FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
Commission File Number 001-13937
ANTHRACITE CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Maryland 13-3978906
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
345 Park Avenue, New York, New York 10154
----------------------------------- -----
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number including area code): (212) 409-3333
---------------
NOT APPLICABLE
(Former name, former address, and former fiscal year if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
(1) Yes X No
--- ---
(2) Yes X No
--- ---
As of May 14, 2001, 34,014,046 shares of voting common stock
($.001 par value) were outstanding.
ANTHRACITE CAPITAL, INC.,
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
----
Item 1. Interim Financial Statements.........................................3
Consolidated Statements of Financial Condition
At March 31, 2001 (Unaudited) and December 31, 2000..................3
Consolidated Statements of Operations
For the Three Months Ended March 31, 2001 and 2000 (Unaudited).......4
Consolidated Statement of Changes in Stockholders' Equity
For the Three Months Ended March 31, 2001 (Unaudited)................5
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2001 and 2000 (Unaudited).......6
Notes to Consolidated Financial Statements (Unaudited)...............7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................15
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........27
Part II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................32
Item 2. Changes in Securities and Use of Proceeds...........................32
Item 3. Defaults Upon Senior Securities.....................................32
Item 4. Submission of Matters to a Vote of Security Holders.................32
Item 5. Other Information...................................................32
Item 6. Exhibits and Reports on Form 8-K....................................32
SIGNATURES ..................................................................33
Part I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Anthracite Capital, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
(in thousands, except per share data)
--------------------------------------------------------------------------------------------------------------------------------
March 31, 2001 December 31, 2000
-------------- -----------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 35,050 $ 37,829
Restricted cash equivalents 23,461 9,484
Securities available for sale, at fair value
Subordinated commercial mortgage-backed securities (CMBS) $294,098 $288,686
Investment grade securities 802,020 389,436
------- -------
Total securities available for sale 1,096,118 678,122
Securities held for trading, at fair value 57,681 54,043
Mortgage loan pools available for sale at fair value - 71,535
Commercial mortgage loans, net 116,552 153,187
Investments in real estate joint ventures 10,393 10,354
Receivable for investments sold 13,475 -
Other assets 17,176 19,097
-------------- ---------------
Total Assets $1,369,906 $1,033,651
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Borrowings:
Secured by pledge of subordinated CMBS $170,384 $161,608
Secured by pledge of other securities available for sale
and cash equivalents 428,796 356,491
Secured by mortgage loans pools - 67,367
Secured by pledge of securities held for trading 62,063 55,212
Secured by pledge of investments in real estate joint ventures 3,385 3,385
Secured by pledge of commercial mortgage loans 55,865 75,279
--------- ---------
Total borrowings $ 720,493 $719,342
Payable for investments purchased 306,837 -
Distributions payable 11,114 9,741
Other liabilities 25,522 31,910
-------------- ---------------
Total Liabilities 1,063,966 760,993
-------------- ---------------
10.5% Series A preferred stock, redeemable convertible, liquidation
preference $34,200 30,517 30,404
-------------- ---------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $0.001 per share; 400,000 shares authorized; 29,792
shares issued and outstanding in 2001; and 25,136 shares issued and
outstanding in 2000 30 25
10% Series B preferred stock, liquidation preference $55,567 in
2001, $56,525 in 2000 42,276 43,004
Additional paid-in capital 354,505 315,533
Distributions in excess of earnings (12,893) (13,437)
Accumulated other comprehensive loss (108,495) (102,871)
-------------- ---------------
Total Stockholders' Equity 275,423 242,254
-------------- ---------------
Total Liabilities and Stockholders' Equity $1,369,906 $1,033,651
============== ===============
The accompanying notes are an integral part of these financial statements.
Anthracite Capital, Inc.
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
--------------------------------------------------------------------------------------------------------------------------------
For the Three For the Three
Months Ended Months Ended
March 31, 2001 March 31, 2000
----------------- ------------------
Income:
Securities available for sale $ 17,247 $ 14,342
Commercial mortgage loans 5,987 1,989
Mortgage loan pools 1,438 -
Trading securities 1,104 -
Earnings from real estate joint ventures 367 -
Cash and cash equivalents 197 291
----------------- ------------------
Total income 26,340 16,622
----------------- ------------------
Expenses:
Interest 11,401 7,467
Interest-trading securities 871 -
Management and incentive fee 2,449 1,290
Other expenses - net 686 887
----------------- ------------------
Total expenses 15,407 9,644
----------------- ------------------
Other gain (losses):
Gain on sale of securities available for sale 1,947 24
Gain on securities held for trading 692 328
Foreign currency gain (loss) 104 (4)
----------------- ------------------
Total other gain (loss) 2,743 348
----------------- ------------------
Income before cumulative transition adjustment 13,676 7,326
Cumulative transition adjustment - SFAS 133 (1,903) -
----------------- ------------------
Net Income 11,773 7,326
----------------- -----------------
Dividends and accretion on preferred stock 2,289 866
----------------- ------------------
Net Income available to Common Shareholders 9,484 6,460
================= ==================
Net income per common share, basic:
Income before cumulative transition adjustment $0.42 $0.31
Cumulative transition adjustment - SFAS 133 (0.07) -
----------------- ------------------
Net income $0.35 $0.31
================== ==================
Net income per common share, diluted:
Income before cumulative transition adjustment $0.39 $0.29
Cumulative transition adjustment - SFAS 133 (0.06) -
----------------- ------------------
Net income $0.33 $0.29
================== ==================
Weighted average number of shares outstanding:
Basic 27,003 20,956
Diluted 31,116 25,037
The accompanying notes are an integral part of these financial statements.
Anthracite Capital, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
For the Three Months Ended March 31, 2001
(in thousands)
------------------------------------------------------------------------------------------------------------------------------------
Series Accumulated
Common B Additional Distributions Other Total
Stock, Preferred Paid-In In Excess Comprehensive Comprehensive Stockholders'
Par Value Stock Capital Of Earnings Loss Income Equity
Balance at January 1, 2001 $25 $43,004 $315,533 ($13,437) ($102,871) $242,254
Issuance of common stock 5 38,216 38,221
Net income 11,773 $11,773 11,773
Net charge associated with current
period hedging transactions (4,303) (4,303) (4,303)
Net amount reclassified into earnings due
to amortization of de-designated hedges 248 248 248
Cumulative transition adjustment -
SFAS 133 1,903 1,903 1,903
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification adjustment (3,472) (3,472) (3,472)
---------
Other Comprehensive loss (5,624)
Comprehensive Income $6,149
=========
Dividends declared-common stock (8,940) (8,940)
Dividends and accretion on
Preferred stock (2,289) (2,289)
Conversion of Series B preferred stock
to common stock (728) 728
-
Compensation cost - stock options 28 28
------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2001 $30 $42,276 $354,505 ($12,893) ($108,495) $275,443
=====================================================================================
Disclosure of reclassification adjustment:
Unrealized holding loss
$(5,419)
Less: reclassification for realized gains
previously recorded as unrealized 1,947
Net charge associated with current period
hedging transactions (4,303)
Net amount reclassified into earnings due
to amortization of de-designated hedges 248
Cumulative transition adjustment - SFAS 133 1,903
---------
Net unrealized loss on securities $(5,624)
==========
The accompanying notes are an integral part of these financial statements.
