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 June 30, 2002
Commission File Number 001-13937
ANTHRACITE CAPITAL, INC.
------------------------
(Exact name of registrant as specified in its charter)
Maryland 13-3978906
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 East 52nd Street, New York, New York 10022
- --------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number including area code): (212) 409-3333
345 Park Avenue, New York, New York 10154
-----------------------------------------
(Former name, former address, and for new fiscal year; if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
(1) Yes X No __
(2) Yes X No __
As of August 12, 2002, 46,527,054 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 June 30, 2002 (Unaudited) and December 31, 2001..................................................3
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2002 and 2001 (Unaudited)...............................4
Consolidated Statement of Changes in Stockholders' Equity
For the Six Months Ended June 30, 2002 (Unaudited)..................................................5
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2002 and 2001 (Unaudited).........................................6
Notes to Consolidated Financial Statements (Unaudited)..............................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................................................18
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................................33
Part II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................38
Item 2. Changes in Securities and Use of Proceeds..........................................................38
Item 3. Defaults Upon Senior Securities....................................................................38
Item 4. Submission of Matters to a Vote of Security Holders................................................38
Item 5. Other Information..................................................................................38
Item 6. Exhibits and Reports on Form 8-K...................................................................38
SIGNATURES ...................................................................................................40
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)
- ---------------------------------------------------------------------------------------------------------------------------------
June 30, 2002 December 31, 2001
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(Unaudited)
ASSETS
Cash and cash equivalents $ 19,565 $ 43,071
Restricted cash equivalents 38,685 37,376
Securities available for sale, at fair value
Subordinated commercial mortgage-backed securities (CMBS) $ - $ 360,159
Investment grade securities 424,124 1,085,795
-------------- --------------
Total securities available for sale 424,124 1,445,954
Securities held for trading, at fair value 887,232 564,081
Securities held to maturity
Subordinated commercial mortgage-backed securities (CMBS) 398,859 -
Investment grade securities 158,770 -
-------------- --------------
Total securities held to maturity 557,629 -
Commercial mortgage loans, net 134,043 142,637
Investments in real estate joint ventures 8,209 8,317
Equity investment in Carbon Capital, Inc. 9,164 8,784
Receivable for investments sold 13,999 344,789
Other assets 32,900 18,267
-------------- ---------------
Total Assets $2,125,550 $ 2,613,276
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Borrowings:
Secured by pledge of subordinated CMBS available for sale $ - $ 178,631
Secured by pledge of other securities available for sale
and restricted cash equivalents 359,600 1,039,469
Secured by pledge of securities held for trading 498,416 559,145
Secured by pledge of securities held to maturity 403,688 -
Secured by pledge of investments in real estate joint ventures 1,337 1,337
Secured by pledge of commercial mortgage loans 36,014 57,356
-------------- --------------
Total borrowings $ 1,299,055 $ 1,835,938
Payable for investments purchased 391,870 346,913
Distributions payable 16,214 17,245
Other liabilities 28,181 29,807
-------------- ---------------
Total Liabilities 1,735,320 2,229,903
-------------- ---------------
10.5% Series A preferred stock, redeemable convertible, liquidation
preference $285 in 2001 - 258
-------------- ---------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $0.001 per share; 400,000 shares authorized; 46,325
shares issued and outstanding in June 30, 2002; and
45,286 shares issued and outstanding in December 31, 2002 46 45
10% Series B preferred stock, liquidation preference $55,317 42,086 42,086
Additional paid-in capital 503,641 492,531
