inc. 2008 Manager Equity Plan (incorporated by
reference to Appendix A to the Company’s Definitive Proxy Statement for
the 2008 Annual Meeting of Stockholders, filed on April 14,
2008)
|
10.7a
|
|
Credit
Agreement, dated as of March 17, 2006, among AHR Capital BofA Limited, as
borrower, the Company, as borrower agent, and Bank of America, N.A., as
lender (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2006,
filed on May 10, 2006)
|
10.7b
|
|
Amendment,
Agreement and Waiver, dated as of August 7, 2008, in respect of the Credit
Agreement, dated as of March 17, 2006 (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)
|
10.8a
|
|
Amended
and Restated Parent Guaranty, dated as of August 7, 2008, executed by the
Company, as guarantor, in favor of Bank of America, N.A., as lender
(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)
|
10.8b
|
|
Third
Omnibus Amendment and Agreement, dated as of January 28, 2009, among the
Company, as borrower agent and guarantor, Anthracite Capital BOFA Funding
LLC, as seller, AHR Capital BofA Limited, as borrower, Bank of America,
N.A., as lender, buyer and buyer agent, and Banc of America Mortgage
Capital Corporation, as buyer (incorporated by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K, filed on February 3,
2009)
|
10.9a
|
|
Master
Repurchase Agreement, dated as of July 20, 2007, among Anthracite Capital
BOFA Funding LLC, as seller, Bank of America, N.A. and Banc of America
Mortgage Capital Corporation, as buyers, and Bank of America, N.A., as
buyer agent (incorporated by reference to Exhibit 10.2 to the Company’s
Current Report on Form 8-K, filed on July 25, 2007)
|
10.9b
|
|
Annex
I, dated as of July 20, 2007, to Master Repurchase Agreement, dated as of
July 20, 2007 (incorporated by reference to Exhibit 10.3 to the
Company’s Current Report on Form 8-K, filed on July 25,
2007)
|
10.9c
|
|
First
Amendment, dated as of October 31, 2007, to the Master Repurchase
Agreement, dated as of July 20, 2007 (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on
November 2, 2007)
|
10.9d
|
|
Amendment
and Agreement, dated as of August 7, 2008, in respect of the Master
Repurchase Agreement, dated as of July 20, 2007 (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)
|
10.10
|
|
Amended
and Restated Guaranty, dated as of August 7, 2008, executed by the
Company, as guarantor, in favor of Bank of America, N.A. and Banc of
America Mortgage Capital Corporation, as buyers, and Bank of America,
N.A., as buyer agent (incorporated by reference to
Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2008, filed on August 11,
2008)
|
10.11a
|
|
Master
Repurchase Agreement, 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 10.10a to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2007, filed on
March 13, 2008)
|
10.11b
|
|
Annex
I, dated as of December 23, 2004, to Master Repurchase Agreement, dated as
of December 23, 2004 (incorporated by reference to Exhibit 10.7 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2004,
filed on March 16, 2005)
|
10.11c
|
|
Amendment
No. 2, dated as of July 8, 2008, to the Master Repurchase Agreement and
Annex I to Master Repurchase Agreement Supplemental Terms and Conditions,
dated as of December 23, 2004 (incorporated by reference to Exhibit 10.2
to the Company’s Current Report on Form 8-K, filed on July 14,
2008)
|
10.12a
|
|
Guaranty,
dated as of December 23, 2004, executed by the Company, as guarantor, for
the benefit of Deutsche Bank AG, Cayman Islands Branch (incorporated by
reference to Exhibit 10.11a to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2007, filed on March 13,
2008)
|
10.12b
|
|
Amendment,
dated as of February 27, 2007, to Guaranty, dated as of December 23, 2004
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report
on Form 8-K, filed on March 1, 2007)
|
10.12c
|
|
Amendment
No. 2, dated as of July 8, 2008, to Guaranty, dated as of December 23,
2004 and amended February 27, 2007 (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K, filed on July 14,