Anthracite Capital, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)(in thousands)
-------------------------------------------------------------------------------------------------------------------------------
For the Three For the Three
Months Ended Months Ended March
March 31, 2001 31, 2000
-------------- --------
Cash flows from operating activities:
Net income $ 11,773 $ 7,326
Adjustments to reconcile net income to net cash provided by operating
activities:
Net sale of trading securities 54,736 328
Amortization on negative goodwill (425) -
Compensation cost - stock options 28 -
Cumulative transition adjustment - SFAS 133 (1,903) -
Premium amortization (discount accretion), net (7,051) (14)
Non-cash portion of net foreign currency (gain) loss (104) 4
Net gain on sale of securities (2,639) (352)
Earnings from real estate joint ventures (367) -
Distributions real estate joint ventures 328 -
(Increase) decrease in other assets (5,892) 893
(Decrease) increase in other liabilities (3,144) 809
--------------- ---------------------
Net cash provided by operating activities 45,340 8,994
--------------- ---------------------
Cash flows from investing activities:
Purchase of securities available for sale (439,334) (8,650)
Funding of commercial mortgage loans - (30,600)
Repayments received from commercial mortgage loans 36,739 -
Increase in restricted cash equivalents (13,977) -
Principal payments received on securities available for sale 17,528 17,482
Principal payments received on mortgage loan pools 10,981 -
Proceeds from sales of securities available for sale and mortgage loan pools 315,975 15,712
Net proceeds (payments) from hedging securities (5,662) (3,133)
--------------- ---------------------
Net cash provided by (used in) investing activities (77,750) (9,189)
--------------- ---------------------
Cash flows from financing activities:
Net increase in borrowings 1,151 1,439
Proceeds from issuance of common stock, net of offering costs 38,222 -
Distributions on common stock (7,429) (6,079)
Distributions on preferred stock (2,313) -
Purchase of common shares - (39)
--------------- ---------------------
Net cash provided by (used in) financing activities 29,631 (4,679)
--------------- ---------------------
Net decrease in cash and cash equivalents (2,779) (4,874)
Cash and cash equivalents, beginning of period 37,829 22,265
--------------- ---------------------
Cash and cash equivalents, end of period $ 35,050 $17,391
=============== =====================
Supplemental disclosure of cash flow information:
Interest paid $ 15,315 $ 7,195
=============== =====================
Investments purchased not settled $ 306,837 -
=============== =====================
Investments sold not settled $ 13,475 -
=============== =====================
The accompanying notes are an integral part of these financial statements.
Anthracite Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except per share data)
---------------------------------------------------------------------
Note 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Anthracite Capital, Inc. (the "Company"), a Maryland corporation, is a
real estate finance company that generates income based on the spread
between the interest income on its mortgage loans and securities
investments and the interest expense from borrowings used to finance its
investments. The Company seeks to earn high returns on a risk-adjusted
basis to support a consistent quarterly dividend. The Company has
elected to be taxed as a Real Estate Investment Trust, therefore, its
income is largely exempt from corporate taxation. The Company commenced
operations on March 24, 1998.
The Company's business focuses on (i) originating high yield commercial
real estate loans, (ii) investing in below investment grade commercial
mortgage backed securities ("CMBS") where the Company has the right to
control the foreclosure/workout process on the underlying loans, and
(iii) acquiring investment grade real estate related securities as a
liquidity diversification.
The accompanying unaudited financial statements have been prepared in
conformity with the instructions to Form 10-Q and Article 10, Rule 10-01
of Regulation S-X for interim financial statements. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for
complete financial statements. These financial statements should be read
in conjunction with the annual financial statements and notes thereto
included in the Company's annual report on Form 10-K for 2000 filed with
the Securities and Exchange Commission.
In the opinion of management, the accompanying financial statements
contain all adjustments, consisting of normal and recurring accruals
(except for the cumulative transition adjustment for SFAS 133 in the
first quarter 2001 - see note 2), necessary for a fair presentation of
the results for the interim periods. Operating results for interim
periods are not necessarily indicative of the results that may be
expected for the entire year.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the statements of financial condition and revenues and expenses
for the periods covered. Actual results could differ from those
estimates and assumptions. Significant estimates in the financial
statements include the valuation of the Company's mortgage-backed
securities and certain other investments.
Note 2 ACCOUNTING CHANGE - DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", 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 balance sheet at fair value. If the derivative is designated as a
fair value hedge, the changes in the fair value of the derivative and of
the hedged item attributable to the hedged risk are recognized in
earnings. If the derivative is designated as a cash flow hedge, the
effective portions of change in the fair value of the derivative are
recorded in other comprehensive income (OCI) and are recognized in the
income statement when the hedged item affects earnings. Ineffective
portions of changes in the fair value of cash flow hedges are recognized
in earnings.
On January 1, 2001 the Company reclassified certain of its agency debt
securities, with an amortized cost of $64,432 from available-for-sale to
trading. An interest rate swap agreement with a $25,000 notional amount
that had been designated as hedging these debt securities was similarly
reclassified. The unrealized gain of $895 related to the agency debt
securities and the unrealized loss of $2,830 related to the interest
rate swap as of January 1, 2001 were removed from OCI and recorded as
the cumulative transition adjustment to earnings upon adoption of SFAS
133. The net cumulative effect of adopting SFAS 133 was ($1,903) or
($0.07) per share, and is reflected as "Cumulative Transition Adjustment
- SFAS 133" on the consolidated statement of operations.
In addition, on January 1, 2001, the Company re-designated interest rate
swap agreements with notional amounts aggregating $98,000 that had been
hedging available-for-sale debt securities as cash flow hedges of its
variable rate borrowings under reverse repurchase agreements. The fair
value of these swap agreements on January 1, 2001, an unrealized loss of
($9,853), remained in OCI at the date of adoption of FAS 133, and
therefore, did not result in a transition adjustment.
Because of the de-designation and re-designation of the $98,000 interest
rate swaps, the Company is required to amortize the related $9,853
recorded in OCI. Amortization is on a straight-line basis over the
shorter of the life of the swap or the previously hedged assets and is
recognized as a reduction of interest income. For the period ended March
31, 2001, $248 was amortized as a reduction of interest income, and $248
will be amortized as a reduction of interest income each quarter for the
next 12 months.
In addition, on January 1, 2001 the Company re-designated interest rate
swap agreements with notional amounts aggregating $57,744 that had been
hedging available-for-sale debt securities as trading securities. These
interest rate swap agreements were sold in January 2001; the loss of
$795 is included in gain on securities held for trading. As of December
31, 2000 the accumulated loss for these interest rate swaps was $3,226.
This accumulated loss is being amortized as a reduction of income from
securities available for sale over the weighted average life of the
securities these interest rate swaps were hedging on December 31, 2000.
The Company uses interest rate swaps to manage exposure to variable cash
flows on its borrowings under reverse repurchase agreements and as
trading derivatives intended to offset changes in fair value related to
securities held as trading assets. On the date in which the derivative
contract is entered, the Company designates the derivative as either a
cash flow hedge or a trading derivative.
The Company has entered into reverse repurchase agreements to finance
securities available for sale that are not financed under its lines of
credit. 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.
As of March 31, 2001, the Company had interest rate swaps with notional
amounts aggregating $251,000 that were hedging borrowings under reverse
repurchase agreements. Their aggregate fair value was a $9,989 liability
included in other liabilities on the statement of financial condition.
For the three months ended, the net change in the fair value of the
interest rate swaps of $(4,303) was recorded in OCI. None of this net
change in value was deemed ineffective and therefore, nothing was
recognized in earnings relating to the change in value.
As of March 31, 2001, the Company had interest rate swaps with notional
amounts aggregating $25,000 designated as trading derivatives. Their
aggregate fair value at March 31, 2001 was $(2,819), included in trading
securities. For the three months ended March 31, 2001, the change in
fair value for these trading derivatives was ($567) and is included in
gain on securities held for trading in the consolidated statement of
operations.
The implementation of SFAS 133 did not change the manner in which the
Company accounts for its forward currency exchange contracts; these
contracts are carried at fair value, with changes in fair value included
as a component of net foreign currency gain or loss in the consolidated
statement of operations.
The Company 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.
Note 3 NET INCOME PER SHARE
Net income per share is computed in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share.