Distributions in excess of earnings (8,183) (13,588)
Accumulated other comprehensive loss (147,360) (137,959)
-------------- ---------------
Total Stockholders' Equity 390,230 383,115
-------------- ---------------
Total Liabilities and Stockholders' Equity $ 2,125,550 $ 2,613,276
============== ===============
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 Months Ended For the Six Months Ended
June 30, June 30,
---------------------------------- ----------------------------------
2002 2001 2002 2001
---- ---- ---- ----
--------------- ----------------- --------------- ------------------
Income:
Interest from securities $ 26,938 $ 19,204 $ 55,617 $ 36,451
Interest from commercial mortgage loans 3,427 4,209 7,046 10,196
Interest from mortgage loan pools - 137 - 1,575
Interest from trading securities 7,420 3,663 13,708 4,767
Earnings from real estate joint ventures 262 317 523 684
Earnings from equity investment 194 - 379 -
Interest from cash and cash equivalents 491 875 810 1,072
--------------- ----------------- --------------- ------------------
Total income 38,732 28,405 78,083 54,745
--------------- ----------------- --------------- ------------------
Expenses:
Interest 13,047 9,450 21,079 21,043
Interest-trading securities 2,427 2,407 6,035 3,278
Management and incentive fee 2,278 2,668 7,685 5,117
Other expenses - net 497 91 1,073 585
--------------- ----------------- --------------- ------------------
Total expenses 18,249 14,616 35,872 30,023
--------------- ----------------- --------------- ------------------
Other gain (losses):
Gain on sale of securities available for sale 4,154 5,134 75 7,081
Gain (loss) on securities held for trading (11,914) (124) (7,900) 568
Foreign currency gain (loss) 18 5 (229) 109
Loss on impairment of asset - (5,702) - (5,702)
--------------- ----------------- --------------- ------------------
Total other gain (loss) (7,742) (687) (8,054) 2,056
--------------- ----------------- --------------- ------------------
Income before cumulative transition adjustment 12,741 13,102 34,157 26,778
--------------- ----------------- --------------- ------------------
Cumulative transition adjustment - SFAS 142 - - 6,327 -
Cumulative transition adjustment - SFAS 133 - - - (1,903)
--------------- ----------------- --------------- ------------------
Net Income 12,741 13,102 40,484 24,875
--------------- ----------------- --------------- ------------------
Dividends and accretion on preferred stock 1,382 2,287 2,771 4,576
--------------- ----------------- --------------- ------------------
Net Income available to Common Shareholders $ 11,359 $ 10,815 $ 37,713 $ 20,299
=============== ================= =============== ==================
Net income per common share, basic:
Income before cumulative transition adjustment $0.25 $0.33 $0.68 $0.75
Cumulative transition adjustment - SFAS 142 - - 0.14 -
Cumulative transition adjustment - SFAS 133 - - - (0.06)
--------------- ----------------- --------------- ------------------
Net income $0.25 $0.33 $0.82 $0.69
=============== ================= =============== ==================
Net income per common share, diluted:
Income before cumulative transition adjustment $0.25 $0.32 $0.68 $0.71
Cumulative transition adjustment - SFAS 142 - - 0.14 -
Cumulative transition adjustment - SFAS 133 - - - (0.06)
--------------- ----------------- --------------- ------------------
Net income $0.65
$0.25 $0.32 $0.82
=============== ================= =============== ==================
Weighted average number of shares outstanding:
Basic 46,144 32,470 45,901 29,736
Diluted 46,183 36,631 45,951 33,874
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 Six Months Ended June 30, 2002
(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, 2002 $45 $42,086 $492,531 ($13,588) ($137,959) $383,115
Net income 40,484 40,484 $40,484
Unrealized loss on cash flow hedges (18,616) (18,616) (18,616)
Reclassification adjustments from cash
flow hedges included in net income 496 496 496
Change in net unrealized gain on
securities available for sale, net of
reclassification adjustment 8,719 8,719 8,719
----------------
Other Comprehensive loss (9,401)
Comprehensive Income $31,083
================
Dividends declared-common stock (32,308) (32,308)
Dividends and accretion on preferred stock (2,771) (2,771)
Issuance of common stock 1 10,852 10,853
Conversion of Series A preferred stock to 258 258
common stock
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 $46 $42,086 $503,641 ($8,183) ($147,360) $390,230
============================================================================================
Disclosure of reclassification adjustment:
Unrealized holding loss $8,644
Less: reclassification for realized gains