2008)
|
10.13*
|
|
Third
Amended and Restated Multicurrency Revolving Facility Agreement, dated as
of December 31, 2008, among AHR Capital MS Limited, as borrower, Morgan
Stanley Mortgage Servicing Ltd, as the security trustee, Morgan Stanley
Bank, as the initial lender, and Morgan Stanley Principal Funding, Inc.,
as the first new lender and agent
|
10.14a
|
|
Amended
and Restated Parent Guaranty and Indemnity, dated as of February 15, 2008,
executed by the Company, as guarantor, in favor of Morgan Stanley Mortgage
Servicing Ltd, as the security trustee, and Morgan Stanley Principal
Funding, Inc., as the agent (incorporated by reference to Exhibit 10.2 to
the Company’s Current Report on Form 8-K, filed on February 21,
2008)
|
10.14b
|
|
First
Amendment, dated as of April 14, 2008, to Amended and Restated Parent
Guaranty and Indemnity, dated as of February 15, 2008 (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
filed on April 16, 2008)
|
10.14c*
|
|
Second
Amendment, dated as of December 31, 2008, to Amended and Restated Parent
Guaranty and Indemnity, dated as of February 15, 2008
|
10.15a
|
|
Credit
Agreement, dated as of March 7, 2008, between the Company and BlackRock
Holdco 2, Inc. (incorporated by reference to Exhibit 10.16 to the
Company’s Annual Report on Form 10-K for the year ended December 31,
2007, filed on March 13, 2008)
|
10.15b
|
|
Amendment
No. 1 and Reaffirmation Agreement, dated as of December 22, 2008, to the
Credit Agreement, dated as of March 7, 2008 (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on
December 30, 2008)
|
10.16
|
|
Fee
letter, dated February 29, 2008, between BlackRock Holdco 2, Inc. and the
Company (incorporated by reference to Exhibit 10.2 to the Company’s
Current Report on Form 8-K, filed on March 4, 2008)
|
10.17
|
|
Ownership
Interests, Pledge and Security Agreement, dated as of March 7, 2008,
between the Company and BlackRock Holdco 2, Inc. (incorporated by
reference to Exhibit 10.17 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2007, filed on March 13,
2008)
|
10.18a
|
|
Sales
Agreement, dated as of June 4, 2008, among Brinson Patrick Securities
Corporation, the Company and, as to Sections 1.2 and 4.1(g) only,
BlackRock Financial Management, Inc. (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K, filed on June 10,
2008)
|
10.18b
|
|
First
Amendment, dated September 10, 2008, to Sales Agreement, dated June 4,
2008 (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
|
21*
|
|
List
of subsidiaries of the Company as of December 31, 2008
|
31.1*
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
31.2*
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
32*
|
|
Certification
of Chief Executive Officer and Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
* Filed
herewith.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
ANTHRACITE
CAPITAL, INC.
|
|
|
|
Date: March
17, 2009
|
By:
|
/s/ Christopher A.
Milner
|
|
|
Christopher
A. Milner
|
|
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date:
March 17, 2009
|
By:
|
/s/ Christopher A.
Milner
|
|
|
Christopher
A. Milner
|
|
|
Chief
Executive Officer and Director
|
|
|
(Principal
Executive Officer)
|
|
|
|
Date: March
17, 2009
|
By:
|
/s/ James J. Lillis
|
|
|
James
J. Lillis
|
|
|
Chief
Financial Officer and Treasurer
|
|
|
(Principal
Financial Officer and Principal
Accounting
Officer)
|
|
|
|
Date:
March 17, 2009
|
By:
|
/s/ Carl F. Geuther
|
|
|
Carl
F. Geuther
|
|
|
Chairman
of the Board of Directors
|
|
|
|
Date:
March 17, 2009
|
By:
|
/s/ Scott M. Amero
|
|
|
Scott
M. Amero
|
|
|
Director
|
|
|
|
Date:
March 17, 2009
|
By:
|
/s/ Walter Gregg
|
|
|
Walter
Gregg
|
|
|
Director
|
|
|
|
Date:
March 17, 2009
|
By:
|
/s/ John B. Levy
|
|
|
John
B. Levy
|
|
|
Director
|
|
|
|
Date:
March 17, 2009
|
By:
|
/s/ Deborah J. Lucas
|
|
|
Deborah
J. Lucas
|
|
|
Director
|
|
|
|
Date:
March 17, 2009
|
By:
|
/s/ Andrew Rifkin
|
|
|
Andrew
Rifkin
|
|
|
Director
|