Basic income (loss) per share is calculated by dividing net income
(loss) available to common shareholders by the weighted average number
of common shares outstanding during the period. Diluted income (loss)
per share is calculated using the weighted average number of common
shares 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 Three For the Three
Months Ended Months Ended
March 31, 2001 March 31, 2000
-------------- --------------
Numerator:
Net Income available to common shareholders before cumulative transition
adjustment $ 11,387 $ 6,460
Cumulative transition adjustment - SFAS 133 (1,903) -
---------- ---------
Numerator for basic earnings per share 9,484 6,460
Effect of 10.5% series A senior cumulative redeemable preferred stock 900 866
---------- ---------
Numerator for diluted earnings per share $10,384 $7,326
========== =========
Denominator:
Denominator for basic earnings per share--weighted average common shares outstanding 27,003 20,956
Effect of 10.5% series A senior cumulative redeemable preferred stock 4,091 4,081
Dilutive effect of stock options 22 -
---------- ---------
Denominator for diluted earnings per share--weighted average common shares
outstanding and common share equivalents outstanding 31,116 25,037
========== =========
Basic net income per weighted average common share:
Income before cumulative transition adjustment $0.42 $0.31
Cumulative transition adjustment - SFAS 133 (0.07) -
---------- ---------
Net income $0.35 $0.31
========== =========
Diluted net income per weighted average common share and common share equivalents:
Income before cumulative transition adjustment $0.39 $0.29
Cumulative transition adjustment - SFAS 133 (0.06) -
---------- ---------
Net income $0.33 $0.29
========== =========
Note 4 SECURITIES AVAILABLE FOR SALE
The Company's securities available for sale are carried at estimated
fair value. The amortized cost and estimated fair value of securities
available for sale as of March 31, 2001 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Security Description Cost Gain Loss Value
----------------------------------------------------------------- --------------- --------------- --------------- ----------------
Commercial mortgage-backed securities ("CMBS"):
CMBS IO's $ 81,069 $ 2,439 $ - $83,508
Investment grade CMBS 90,836 3,448 (7,238) 87,046
Non-investment grade rated subordinated securities 342,473 868 (78,139) 265,202
Non-rated subordinated securities 36,639 807 (8,550) 28,896
----------------------------------------------------------------- --------------- --------------- --------------- ----------------
Total CMBS 551,017 7,562 (93,927) 464,652
Single-family residential mortgage-backed securities ("RMBS"):
Agency adjustable rate securities 89,222 1,155 - 90,377
--------------- --------------- --------------- ----------------
Agency fixed rate securities 541,028 1,005 (944) 541,089
--------------- --------------- --------------- ----------------
Total RMBS 1,181,267 9,722 (94,871) 1,096,118
=============== =============== =============== ================
As of March 31, 2001, an aggregate of $884,781 in estimated fair value
of the Company's securities available for sale was pledged to secure its
collateralized borrowings.
The following table sets forth certain information relating to the
aggregate principal balance and payment status of delinquent mortgage
loans underlying the subordinated CMBS held by the Company as of March
31, 2001:
March 31, 2001
Principal Number of % of
Loans Collateral
Past due 30 days to 60 days $3,234 1 0.04%
Past due 60 days to 90 days 21,586 4 0.24
Past due 90 days or more 27,879 6 0.31
REO 10,107 2 0.11
Total $62,806 13 0.69%
Total principal balance $9,101,437 1,760
The Company's delinquency experience of 0.69% is compared to the 0.99%
for directly comparable collateral experience shown in the Lehman
Brothers CMBS 1998 vintage collateral delinquency index.
To the extent that realized losses, if any, or such resolutions differ
significantly from the Company's original loss estimates, it may be
necessary to reduce the projected GAAP 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 GAAP yields
are appropriate.
In July of 2000, the FASB's Emerging Issues Task Force reached a
consensus on Issue 99-20, Recognition of Interest Income and Impairment
on Purchased and Retained Beneficial Interests in Securitized Financial
Interests. This issue provides guidance on the appropriate methodology
to be used in recognizing changes in the estimated yield on asset-backed
securities, and in determining whether impairment exists. This consensus
is to be applied in the second quarter of 2001. The Company's management
does not believe that application of this consensus will have a material
impact on the Company's financial statements, but it may require earlier
recognition of impairment of CMBS investments than under previous
guidance, should the Company experience credit losses on the loans
underlying a CMBS investment in amounts greater than anticipated at
acquisition.
As of March 31, 2001, the anticipated weighted average unleveraged yield
to maturity based upon adjusted cost of the Company's subordinated CMBS
was 9.83% per annum, and of the Company's other securities available for
sale was 7.82% per annum. The Company's anticipated yields to maturity
on its subordinated CMBS and other securities available for sale are
based upon 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 and liquidations), the pass-through
or coupon rate and interest rate fluctuations. Additional factors that
may affect the Company's anticipated yields to maturity on its
subordinated CMBS include interest payment shortfalls due to
delinquencies on the underlying mortgage loans, and the timing and
magnitude of credit losses on the mortgage loans underlying the
subordinated 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 anticipated yields to maturity, discussed above and
elsewhere, will be achieved.
During the three months ended March 31, 2001, the Company sold all of
its mortgage loan pools. The gain on the sale was $723.
Note 5 SECURITIES HELD FOR TRADING
Securities held for trading reflect short-term trading strategies, which
the Company employs from time to time, designed to generate economic and
taxable gains. As part of its trading strategies, the Company may
acquire long or short positions in U.S. Treasury or agency securities,
forward commitments to purchase such securities, financial futures
contracts and other fixed income or fixed income derivative securities.
Any taxable gains from such strategies will be applied as an offset
against the tax basis capital loss carry forward that the Company
incurred during 1998 as a result of the sale of a substantial portion of
its securities available for sale.
The Company's securities held for trading are carried at estimated fair
value. At March 31, 2001, the Company's securities held for trading
consisted of FNMA Mortgage Pools with an estimated fair value of $60,500
and a interest rate swap agreement which represented a notional amount
of $25,000 and a fair value of $(2,189). The FNMA Mortgage Pools, and
the underlying mortgages, bear interest at fixed rates for specified
periods, generally three to seven years after which the rates are
periodically reset to market.
The Company's trading strategies are subject to the risk of
unanticipated changes in the relative prices of long and short positions
in trading securities, but are designed to be relatively unaffected by
changes in the overall level of interest rates.
Note 6 COMMERCIAL MORTGAGE LOANS
A summary of activity for commercial mortgage loans at March 31, 2001 is
as follows:
March 31, 2001
---------------
Balance at beginning of period $153,187
Principal payments received during the period (1,635)
Proceeds from repayment of mortgage loans (35,000)
---------------
Balance at end of period $116,552
===============
In March 2001, a $35,000 commercial real estate construction loan
secured by a second mortgage on an office complex located in Santa
Monica, California was satisfied in full. The original maturity of the
loan was August 2001. Upon repayment, the remaining unamortized
commitment fee was recognized and recorded as additional interest
income.
Note 7 COMMON STOCK
On February 14, 2001 the Company completed a secondary offering of
4,000,000 shares of its common stock in an underwritten public offering.
The aggregate net proceeds to the Company (after deducting underwriting
fees and expenses) were approximately $33,200. The Company had granted
the underwriters an option, exercisable for 30 days, to purchase up to
600,000 additional shares of Common Stock to cover over-allotments. This
option was exercised on March 13, 2001 and resulted in net proceeds to
the Company of approximately $5,000.
On May 11, 2001, the Company completed a secondary offering of 4,000,000
shares of its common stock in an underwritten public offering. The
aggregate net proceeds to the Company (after deducting underwriting fees
and expenses) were approximately $37,800. The Company had granted the
underwriters an option, exercisable for 30 days, to purchase up to
600,000 additional shares of Common Stock to cover over-allotments.
On March 15, 2001, the Company declared distributions to its common
shareholders of $0.30 per share, payable on April 30, 2001 to
stockholders of record on March 30, 2001. For U.S. Federal income tax
purposes, the dividends are expected to be ordinary income to the
Company's stockholders.
Note 8 TRANSACTIONS WITH AFFILIATES
The Company has a management agreement (the "Management Agreement") with
BlackRock Financial Management, Inc. (the "Manager"), a majority owned
indirect subsidiary of PNC Financial Services Group, Inc. ("PNC Bank")
and the employer of certain directors and officers of the Company, under
which the Manager manages the Company's day-to-day operations, subject
to the direction and oversight of the Company's Board of Directors. The
Management Agreement expires on March 20, 2002. The Company pays the
Manager an annual base management fee equal to a percentage of the
average invested assets of the Company as defined in the Management
Agreement. The base management fee is equal to 1% per annum of the
average invested assets rated less than BB- or not rated, 0.75% of
average invested assets rated BB- to BB+, and 0.35% of average invested
assets rated above BB+.
The Company incurred $1,866 and $1,290 in base management fees in
accordance with the terms of the Management Agreement for the three
months ended March 31, 2001 and 2000 respectively. In accordance with
the provisions of the Management Agreement, the Company recorded
reimbursements to the Manager of $37 and $100 for certain expenses
incurred on behalf of the Company during the three months ended March
31, 2001 and 2000, respectively.