previously recorded as unrealized 75
----------------
8,719
Unrealized gain on cash flow hedges (18,616)
Reclassification adjustments from cash
flow hedges included in net income 496
----------------
Net unrealized gain on securities $(9,401)
================
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 Six For the Six Months
Months Ended Ended
June 30, 2002 June 30, 2001
------------- -------------
Cash flows from operating activities:
Net income $ 40,484 $ 24,875
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Net sale (purchase) of trading securities 41,462 (388,353)
Amortization on negative goodwill - (960)
Compensation cost - stock options - 132
Cumulative transition adjustment (6,327) 1,903
Premium amortization (discount accretion), net (2,176) 4,509
Loss on impairment of asset - 5,702
Non-cash portion of net foreign currency gain (69) (109)
Net loss (gain) on sale of securities 7,825 (7,649)
Distributions in excess of earnings from real estate joint ventures 108 59
Increase in other assets (8,405) 4,694
Increase in other liabilities 4,701 (9,675)
----------------------- ---------------------
Net cash provided by (used in) operating activities 77,603 (364,872)
----------------------- ---------------------
Cash flows from investing activities:
Purchase of securities (338,673) (1,262,768)
Funding of commercial mortgage loans (3,370) (13,170)
Repayments received from commercial mortgage loans 12,033 67,467
Increase in restricted cash equivalents (1,309) (20,541)
Principal payments received on securities available for sale 120,235 29,388
Proceeds from sales of securities available for sale and mortgage loan pools 678,724 853,219
Net payments from hedging securities (6,609) (5,695)
----------------------- ---------------------
Net cash provided by (used in) investing activities 461,031 (352,100)
----------------------- ---------------------
Cash flows from financing activities:
Net (decrease) increase in borrowings (536,883) 632,995
Proceeds from issuance of common stock, net of offering costs 10,853 88,624
Distributions on common stock (33,344) (16,415)
Distributions on preferred stock (2,766) (4,437)
----------------------- ---------------------
Net cash (used in) provided by financing activities (562,140) 700,767
----------------------- ---------------------
Net decrease in cash and cash equivalents (23,506) (16,205)
Cash and cash equivalents, beginning of period $ 43,071 $ 37,829
----------------------- ---------------------
Cash and cash equivalents, end of period $ 19,565 $ 21,624
======================= =====================
Supplemental disclosure of cash flow information:
Interest paid $ 34,887 $ 20,339
======================= =====================
Investments purchased not settled $ 391,870 $ 94,048
======================= =====================
Investments sold not settled $ 13,999 $ 69,537
======================= =====================
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 ("GAAP")
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 December 31, 2001 annual report on
Form 10-K 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 142 in the
first quarter of 2002 - see note 2, and SFAS 133 in the first quarter of
2001), 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 certain of the Company's
mortgage-backed securities and certain other investments.
Note 2 ACCOUNTING CHANGE - BUSINESS COMBINATIONS
In July 2001, the FASB issued Statements of Financial Accounting
Standards No. 141, "Business Combinations" and No. 142, "Goodwill and
Other Intangible Assets" ("FAS 142"). These standards change the
accounting for business combinations by, among other things, prohibiting
the prospective use of pooling-of-interests accounting and requiring
companies to stop amortizing goodwill and certain intangible assets with
an indefinite useful life. Instead, goodwill and intangible assets
deemed to have an indefinite useful life will be subject to an annual
review for impairment. The new standards generally were effective for
the Company in the first quarter of 2002. Upon adoption of FAS 142 in
the first quarter of 2002, the Company recorded a one-time, noncash
adjustment of approximately $6,327 to write off the unamortized balance
of its negative goodwill. Such charge is non-operational in nature and
is reflected as a cumulative effect of an accounting change in the
accompanying consolidated statement of operations. Amortization of
negative goodwill was $425 and $960 for the three and six months ended
June 30, 2001. If such negative goodwill had not been amortized, the
Company's income before cumulative translation adjustment would have
been $12,783 and $26,058 for the three and six months ended June 30,
2001.