The Company will also pay the Manager, as incentive compensation, an
amount equal to 25% of the funds from operations of the Company (as
defined) plus gains (minus losses) from debt restructuring and sales of
property, before incentive compensation, in excess of the amount that
would produce an annualized return on equity equal to 3.5% over the
ten-year U.S. Treasury Rate as defined in the Management Agreement. For
purposes of the incentive compensation calculation, equity is generally
defined as proceeds from issuance of Common Stock before underwriting
discounts and commissions and other costs of issuance. The Company
incurred $583 in incentive compensation for the three months ended March
31, 2001. The Company did not pay incentive compensation for the three
months ended March 31, 2000.
Under the terms of an administration agreement, the Manager provides
financial reporting, audit coordination and accounting oversight
services. The Company pays the Manager a monthly administrative fee at
an annual rate of 0.06% of the first $125 million of average net assets,
0.04% of the next $125 million of average net assets and 0.03% of
average net assets in excess of $250 million subject to a minimum annual
fee of $120. For both the three months ended March 31, 2001 and March
31, 2000, the administration fee was $30.
On March 30, 2001, the Company purchased two certificates representing a
1% interest in PNC Loan Trust - III for an aggregate investment of
$1,732. These certificates were purchased from PNC Bank, an affiliate.
The assets of the Trusts consist of commercial mortgage loans originated
or acquired by PNC. The Company has a committed line of credit for
$4,500 from PNC Funding Corp., a wholly owned indirect subsidiary of PNC
Bank, to borrow up to 90% of the fair market value of the Company's
interest in such Trusts. Outstanding borrowings against this line of
credit bear interest at a LIBOR based variable rate. As of March 31,
2001, there were no outstanding borrowings against this line of credit.
During the three months ended March 31, 2001, the Company purchased
twelve certificates each representing a 1% interest in different classes
of Owner Trust NS I Trust ("Owner Trusts") for an aggregate investment
of $37,868. These certificates were purchased from PNC Bank. The assets
of the Owner Trusts consist of commercial mortgage loans originated or
acquired by an affiliate of PNC. The Company entered into a $50,000
committed line of credit from PNC Funding Corp. to borrow up to 95% of
the fair market value of the Company's interest in the Owner Trusts.
Outstanding borrowings against this line of credit bear interest at a
LIBOR based variable rate. As of March 31, 2001, there was $35,974
borrowed under this line of credit. The Company earned $121 from the
Owner Trusts and paid interest of approximately $99 to PNC Funding Corp.
as interest on borrowings under a related line of credit for the three
months ended March 31, 2001.
Note 9 BORROWINGS
Certain information with respect to the Company's collateralized
borrowings at March 31, 2001 is summarized as follows:
Lines of Reverse Total
Credit and Repurchase Collateralized
Term Loans Agreements Borrowings
----------------------------------------------
Outstanding borrowings $ 151,323 $569,170 $720,493
Weighted average borrowing rate 6.31% 5.28% 5.50%
Weighted average remaining maturity 174 days 22 days 54 days
Estimated fair value of assets pledged $176,312 $708,469 $884,781
As of March 31, 2001, $24,803 of borrowings outstanding under the lines
of credit were denominated in pounds sterling and interest payable is
based on sterling LIBOR.
As of March 31, 2001, the Company's collateralized borrowings had the
following remaining maturities:
Lines of Reverse Total
Credit and Repurchase Collateralized
Term Loan Agreements Borrowings
----------- ----------- --------------
Within 30 days $40,324 $518,666 $558,990
31 to 59 days - 50,504 50,504
Over 60 days 110,999 - 110,999
----------- ----------- --------------
$151,323 $569,170 $720,493
=========== =========== ==============
Under the lines of credit and the reverse repurchase agreements, the
respective lender retains the right to mark the underlying collateral to
estimated market value. A reduction in the value of its pledged assets
will require the Company to provide additional collateral or fund margin
calls. From time to time, the Company expects that it will be required
to provide such additional collateral or fund margin calls.
The Company repaid its $17,500 three year term financing secured by the
Company's $35,000 Santa Monica Loan in March 2001 when the Santa Monica
Loan was paid off in full.
The Company has a facility with ABN Amro, in the amount of $200,000,
which matures on June 18, 2001, and bears interest at a variable based
LIBOR rate. As of March 31, 2001, outstanding borrowing under the ABN
Amro facility was $25,264. This amount was repaid in April 2001 when the
sale of the mortgage loan pool assets was completed.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General:
During the first quarter of 2001 the Company's stock posted a total
return of 29.4%. The financial markets are placing greater value on
consistent earnings and recognizing the Company's ability to perform
versus expectations. The Company is focused on increasing scale with the
long-term goals of increasing earnings, increasing dividends and
providing greater financial flexibility. Through May 11, 2001 the
Company issued 8,600,000 shares of common stock at prices significantly
in excess of GAAP book value. The Federal Reserve Board's dramatic
reductions in short term rates has created a positive environment to
invest accretively using the Company's traditional investment
strategies. The Company is currently deploying its new capital in the
investment grade real estate related securities sector employing greater
leverage and less credit risk to create a higher level of operating
earnings. This strategy will be followed by a continued focus on
strategic redeployment of this capital into the high yield commercial
real estate loan portfolio, creating a sustainable level of higher
earnings on a risk adjusted basis. The Company believes that this
approach will allow shareholders to benefit from rising dividends and
improved stock market valuation.
The Company's business focuses on (i) originating high yield commercial
real estate loans, (ii) investing in below investment grade commercial
mortgage backed securities ("CMBS") where the Company has the right to
control the foreclosure/workout process on the underlying loans, and
(iii) acquiring investment grade real estate related securities.
Company management believes that this represents an integrated strategy
where each line of business supports the others and creates additional
value for shareholders over and above operating each line in isolation.
The commercial real estate loans provide high risk adjusted returns for
shorter periods of time, the CMBS portfolio provides diversification and
high loss adjusted returns over a weighted average life of approximately
10 years, and the investment grade securities investments are an
actively managed portfolio that supports the liquidity needs of the
Company while earning attractive returns.
These strategies are pursued within an aggregate risk management
framework that seeks to limit the exposure of the Company's equity and
earnings to changes in interest rates and other factors beyond the
Company's control.
The principal risks that the Company faces are (i) credit risk on the
high yield real estate loans and securities it underwrites, (ii)
interest rate risk on the spread between the rates (typically one month
LIBOR) at which the Company borrows and the generally longer term rates
(as represented by the U.S. Ten Year Treasury) at which the Company
lends; and (iii) funding risk in the amount and cost of debt financing
employed by the Company over time versus the level of such funding that
is sustainable by the financing markets. These risks are discussed in
more detail below, under the heading, "Quantitative and Qualitative
Disclosures About Market Risk and under Capital Resources and
Liquidity".
The Company also provides financing through certain real estate loan
arrangements that, because of their nature, qualify either as real
estate or joint venture investments for financial reporting purposes.
The following discussion should be read in conjunction with the
financial statements and related notes. Dollar amounts are expressed in
thousands, other than per share amounts.
Market Conditions:
Commercial Real Estate Conduit Credit: The Company considers delinquency
information from the Lehman Brothers Conduit Guide for 1998 transactions
to be the most relevant measure of market conditions applicable to its
below investment grade CMBS holdings. Pursuant to these statistics as of
March 31, 2001, 40 different securitizations were included in the index
and 0.99% of principal balances were delinquent. As of December 31,
2000, 41 securitizations had 0.77% of principal balances delinquent. The
broader measure of all transactions tracked in the Conduit Guide since
1994 also provides relevant comparable information. As of March 31,
2001, 180 securitizations were being monitored among the larger universe
and 0.94% of outstanding balances were delinquent, compared to 180
securitizations included as of December 31, 2000 and 0.77% delinquent.
Morgan Stanley Dean Witter (MSDW) also tracks CMBS loan delinquencies
using a slightly smaller universe. Their index tracks all CMBS
transactions with more than $200,000 of collateral that have been
seasoned for at least one year. This will generally adjust for the lower
delinquencies that occur in newly originated collateral. As of March 31,
2001, MSDW delinquencies on 150 securitizations were 1.27%. As of
December 31, 2000 this same index tracked 144 securitizations with
delinquencies of 1.01%. Over the life of these types of transactions,
delinquencies and issues will naturally increase.
Real Estate: The slowing economy has had different effects on each
property type. Rent growth has stopped for office properties as space
becomes available in the sublet market and users no longer inventory
space based on high growth expectations. Retail property markets have
yet to experience a slow down in consumer spending, but properties have
been impacted by disparate anchor tenant performance. Multifamily
properties have been the beneficiary of the slowdown as job layoffs and
economic uncertainty lead households to remain renters rather than buy a
home. The lodging sector may also slow as business travel expenses are
further reduced.
Real Estate Capital Markets: CMBS exhibited modest spread tightening at
the BB level and modest widening at the B rating category. Increasing
volume of mortgage CBO's has created demand for BB rated CMBS and
increased money manager participation in the sector. Single-B bonds are
not generally included in CBO structures and generally are bought in
conjunction with the first-loss bonds in a securitization. Due to the
low interest rate environment, and the increased bid/ask spread between
buyers and sellers, mortgage debt is increasingly viewed as an
alternative to a sale of real property. Real estate equity mutual fund
flows turned negative in the first quarter of 2001 as outflows totaled
$11,000. This marked a turnaround from the positive inflows of $63,000
compared to the fourth quarter of 2000. Year-to-date flows through the
first week of May 2001 were negative $38,000. All figures are exclusive
of distributions as reported by Salomon Smith Barney equity research.
CMBS: CMBS credit spreads remain at historically wide levels despite
continued strength in the commercial real estate credit markets.
Corporate high yield spreads widened considerably at the end of 2000.
The chart below compares the credit spreads for high yield CMBS to high
yield corporate bonds.
Average Credit Spreads (in basis points)*
-----------------------------------------
BB CMBS BB Corporate Difference
------- ------------ ----------
As of March 31, 2001 556 448 108
As of December 31, 2000 558 523 35
B CMBS B Corporate Difference
------- ------------ ----------
As of March 31, 2001 990 818 172
As of December 31, 2000 987 978 9
* Source - Lehman Brothers CMBS High Yield Index & Lehman Brothers
High Yield Index
Interest Rates: During the first quarter of 2001 the yield on the
ten-year U.S. Treasury Note dropped by 19 basis points from 5.11% to
4.92%. At the beginning of 2001 the Federal Reserve Board began a
dramatic reversal of short-term policy by reducing rates in 50 basis
points increments. By the end of March the Fed had reduced short-term
rates by 150 basis points. This caused one month LIBOR to drop from
6.56% to 5.09% by quarter end. The outlook for short-term rates
indicates a continuing bias towards easing. On April 12, 2001 the Fed
once again surprised the market with another 50 basis point reduction.
Effect of Market Conditions on Company Performance:
Commercial Mortgage Backed Securities: The Company's below investment
grade CMBS represent approximately $608,109 of par collateralized by
underlying pools of first lien commercial mortgages. The CMBS owned by
the Company include 1,760 loans with an aggregate principal balance of
over $9.1 billion as of March 31, 2001. The Company is in a first loss
position with respect to these loans. The Company manages its credit
risk through conservative underwriting, diversification, active
monitoring of loan performance and exercise of its right to control the
workout process as early as possible. All of these processes are based
on the extensive intranet-based analytic systems developed by BlackRock.
In underwriting loans, the Company performs site inspections and/or
desktop reviews of all loans in the pools. This process includes
detailed analysis of regional economic factors, industry outlooks,
project viability and documentation. Unacceptable risks are removed from
the pool. An assumption of expected losses is developed and the
securities are priced accordingly.
Active monitoring of loan performance is a critical function that is
performed via electronic uploads of information gathered from the loan
servicers, PNC Bank and external data providers. This internet based
system allows the Company to monitor payments, debt service coverage
ratios, regional economic statistics, general real estate market trends
and other relevant factors.
The Company also uses the internet based system to monitor
delinquencies. The Company updates this information monthly allowing for
more detailed analysis of loans before problems develop. In addition the
Company tracks debt service coverage ratios ("DSCR") on all loans on a
quarterly basis. The current DSCR information is compared to the
underwritten information to develop an understanding of the property
performance trends.
The following table shows the comparison of delinquencies:
March 31, 2001 December 31, 2000
Number of % of Number of % of
Principal Loans Collateral Principal Loans Collateral
--------- --------- ---------- --------- --------- ----------
Past due 30 days to 60 days $3,234 1 0.04% $6,319 3 0.07%
Past due 60 days to 90 days 21,586 4 0.24 7,963 2 0.09
Past due 90 days or more 27,879 6 0.31 28,526 5 0.31
Real Estate owned 10,107 2 0.11 10,145 2 0.11%
-----------------
Total Delinquent $62,806 13 0.69% $52,953 12 0.58%
----------------
Total Principal Balance $9,101,437 1,760 $9,137,150 1,765
-----------------------
Of the 13 delinquent loans as of March 31, 2001, five were delinquent
due to technical reasons, two were REO and being marketed for sale,
three were in foreclosure, and the remaining three loans were in workout
negotiations. Realizing the estimated losses on all the properties
currently in delinquency would not cause the Company to change its loss
adjusted yields. The 13 delinquent loans do not indicate any weakness in
any geographic area or property type.
During the first quarter the Company negotiated and accepted a
discounted pay off for one loan secured by an office building in
Kingston, NY. This loan was not delinquent at any time. This property is
in a market that has been experiencing significant vacancy rates for an
extended period of time. At acquisition the Company projected there
would be a loss on this loan of $3,300. The actual realized loss on this
transaction was $2,445. The excess of the projected loss over the actual
loss will be allocated to other loans in the pool.
The Company's delinquency experience of 0.69% remains slightly better
than the 0.99% for directly comparable collateral experience shown in
the Lehman Brothers Conduit Guide for 1998 Transactions.
During the first quarter of 2001 the Company also experienced early
payoffs of $12,992, representing 0.14% of the existing pool balance.
These loans were paid at par with no loss. The anticipated losses
attributable to these loans will be reallocated to the loans remaining
in the pools.
The Company's DSCR monitoring process shows improving debt service
coverage across the aggregate portfolio. This process generally has a
3-6 month lag so this information is as of December 31, 2000.
Subsequent to March 31, 2001 one of the REO properties was sold. The
realized loss to the trust is expected to be approximately $1,000. This
is well within expectations and will not cause a change in loss-adjusted
yields on the portfolio.
During April of 2001 two of the delinquent loans became current; both
were loans on healthcare facilities. Also in April four loans became
delinquent; two are loans on multifamily properties, one office building
and one hotel. The four loans are in diverse locations.
The unrealized loss on the Company's holdings of CMBS at March 31, 2001
was $85,149. This decline in the value of the investment portfolio
represents market valuation changes and is not due to credit experience
or credit expectations. The adjusted purchase price of the Company's
CMBS portfolio as of March 31, 2001 represents approximately 62% of its
par amount. As the portfolio matures the Company expects to recoup the
unrealized loss, provided that the credit losses experienced are not
greater than the credit losses assumed in the purchase analysis. The
Company performs a detailed review of its loss assumptions on a
quarterly basis and will adjust them when it believes that credit
experience or expectations justify such an adjustment. As of March 31,
2001 the Company concluded that real estate credit fundamentals remain
solid, and the Company believes there has been no material change in the
credit quality of its portfolio. 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. This is the natural course for this type of security and is
built into the loss expectations of the portfolio. This would negatively
affect the market value and liquidity of the portfolio, but will not
affect its credit performance.
Investment Grade Real Estate Related Securities: As part of the
acquisition of CORE Cap, Inc. in May 2000 the Company inherited three
securities backed by franchise loans originated by Franchise Mortgage
Acceptance Corporation ("FMAC"). The securities were the class B, C and
D securities issued by the FMACT 1998 - BA trust. The respective credit
ratings at the date of acquisition were AA, A and BBB. The Company
currently owns $16,366 of class B principal and $10,829 of class C
principal.
The trust is collateralized by loans on 365 properties to 75 borrowers.
The quality of information provided by the servicer on underlying
collateral has been poor. In March 2001 class B was downgraded to A and
class C was downgraded to BB. These bonds were marked down to dollar
prices of 70 and 50 respectively. At these marks, the unrealized losses
on these two positions are $2,700 and $4,538 respectively. The Company's
current strategy is to force the servicer to provide timely and accurate
information so the bonds may be properly evaluated.
Commercial Lending: The Company also owns five mezzanine whole loans and
two preferred equity interests in partnerships that own office
buildings. The Company's commercial loan portfolio generally emphasizes
larger transactions located in metropolitan markets as compared to the
loans in the CMBS portfolio.
In March 2001, a $35,000 commercial real estate construction loan
secured by a second mortgage on an office complex located in Santa
Monica, California was satisfied in full. The original maturity of the
loan was August 2001.