Note 3 NET INCOME PER SHARE
Net income per share is computed in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Basic income
per share is calculated by dividing net income available to common
shareholders by the weighted average number of common shares outstanding
during the period. Diluted income 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 Months Ended For the Six Months Ended
June 30, June 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Numerator:
Net Income available to common shareholders before
cumulative transition adjustment $ 11,359 $ 10,815 $ 31,386 $ 22,202
Cumulative transition adjustment - - 6,327 (1,903)
--------------- --------------- -------------- ---------------
Numerator for basic earnings per share 11,359 10,815 37,713 20,299
Effect of 10.5% series A senior cumulative redeemable
preferred stock - 904 - 1,804
--------------- --------------- -------------- ---------------
Numerator for diluted earnings per share $ 11,359 $ 11,719 $ 37,713 $ 22,103
=============== =============== ============== ===============
Denominator:
Denominator for basic earnings per share--weighted
average common shares outstanding 46,144 32,470 45,901 29,737
Effect of 10.5% series A senior cumulative redeemable
preferred stock - 4,106 14 4,098
Dilutive effect of stock options
39 56 36 40
--------------- --------------- -------------- ---------------
Denominator for diluted earnings per share--weighted
average common shares outstanding and common share
equivalents outstanding 46,183 36,632 45,951 33,875
=============== =============== ============== ===============
Basic net income per weighted average common share:
Income before cumulative transition adjustment $0.25 $0.33 $0.68 $0.75
Cumulative transition adjustment - SFAS 142 - - 0.14 -
Cumulative transition adjustment - SFAS 133 - - - (0.06)
--------------- --------------- -------------- ---------------
Net income $ 0.25 $ 0.33 $ 0.82 $ 0.69
=============== =============== ============== ===============
Diluted net income per weighted average common share and common share
equivalents:
Income before cumulative transition adjustment $ 0.25 $ 0.32 $ 0.68 $ 0.71
Cumulative transition adjustment - SFAS 142 - - 0.14 -
Cumulative transition adjustment - SFAS 133 - - (0.06)
--------------- --------------- -------------- ---------------
Net income $0.25 $0.32 $0.82 $0.65
=============== =============== ============== ===============
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 June 30, 2002 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Gain Unrealized Fair
Security Description Cost Loss Value
-------------------------------------------------------------- -------------- ---------------- --------------- ---------------
Commercial mortgage-backed securities ("CMBS"):
CMBS IOs $ 42,138 $ 665 $ (425) $ 42,378
-------------- ---------------- --------------- ---------------
Total CMBS 42,138 665 (425) 42,378
-------------- ---------------- --------------- ---------------
Single-family residential mortgage-backed securities ("RMBS"):
Agency adjustable rate securities 46,605 367 (194) 46,778
Agency fixed rate securities 295,697 1,367 (792) 296,272
Residential CMOs 17,400 266 (407) 17,259
Hybrid ARMs 21,255 182 - 21,437
-------------- ---------------- --------------- ---------------
Total RMBS 380,957 2,182 (1,393) 381,746
-------------- ---------------- --------------- ---------------
Total securities available for sale 423,095 2,847 (1,818) 424,124
============== ================ =============== ===============
As of June 30, 2002, an aggregate of $371,124 in estimated fair value of
the Company's securities available for sale was pledged to secure its
collateralized borrowings.
As of June 30, 2002, the anticipated weighted average unlevered yield to
maturity based upon the adjusted cost of the Company's securities
available for sale was 6.08% per annum. The Company's anticipated yields
to maturity on its 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. 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.
As discussed in Note 6, on March 31, 2002, the Company reclassified its
subordinated non-investment grade CMBS from available-for-sale to held
to maturity.
Note 5 SECURITIES HELD FOR TRADING
Securities held for trading includes assets that are intended to be held
for a short period of time. These securities are required to be marked
to market through the income statement at quarter end.
This includes assets held as part of an active trading strategy 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. The Company uses treasury futures to hedge
a portion of its interest rate risk. The Company classifies a
significant portion of its RMBS portfolio as held for trading to balance
the mark to market risk of the futures.
The Company's securities held for trading are carried at estimated fair
value. At June 30, 2002, the Company's securities held for trading
consisted of FNMA Mortgage Pools with an estimated fair value of $890,961,
a short 10 year U.S. Treasury Note with an estimated fair value of
$(3,447), short interest rate swap agreements which represented a notional
amount of $(160,000) and a fair value of $(1,360), an interest rate swap
agreement with a notional amount of $(112,145) and a fair value of $(112)
which converts REIT debt securities' biannual payments to monthly payments,
and an interest rate cap which represented a notional amount of $85,000 and
a fair value of $1,190. The Company's active trading strategies and its
RMBS portfolio consist of predominantly low coupon fixed rate 15 year
mortgages and contracts to purchase such mortgages hedged with swaps or
treasury futures.
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. The value of these
positions will be affected by periods of high interest rate volatility.
Note 6 SECURITIES HELD TO MATURITY
At the end of the first quarter of 2002 the Company reclassified its
subordinated non-investment grade CMBS on the balance sheet from
available for sale to held to maturity. This reclassification reflected
the Company's intent and ability to hold these assets until maturity in
anticipation of closing the CDO financing in May 2002. The effect of
this change is that these assets will be presented on the balance sheet
at their carrying value, rather than previously at their fair market
value. As this reclassification was effective on March 31, 2002, the
carrying value as of March 31, 2002 is equal to the market value at the
date of transfer for all assets purchased prior to January 1, 2002. Any
unamortized gain or loss relating to the securities remains in
accumulated other comprehensive loss ("OCI") and will be amortized as an
adjustment of yield over the anticipated life of the security. For those
assets purchased during the first three months of 2002, an approximate
par of $186,000, the adjusted cost basis at March 31, 2002 is equal to
the original purchase price.
The par value, amortized cost, carrying value and estimated fair value
of securities held to maturity as of June 30, 2002 are summarized as
follows:
Par Unamortized Amortized Cost Unamortized Carrying Estimated
Discount Balance in OCI Value Fair Value
- ---------------------------------------------------------------------------------------------------------------------------------
Non-investment grade rated subordinated $ 647,524 $ (188,263) $ 459,261 $ (88,256) $371,005 $ 381,056
securities
Non-rated subordinated securities 126,010 (92,234) 33,776 (5,922) 27,854 25,509
Investment grade CMBS 47,730 (1,158) 46,572 - 46,572 49,332
------------------------------------------------------------------------------------
Total CMBS 821,264 (281,655) 539,609 (94,178) 445,431 455,897
------------------------------------------------------------------------------------
Investment grade REIT debt securities 112,145 53 112,198 - 112,198 116,013
------------------------------------------------------------------------------------
Total securities held to maturity $ 933,409 $(281,602) $651,807 $ (94,178) $557,629 $571,910
====================================================================================
The Company's anticipated yields to maturity on its subordinated CMBS
and investment grade securities held to maturity 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. Such delinquencies and credit losses are typically 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.
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 June
30, 2002:
---------------------------------------------------------------- ------------------------------------------
June 30, 2002
------------------------------------------ --------------------- -------------------- ---------------------
Principal Number of % of
Loans Collateral
------------------------------------------ --------------------- -------------------- ---------------------
Past due 30 days to 60 days $14,696 8 0.15%
------------------------------------------ --------------------- -------------------- ---------------------
Past due 60 days to 90 days 11,252 4 0.11
------------------------------------------ --------------------- -------------------- ---------------------
Past due 90 days or more 148,226 22 1.52
------------------------------------------ --------------------- -------------------- ---------------------
REO 19,805 5 0.20
------------------------------------------ --------------------- -------------------- ---------------------
Total $193,979 39 1.98%
------------------------------------------ --------------------- -------------------- ---------------------
Total principal balance $9,774,075 1,899
------------------------------------------ --------------------- -------------------- ---------------------
To the extent that the Company's expectation of realized losses on
individual loans supporting the CMBS, 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, and write the investment down to its fair value. While
realized losses on individual loans may be higher or lower than original
estimates, the Company currently believes its aggregate loss estimates
and GAAP yields are appropriate on all investments.
The Company owns several subordinate tranches of the GMAC 98 C-1 CMBS
securitization, included in securities held to maturity. On May 14,
2002, a borrower whose loan is included in the securitization filed
Chapter 11 bankruptcy. The loan is secured by mortgages on 82 skilled
nursing facilities as well as a surety bond from an A1- rated surety.
The bankruptcy court has approved of the surety providing
debtor-in-possession financing for up to $20,000. The principal amount
of the loan is $209,305 relative to the remaining principal amount in
the GMAC 98 C-1 CMBS securitization of $1,295,616.
Note 7 COMMON STOCK
On March 14, 2002, the Company declared distributions to its common
shareholders of $0.35 per share, payable on April 30, 2002 to
stockholders of record on April 4, 2002. For U.S. Federal income tax
purposes, the dividends are expected to be ordinary income to the
Company's stockholders.
In March 2002, the remaining 10,000 shares of Series A Preferred Stock
were converted to 34,427 shares of the Company's Common Stock at a price
of $7.26 per share in accordance with the terms of the Series A
Preferred Stock.
On June 15, 2002, the Company declared distributions to its common
shareholders of $0.35 per share, payable on July 31, 2002 to
stockholders of record on June 29, 2002. For U.S. Federal income tax
purposes, the dividends are expected to be ordinary income to the
Company's stockholders.