Interest Rates: The Company's earnings depend, in part, on the
relationship between long-term interest rates and short-term interest
rates. A significant part of Company's investments bear interest at
fixed rates determined by reference to the yields of medium or long-term
U.S. Treasury securities or at adjustable rates determined by reference
(with a lag) to the yields on various short-term instruments.
Approximately $101,552 of the Company's assets earn interest at rates
that are determined with reference to LIBOR. All of the Company's
borrowings bear interest at rates that are determined with reference to
LIBOR. To the extent that interest rates on the Company's borrowings
increase without an offsetting increase in the interest rates earned on
the Company's investments and hedges, the Company's earnings could be
negatively affected. The chart below compares the rate for the ten-year
U.S. Treasury securities to the one-month LIBOR rate.
Ten Year One month
U.S Treasury Securities LIBOR Difference
----------------------- --------- ----------
March 31, 2001 4.92% 5.09% 0.17%
December 31, 2000 5.11% 6.56% 1.45%
The decrease in LIBOR from December 31, 2000 to March 31, 2001 had a
positive impact on the Company's financing costs. On May 11, 2001 one
month LIBOR was 4.12%, and the ten-year U.S. Treasury Note was 5.49%,
creating a positively sloped yield curve of 1.37%.
Recent Events:
On May 11, 2001, the Company completed a secondary offering of 4,000,000
shares of its common stock in an underwritten public offering. The
aggregate net proceeds to the Company (after deducting underwriting fees
and expenses) were approximately $37,800. The Company has granted the
underwriters an option, exercisable for 30 days, to purchase up to
600,000 additional shares of Common Stock to cover over-allotments.
This transaction was done on a spot basis to take advantage of the
significant earnings accretion opportunities that developed when the
yield curve steepened dramatically following the Federal Reserve's
fourth 50 basis point rate cut in 2001. The Company sought to act
quickly to take advantage of this opportunity and was able to issue
stock at a significant premium to GAAP book value. This is consistent
with the Company's long-term goal of increasing scale to provide higher
earnings, higher dividends and improved valuations.
Funds From Operations (FFO): Most industry analysts, including the
Company, consider FFO an appropriate supplementary measure of operating
performance of a REIT. In general, FFO adjusts net income for non-cash
charges such as depreciation, certain amortization expenses and gains or
losses from debt restructuring and sales of property. However, FFO does
not represent cash provided by operating activities in accordance with
GAAP and should not be considered an alternative to net income as an
indication of the results of the Company's performance or to cash flows
as a measure of liquidity.
The Company computes FFO in accordance with the definition recommended
by the National Association of Real Estate Investment Trusts. The
Company believes that the exclusion from FFO of gains or losses from
sales of property was not intended to address gains or losses from sales
of securities as it applies to the Company. Accordingly, the Company
includes gains or losses from sales of securities in its calculation of
FFO.
The Company's FFO for the three months ended March 31, 2001 and 2000 was
$11,773, and $7,326, respectively, which was the same as its reported
GAAP net income for the periods. The Company reported cash flows
provided by operating activities of $45,340 and $8,994, cash flows used
in investing activities of $77,750 and of $9,189 and cash flows provided
by (used in) financing activities of $29,631 and $(4,679) in its
statement of cash flows for the three months ended March 31, 2001 and
2000, respectively.
Results of Operations: Net income for the three months ended March 31,
2001 was $11,773 or $0.35 per share ($0.33 diluted). Net income for the
three months ended March 31, 2000 was $7,326, or $0.31 per share ($0.29
diluted). Further details of the changes are set forth below.
The following tables sets forth information regarding the total amount
of income from certain of the Company's interest-earning assets.
For the Three Months Ended March 31
2001 2000
Interest Interest
Income Income
------------------------------------
CMBS $10,307 $9,093
Other securities available for sale 6,940 5,249
Commercial mortgage loans 5,987 1,989
Mortgage loan pools 1,438 -
Trading securities 1,104 -
Cash And cash equivalents 197 291
------------------------------------
Total $25,973 $16,622
====================================
In addition to the foregoing, the Company earned $367 from real estate
joint ventures during the three months ended March 31, 2001.
Interest Expense: The following table sets forth information regarding
the total amount of interest expense from certain of the Company's
collateralized borrowings. Information is based on daily average
balances during the period.
For the Three Months Ended March 31
2001 2000
Interest Interest
Expense Expense
-------------------------------------
Reverse repurchase agreements $ 8,756 $5,802
Lines of credit and term loan 3,516 1,665
-------------------------------------
Total $12,272 $7,467
=====================================
Net Interest Margin and Net Interest Spread from the Portfolio: The
Company considers its portfolio to consist of its securities available
for sale, mortgage loan pools, 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 liquid investment grade securities to enhance the Company's
liquidity.
Net interest margin from the portfolio is annualized net interest income
from the portfolio divided by the average market value of
interest-earning assets in the portfolio. Net interest income from the
portfolio is total interest income from the portfolio less interest
expense relating to collateralized borrowings. Net interest spread from
the portfolio 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 from the portfolio divided by average amortized cost of
interest earning assets in the portfolio. The average cost of funds is
interest expense from the portfolio divided by average outstanding
collateralized borrowings.
The following chart describes the interest income, interest expense, net
interest margin, and net interest spread for the Company's portfolio.
Interest income and Interest expense do not include earnings from real
estate joint ventures of $367 and $60, respectively.
For the Three Months Ended March 31
2001 2000
-------------------------------------------
Interest income $25,973 $16,622
Interest expense $12,212 $7,467
Net interest margin 5.04% 5.72%
Net interest spread 3.92% 2.29%
Other Expenses: Expenses other than interest expense consist primarily
of management fees and general and administrative expenses. Management
fees of $2,449 for the three months ended March 31, 2001 comprised base
management fees of $1,866 and incentive fees of $583. Management fees of
$1,290 for the three months ended March 31, 2000 were comprised solely
of the base management fee paid to the Manager (as provided pursuant to
the management agreement between the Manager and the Company), as the
Manager earned no incentive fee for the period. Other expenses - net of
$686 for the three months ended March 31, 2001, and $887 for the three
months ended March 31, 2000, were comprised of accounting agent fees,
custodial agent fees, directors' fees, fees for professional services,
insurance premiums, broken deal expenses, due diligence costs and
amortization of negative goodwill.
Other Gains (Losses): During the three months ended March 31, 2001 and
2000 the Company sold a portion of its securities available-for-sale for
total proceeds of $315,975 and $15,712, resulting in a realized gain of
$1,947 and $24, respectively. The gains on securities held for trading
were $692 and $328 for the three months ended March 31, 2001 and 2000,
respectively. The foreign currency gains (losses) of $104 and $(4) for
the three months ended March 31, 2001 and 2000, respectively, relate to
the Company's net investment in a commercial mortgage loan denominated
in pounds sterling and associated hedging.
Dividends Declared: On March 15, 2001, the Company declared
distributions to its shareholders of $.30 per share, payable on April
30, 2001 to shareholders of record on March 30, 2001.
Tax Basis Net Income and GAAP Net Income: Net income as calculated for
tax purposes (tax basis net income) was estimated at $14,496, or $0.45
($0.42 diluted) per share, for the three months ended March 31, 2001,
compared to a net income as calculated in accordance with GAAP of
$11,773, or $0.35 ($0.33 diluted) per share.
Differences between tax basis net income and GAAP net income arise for
various reasons. For example, in computing income from its subordinated
CMBS for GAAP purposes, the Company takes into account estimated credit
losses on the underlying loans whereas for tax basis income purposes,
only actual credit losses are taken into account. As there were no
actual credit losses incurred in 2001, tax basis income for subordinate
CMBS is higher the GAAP income. Certain general and administrative
expenses may differ due to differing treatment of the deductibility of
such expenses for tax basis income. Also, differences could arise in the
treatment of premium and discount amortization on the Company's
securities available for sale.