For the three and six months ended June 30, 2002, the Company issued
302,655 and 821,968 shares of common stock under its Dividend
Reinvestment and Stock Purchase Plan. Net proceeds to the Company were
approximately $3,459 and $9,120, respectively. For the three and six
months ended June 30, 2001, the Company issued 717,624 shares of common
stock under its Dividend Reinvestment and Stock Purchase Plan. Net
proceeds to the Company were approximately $7,065 for the three and six
months ended June 30, 2001.
Note 8 TRANSACTIONS WITH AFFILIATES
The Company has an Investment Advisory 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 initial two-year term of the Management
Agreement was to expire on March 27, 2000; on March 16, 2000, the
Management Agreement was extended for an additional two years, with the
unanimous approval of the unaffiliated directors, on terms similar to
the prior agreement. On March 25, 2002, the Management Agreement was
extended for one year through March 27, 2003, with the unanimous
approval of the unaffiliated directors, on terms similar to the prior
agreement with the following changes: (i) the incentive fee calculation
would be based on GAAP earnings instead of funds from operations, (ii)
the removal of the four year period to value the Management Agreement in
the event of termination, and (iii) subsequent renewal periods of the
Management Agreement would be for one year instead of two years. The
Board was advised by Houlihan Lokey Howard & Zukin Financial Advisors,
Inc. ("Houlihan Lokey") in the renewal process. Houlihan Lokey is a
national investment banking and financial advisory firm.
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 0.20% of average
invested assets rated above BB+.
The Company incurred $2,278 and $4,497 in base management fees in
accordance with the terms of the Management Agreement for the three and
six months ended June 30, 2002 and $2,109 and $3,980 in base management
fees for the three and six months ended June 30, 2001. In accordance
with the provisions of the Management Agreement, the Company recorded
reimbursements to the Manager of $6 and $11 for certain expenses
incurred on behalf of the Company during the three and six months ended
June 30, 2002 and $68 and $156 for certain expenses incurred on behalf
of the Company during the three and six months ended June 30, 2001.
Through March 28, 2002, the Company paid the Manager on a quarterly
basis, as incentive compensation, an amount equal to 25% of the funds
from operations of the Company (as defined in the Management Agreement)
plus gains (minus losses) from debt restructuring and sales of property,
before incentive compensation in excess of a threshold rate. The
threshold rate for the six months ended June 30, 2001 was based upon an
annualized return on equity equal to 3.5% over the ten year U.S.
Treasury Rate on the adjusted issue price of the Common Stock. Effective
July 1, 2001, the Manager revised the threshold rate to be the greater
of 3.5% over the ten-year U.S. Treasury Rate or 9.5%.
Pursuant to the March 25, 2002 one-year Management Agreement extension,
such incentive fee will be based on 25% of the Company's GAAP net
income. 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.
Additionally, the Management Agreement was revised in May 2002 as the
Manager agreed that in determining GAAP earnings for purposes of
calculating the incentive fee, GAAP earnings for the three months ended
March 31, 2002 would not include the $6,327 income recognized as the
cumulative effect of implementing SFAS 142. Instead, the income from the
cumulative effect of SFAS 142 will be included in GAAP income in the
periods in which it would have been earned had the Company not adopted
SFAS 142. The Company incurred $3,188 in incentive compensation for the
six months ended June 30, 2002, and $559 and $1,137 in incentive
compensation for the three and six months ended June 30, 2001. The
Company did not incur incentive compensation for the three months ended
June 30, 2002. 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 the three and six month period
ended June 30, 2002, the administration fee was $43 and $86,
respectively. For the three and six month period ended June 30, 2001,
the administration fee was $35 and $66, respectively.
In March 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 December 31, 2001, there was $13,885 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 three months ended March
31, 2001. The outstanding borrowings were repaid prior to the expiration
on March 13, 2002; at which time the remaining trusts were sold at a
gain of $90.
On July 20, 2001, the Company entered into a $50,000 commitment to
acquire shares in Carbon Capital, Inc. ("Carbon"), a private commercial
real estate income opportunity fund managed by BlackRock . The Company
does not pay BlackRock management or incentive fees through Carbon and
has additionally received a reduction of management fee for this
investment on its own management contract with BlackRock as a result of
this investment. On November 7, 2001 the Company received a capital call
notice to fund a portion of its Carbon Capital, Inc. investment. The
total amount of the capital call was $8,784, which was paid on November
19, 2001. The proceeds were used by Carbon to acquire three commercial
loans all of which are secured by office buildings. The Company's
remaining commitment is $41,216. As of June 30, 2002, the Company owned
20.3% of the outstanding shares in Carbon, and BlackRock Financial
Management, Inc., its affiliates, officers, directors and employees
collectively owned 3.9%.
At the time of the Core-Cap merger, the Manager agreed to pay GMAC
Mortgage Asset Management, Inc. (GMAC) $12,500 over a ten-year period
(Installment Payment). The Company agreed that should it terminate the
Manager without 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. As of June 30, 2002, the installment payment would
be $9,500 payable over eight years. The Company does not accrue for this
contingent liability.
Note 9 BORROWINGS
Certain information with respect to the Company's collateralized
borrowings excluding Collateralized Debt Obligations ("CDO") at June 30,
2002 is summarized as follows:
Reverse Total
Lines of Credit Repurchase
and Term Loans Agreements Collateralized
Borrowings
----------------------- --------------------- -----------------------
Outstanding borrowings $ 37,351 $858,016 $895,367
Weighted average borrowing rate 4.34% 1.83% 1.93%
Weighted average remaining maturity 369 days 19 days 33 days
Estimated fair value of assets pledged $57,869 $884,922 $942,791
As of June 30, 2002, $21,348 of borrowings outstanding under the lines
of credit was denominated in pounds sterling and interest payable is
based on sterling LIBOR.
As of June 30, 2002, the Company's collateralized borrowings had the
following remaining maturities:
Lines of Reverse Total
Credit and Repurchase
Term Loan Agreements Collateralized
Borrowings
----------------------- ----------------------- -----------------------
Within 30 days $ 1,337 $858,016 $859,353
31 to 59 days - - -
Over 60 days 36,014 - 36,014
----------------------- ----------------------- -----------------------
$37,351 $858,016 $895,367
======================= ======================= =======================
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.
On May 29, 2002 the Company issued ten tranches of secured debt through
a CDO. In this transaction a wholly-owned subsidiary of the Company
issued secured debt in the par amount of $419,185 secured by the
subsidiary's assets. The adjusted issue price of the CDO debt as of June
30, 2002 is $403,688. Five tranches were issued at a fixed rate coupon
and five tranches were issued at a floating rate coupon with a combined
weighted average remaining maturity of 9.94 years. All floating rate
coupons were swapped to fixed resulting in a total fixed rate cost of
funds for the CDO of approximately 7.21%. The CDO was structured to
match fund the cash flows from a significant portion of the Company's
CMBS and 100% of its unsecured real estate investment trust debt
portfolio (REIT debt). The par amount as of June 30, 2002 of the
collateral securing the CDO consists of 78% CMBS rated B or higher and
22% REIT debt rated BBB or higher. As of June 30, 2002, the collateral
securing the CDO has a fair value of $410,796. Proceeds from the CDO
were used to pay off all of the financing of the Company's CMBS Below
Investment Grade portfolio, BBB portfolio, and its REIT debt portfolio.
Prior to the CDO, these portfolios were financed with thirty-day
repurchase agreements with various counterparties that marked the assets
to market on a daily basis at interest rates based on 30 day LIBOR. For
accounting purposes, this transaction was treated as a secured
financing, and the loan is non-recourse to the Company.
Note 10 DERIVATIVE 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). Ineffective portions of
changes in the fair value of cash flow hedges 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
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.
As of June 30, 2002, the Company had interest rate swaps with notional
amounts aggregating $866,495 that were designated as cash flow hedges of
borrowings under reverse repurchase agreements. Their aggregate fair
value was a $20,505 liability included in other liabilities on the
statement of financial condition. For the six months ended June 30,
2002, the net change in the fair value of the interest rate swaps was a
decrease of $18,404 of which $212 was deemed ineffective and is included
as a reduction of interest expense and $18,616 was recorded as a
reduction of OCI. As of June 30, 2002, the $866,495 notional amount of
the swaps, which were designated as cash flow hedges, had a weighted
average remaining term of 5.4 years.