A reconciliation of GAAP net income to tax basis net income is as
follows:
For the Three Months Ended March 31
2001 2000
------------------------------
GAAP net income $11,773 $7,326
Gain on trading securities and FAS 133
adjustment 1,709 -
Subordinate CMBS income differences 1,014 993
------------------------------
Tax basis net income $14,496 $8,319
==============================
Changes in Financial Condition
Securities Available for Sale: The Company's securities available for
sale, which are carried at estimated fair value, included the following
at March 31, 2001 and December 31, 2000:
March 31, 2001 December 31,
Estimated 2000 Estimated
Fair Fair
Security Description Value Percentage Value Percentage
------------------------------------------------------------------------ --------------- ----------------- ----------------
Commercial mortgage-backed securities:
CMBS IO's $ 83,508 7.6% $ 68,844 10.2%
Investment grade CMBS 87,046 7.9 54,905 8.1
Non-investment grade rated subordinated securities 265,202 24.2 261,489 38.5
Non-rated subordinated securities 28,896 2.6 27,197 4.0
----------------- --------------- ----------------- ----------------
464,652 42.3 412,435 60.8
----------------- --------------- ----------------- ----------------
Single-family residential mortgage-backed securities:
Agency adjustable rate securities 90,377 8.3 160,928 23.7
Agency fixed rate securities 541,089 49.4 104,759 15.5
----------------- --------------- ----------------- ----------------
631,466 57.7 265,687 39.2
----------------- --------------- ----------------- ----------------
$1,096,118 100.0% $678,122 100.0%
================= =============== ================= ================
Borrowings: As of March 31, 2001, the Company's debt consisted of
line-of-credit borrowings, term loans and reverse repurchase agreements,
collateralized by a pledge of most of the Company's securities available
for sale, securities held for trading, mortgage loans held for sale and
its commercial mortgage loans. The Company's financial flexibility is
affected by its ability to renew or replace on a continuous basis its
maturing short-term borrowings. As of March 31, 2001, the Company has
obtained financing in amounts and at interest rates consistent with the
Company's short-term financing objectives.
Under the lines of credit, term loans, and the reverse repurchase
agreements, the lender retains the right to mark the underlying
collateral to market value. A reduction in the value of its pledged
assets will require the Company to provide additional collateral or fund
margin calls. From time to time, the Company expects that it will be
required to provide such additional collateral or fund margin calls.
The following table sets forth information regarding the Company's
collateralized borrowings.
For the Three Months Ended
March 31, 2001
----------------------------------------------------------------
March 31, 2001 Maximum Range of
Balance Balance Maturities
---------------------- -------------------- --------------------
Reverse repurchase agreements $569,170 $729,605 5 to 44 days
Line of credit and term loan borrowings 151,323 $206,278 26 to 347 days
---------------------- -------------------- --------------------
Hedging Instruments: Effective January 1, 2001, the Company adopted SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
as amended, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities.
As a result, On January 1, 2001 the Company reclassified certain of its
agency debt securities, with an amortized cost of $64,432 from
available-for-sale to trading. An interest rate swap agreement with a
$25,000 notional amount that had been designated as hedging these debt
securities was similarly reclassified. The unrealized gain of $895
related to the debt securities and the unrealized loss of $2,830 related
to the interest rate swap were removed from OCI and recorded as the
cumulative transition adjustment to earnings upon adoption of SFAS 133.
The net cumulative effect of adopting SFAS 133 was ($1,903) or ($0.07)
per share, and is reflected as Cumulative transition adjustment - SFAS
133 on the statement of operations.
In addition, on January 1, 2001, the Company re-designated interest rate
swap agreements with notional amounts aggregating $98,000 that had been
hedging available-for-sale debt securities as cash flow hedges of its
variable rate borrowings under reverse repurchase agreements. The fair
value of these swap agreements on January 1, 2001, an unrealized loss of
($9,853), remained in OCI at the date of adoption of FAS 133, and
therefore, did not result in a transition adjustment.
In addition, on January 1, 2001 the Company re-designated interest rate
swap agreements with notional amounts aggregating $57,744 that had been
hedging available-for-sale debt securities as trading securities. These
interest rate swap agreements were sold in January 2001; the loss of
$795 is included in Gain on securities held for trading.
Capital Resources and Liquidity: Liquidity is a measurement of the
Company's ability to meet potential cash requirements, including ongoing
commitments to repay borrowings, fund investments, loan acquisition and
lending activities and for other general business purposes. The primary
sources of funds for liquidity consist of collateralized borrowings,
principal and interest payments on and maturities of securities
available for sale, securities held for trading and commercial mortgage
loans, and proceeds from sales thereof.
To the extent that the Company may become unable to maintain its
borrowings at their current level due to changes in the financing
markets for the Company's assets, the Company may be required to sell
assets in order to achieve lower borrowing levels. In this event, the
Company's level of net earnings would decline. The Company's principal
strategies for mitigating this risk are to maintain portfolio leverage
at levels it believes are sustainable and to diversify the sources and
types of available borrowing and capital. The Company has utilized
committed bank facilities, preferred stock, and will consider
resecuritization or other achievable term funding of existing assets.
On February 14, 2001 the Company completed a secondary offering of
4,000,000 shares of its common stock in an underwritten public offering.
The aggregate net proceeds to the Company (after deducting underwriting
fees and expenses) were approximately $33,200. The Company had granted
the underwriters an option, exercisable for 30 days, to purchase up to
600,000 additional shares of common stock to cover over-allotments. This
option was exercised on March 13, 2001 and resulted in net proceeds to
the Company of approximately $5,000.
On May 11, 2001 the Company completed a secondary offering of 4,000,000
shares of its common stock in an underwritten public offering. The
aggregate net proceeds to the Company (after deducting underwriting fees
and expenses) were approximately $37,800. The Company has granted the
underwriters an option, exercisable for 30 days, to purchase up to
600,000 additional shares of common Stock to cover over-allotments.
As of March 31, 2001, $131,190 of the Company's $185,000 committed
credit facility with Deutsche Bank, AG was available for future
borrowings, and $138,461 was available under the Company's $200,000 term
facility with Merrill Lynch.
The Company's operating activities provided cash of $45,340 and $8,994
during the three months ended March 31, 2001, and 2000, respectively,
primarily through net income and, in 2001, sales of trading securities.
The Company's investing activities used cash totaling $77,750 and $9,189
during the three months ended March 31, 2001, and 2000, respectively,
primarily to purchase securities available-for-sale and to fund
commercial mortgage loans, offset by principal payments received on
securities available-for-sale and proceeds from sales of securities
available-for-sale.
The Company's financing activities provided (used) cash of $29,631 and
$(4,679) during the three months ended March 31, 2001 and 2000,
respectively, primarily to reduce the level of short-term borrowings and
to pay distributions, offset in 2001, by proceeds from the issuance of
common stock.
Although the Company's portfolio of securities available-for-sale was
acquired at a net discount to the face amount of such securities, the
Company has received to date and expects to continue to receive
sufficient cash flows from these securities to fund distributions to the
Company's stockholders.
The Company is subject to various covenants in its lines of credit,
including maintaining a minimum GAAP net worth of $140,000, a
debt-to-equity ratio not to exceed 4.5 to 1, a minimum cash requirement
based upon certain debt to equity ratios, a minimum debt service
coverage ratio of 1.5, and a minimum liquidity reserve of $10,000.
Additionally, the Company's GAAP net worth cannot decline by more than
37% during the course of any two consecutive fiscal quarters. As of
March 31, 2001, the Company was in compliance with all such covenants.
The Company's ability to execute its business strategy depends to a
significant degree on its ability to obtain additional capital. Factors
which could affect the Company's access to the capital markets, or the
costs of such capital, include changes in interest rates, general
economic conditions and perception in the capital markets of the
Company's business, covenants under the Company's current and future
credit facilities, results of operations, leverage, financial conditions
and business prospects. There can be no assurance that the Company will
be able to effectively fund future growth. Except as discussed herein,
management is not aware of any other trends, events, commitments or
uncertainties that may have a significant effect on liquidity.
REIT Status: The Company has elected to be taxed as a REIT and to comply
with the provisions of the Code, with respect thereto. Accordingly, the
Company generally will not be subject to Federal income tax to the
extent of its distributions to stockholders and as long as certain
asset, income and stock ownership tests are met. The Company may,
however, be subject to tax at corporate rates or at excise tax rates on
net income or capital gains not distributed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk: Market risk is 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 and credit curve
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 risk is highly sensitive to dynamics of
the markets for commercial mortgage 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 market value of the Company's portfolio.
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,
indeed, that such losses may exceed the amount invested in such
instruments. A hedge may not perform its intended purpose of offsetting
losses or increased costs. Moreover, with respect to certain of the
instruments used as hedges, the Company is exposed to the risk that the
counter parties 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 test
purposes, the Company may conduct part or all of its hedging activities
through a to-be-formed corporate subsidiary that is fully subject to
federal corporate income taxation. The profitability of the Company may
be adversely affected during any period as a result of changing interest
rates.
The following tables quantify the potential changes in the Company's net
portfolio value and net interest income under various interest rates and
credit-spread scenarios. Net portfolio value is defined as the value of
interest-earning assets net of the value of interest-bearing
liabilities. It is evaluated using an assumption that interest rates, as
defined by the U.S. Treasury yield curve, increase or decrease up to 300
basis points and the assumption that the yield curves of the rate shocks
will be parallel to each other.
Net interest income is defined as interest income earned from
interest-earning assets net of the interest expense incurred by the
interest bearing liabilities. It is evaluated using the assumptions that
interest rates, as defined by the U.S. LIBOR curve, increase or decrease
by 200 basis points and the assumption that the yield curves of the
LIBOR rate shocks will be parallel to each other. Market value in this
scenario is calculated using the assumption that the U.S. Treasury yield
curve remains constant.
All changes in income and value 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 as of March 31,
2001. Actual results could differ significantly from these estimates.
Projected Percentage Change In Portfolio Net Market Value
Given U.S. Treasury Yield Curve Movements
Change in Projected Change in
Treasury Yield Curve, Portfolio
+/- Basis Points Net Market Value
------------------------------- ------------------------
-300 1.6%
-200 2.7%
-100 2.2%
Base Case 0
+100 (3.9)%
+200 (9.4)%
+300 (16.6)%
Projected Percentage Change In Portfolio Net Market Value
Given Credit Spread Movements
Change in Projected Change in
Credit Spreads, Portfolio
+/- Basis Points Net Market Value
------------------------------- --------------------------
-300 55.6%
-200 36.0%
-100 17.5%
Base Case 0
+100 (16.5)%
+200 (32.0)%
+300 (46.6)%
Projected Percentage Change In Portfolio Net Interest Income
and Change in Net Income per Share Given LIBOR Movements
Projected Change in Projected Change in Net
Change in LIBOR, Portfolio Income per Share
+/- Basis Points Net Interest Income
------------------------------- ------------------------- ---------------------
-200 22.0% $0.42
-100 11.0% $0.21
Base Case 0 0
+100 (11.0)% $(0.21)
+200 (22.0)% $(0.42)
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 American economy, and other factors
beyond the control of the Company.
All loans are subject to a certain probability of default. The nature of
the CMBS assets owned are such that all losses experienced by a pool of
mortgages will be borne by the Company. Changes in the expected default
rates of the underlying mortgages will significantly affect the value of
the Company, the income it accrues and the cash flow it receives. An
increase in default rates will reduce the book value of the Company's
assets and the Company earnings and cash flow available to fund
operations and pay dividends.
The Company manages credit risk through the underwriting process,
establishing loss assumptions, and careful monitoring of loan
performance. Before acquiring a security that represents a pool of
loans, the Company will perform a rigorous analysis of the quality of
substantially all of the loans proposed for that security. As a result
of this analysis, loans with unacceptable risk profiles will be removed
from the proposed security. Information from this review is then used to
establish loss assumptions. The Company will assume that a certain
portion of the loans will default and calculate an expected, or loss
adjusted yield based on that assumption. 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 timing experience is likely to cause a reduction
in the expected yield and therefore reduce the earnings of the Company,
and may require a significant write down of assets.
For purposes of illustration, a doubling of the losses in the Company's
credit sensitive portfolio, without a significant acceleration of those
losses would reduce the expected yield on adjusted purchase price from
9.78% to 8.35%. This would reduce GAAP income going forward by
approximately $0.20 per common share and cause a significant write down
in assets at the time the loss assumption is changed.
Asset and Liability Management: Asset and liability management is
concerned with the timing and magnitude of the repricing and/or maturing
of assets and liabilities. It is the objective of the Company to attempt
to control risks associated with interest rate movements. In general,
management's strategy is to match the term of the Company's liabilities
as closely as possible with the expected holding period of the Company's
assets. This is less important for those assets in the Company's
portfolio considered liquid as there is a very stable market for the
financing of these securities.
The Company uses interest rate duration as its primary measure of
interest rate risk. This metric, expressed when considering any existing
leverage, allows the Company's management to approximate changes in the
net market value of the Company's portfolio given potential changes in
the U.S. Treasury yield curve. Interest rate duration considers both
assets and liabilities. As of March 31, 2001 the Company's duration on
equity was approximately 3.03 years. This implies that a parallel shift
of the U.S. Treasury yield curve of 100 basis points would cause the
Company's net asset value to increase or decrease by approximately
3.03%. Because the Company's assets, and their markets, have other, more
complex sensitivities to interest rates, the Company's management
believes that this metric represents a good approximation of the change
in portfolio net market value in response to changes in interest rates,
though actual performance may vary due to changes in prepayments, credit
spreads and increased market volatility.
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 repricing within a
given time period), are used but are considered of lesser significance
in the daily management of the Company's portfolio. The majority of the
Company's assets pay a fixed coupon and the income from such assets are
relatively unaffected by interest rate changes. The majority of the
Company's liabilities are borrowings under its line of credit or reverse
repurchase agreements that bear interest at variable rates that reset
monthly. Given this relationship between assets and liabilities, the
Company's interest rate sensitivity gap is highly negative. This implies
that a period of falling short-term interest rates will tend to increase
the Company's net interest income while a period of rising short-term
interest rates will tend to reduce the Company's net interest income.
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.
The Company currently has positions in forward currency exchange
contracts to hedge currency exposure in connection with its commercial
mortgage loan denominated in pounds sterling. The purpose of the
Company's foreign currency-hedging activities is to protect the Company
from the risk that the eventual U.S. dollar net cash inflows from the
commercial mortgage loan will be adversely affected by changes in
exchange rates. The Company's current strategy is to roll these
contracts from time to time to hedge the expected cash flows from the
loan. Fluctuations in foreign exchange rates are not expected to have a
material impact on the Company's net portfolio value or net interest
income.
Forward-Looking Statements: Certain statements contained herein are not,
and certain statements contained in future filings by the Company with
the SEC in the Company's press releases or in the Company's other public
or shareholder communications may not be, based on historical facts and
are "Forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements
which are based on various assumptions (some of which are beyond the
Company's control) may be identified by reference to a future period or
periods, or by the use of forward-looking terminology, such as "may,"
"will," "believe," "expect," "anticipate," "continue," or similar terms
or variations on those terms, or the negative of those terms. Actual
results could differ materially from those set forth in forward-looking
statements due to a variety of factors, including, but not limited to,
those related to the economic environment, particularly in the market
areas in which the Company operates, competitive products and pricing,
fiscal and monetary policies of the U.S. Government, changes in
prevailing interest rates, acquisitions and the integration of acquired
businesses, credit risk management, asset/liability management, the
financial and securities markets and the availability of and costs
associated with sources of liquidity. Additional information regarding
these and other important factors that could cause actual results to
differ from those in the Company's forward looking statements are
contained under the section entitled "Risk Factors" in the Company's
Registration Statement on Form S-3 (File No. 333-32155), as filed with
the SEC on March 10, 2000, and in the Company's Registration Statement
on Form S-4 (File No.333-33596), as filed with the SEC on March 30,
2000, as amended by Amendment No.1 to the Company's Registration
Statement on Form S-4, as filed with the SEC on April 11, 2000, and the
Company's prospectus supplement, dated May 7, 2001, to the prospectus
dated February 13, 2001, as filed with the SEC on May 8, 2001 (File No.
333-75473). The Company hereby incorporates by reference those risk
factors in this Form 10-Q. The Company does not undertake, and
specifically disclaims any obligation, to publicly release the result of
any revisions which may be made to any forward-looking statements to
reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
At March 31, 2001 there were no pending legal proceedings to which the
Company was a party or of which any of its property was subject.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANTHRACITE CAPITAL, INC.
Dated: May 15, 2001 By: /s/ Hugh R. Frater
---------------------------------
Name: Hugh R. Frater
Title: President and Chief
Executive Officer
(authorized officer of
registrant)
Dated: May 15, 2001 By: /s/ Richard M. Shea
---------------------------------
Name: Richard M. Shea
Title: Chief Operating Officer
and Chief Financial Officer
(principal accounting officer)