During the three months ended June 30, 2002, the Company closed two of
its interest rate swaps with a notional amount of $103,000, which were
designated as a cash flow hedge of borrowings under reverse repurchase
agreements. The Company will amortize as an increase of interest expense
the $2,268 loss in value included in OCI incurred upon closure of the
swaps over their remaining terms. The amortized cost of $4,585 related
to the purchase of the swap, will continue to be amortized as a decrease
of interest income over the remaining term of the swap.
As of June 30, 2002, the Company had interest rate swaps with notional
amounts aggregating $272,145 designated as trading derivatives. Their
aggregate fair value at June 30, 2002 of $(1,473) is included in trading
securities. For the six months ended June 30, 2002, the change in fair
value for these trading derivatives was a decrease of $1,718 and is
included as an addition to loss on securities held for trading in the
consolidated statement of operations. As of June 30, 2002, the $272,145
notional of swaps, which were designated as trading derivatives, had a
weighted average remaining term of 9.24 years.
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. Net deposits are
recorded as a component of accounts receivable or other liabilities.
Should the counterparty fail to return deposits paid, the Company would
be at risk for the fair market value of that asset. At June 30, 2002 and
2001, the balance of such net margin deposits owed to counterparties as
collateral under these agreements totaled $1,610 and $10,675,
respectively.
The contracts identified in the remaining portion of this footnote have
been entered into to limit the Company's mark to market exposure to
long-term interest rates.
At June 30, 2002, the Company had outstanding a long position of 645
five-year U.S. Treasury Note future contracts expiring in September
2002, which represented $64,500 in face amount of U.S. Treasury Notes,
and an interest rate cap with a notional amount of $85,000.
Additionally, at June 30, 2002, the Company had outstanding a short
position of 2,735 ten-year U.S. Treasury Note future contracts expiring
in September 2002, which represented 273,500 in face amount of U.S.
Treasury Notes. The estimated fair value of these contracts was
approximately $(218,320) at June 30, 2002, included in securities held
for trading, and the change in fair value related to these contracts is
included as a component of loss on securities held for trading.
Note 11 SUBSEQUENT EVENTS
On July 16, 2002, the Company extended its $185,000 committed credit
facility with Deutsche Bank, AG for three years until July 15, 2005. The
Company's leverage constraint of 5.0 to 1, as provided for in the
Deutsche Bank facility, was revised to be 5.5 to 1.
On July 8, 2002 the Company entered into a $75,000 committed credit
facility with Greenwich Capital, Inc. The facility provides the Company
with the ability to borrow only in the first year, with the repayment of
principal not due for three years. As of August 13, 2002, no amounts
were drawn under this facility. The facility is LIBOR based.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company's long-term goal is to provide a consistent dividend
primarily supported by long-term operating earnings from a portfolio of
commercial real estate loans and securities secured by such loans.
The Company reported $0.25 per share of net income for the second
quarter of 2002 and $0.82 for the six months ended June 30, 2002. The
comparable figures for the year earlier periods were $0.32 and $0.65
respectively. Operating Income for the second quarter was $0.43 per
share and $0.86 for the six months ended June 30, 2002 versus $0.34 and
$0.65 per share respectively for the year earlier periods. The Company
considers operating income ("Operating Income") to be its net interest
income less all operating expenses and loss provisions. Operating Income
does not include potentially non-recurring items such as the effects of
accounting changes (FAS 133 and 142). It also does not include realized
or unrealized gains and losses from active trading and from mark to
market of assets and hedging instruments held for trading. Securities
held for trading can be separated into two general categories. First,
those residential mortgage backed securities held primarily for
liquidity diversification, and second, those securities held for active
trading associated with strategies designed to generate realized capital
gains over time to offset capital loss carry forwards. During the three
and six months ended June 30, 2002 these items resulted in losses of
$0.19 per share and $0.04 per share respectively including the effects
of accounting changes. The loss on securities held for trading is
related to a widening of residential mortgage spreads relative to their
associated hedges.
When establishing the level of dividends the Company relies primarily on
its Operating Income as the Company believes that despite periodic
fluctuations in values, gains and losses from securities held for
trading will generally net positive gains. On June 20, 2002, the Company
declared a quarterly dividend of $0.35, which results in a semi-annual
rate of $0.70. This level of semi-annual dividends is consistent with
the semi-annual level of operating and reported earnings. Excluding the
effects of accounting changes, income for the first six months of 2002
is $0.68 per share, which is also consistent with the level of dividends
declared during the period.
The Company's second quarter Operating Income represents an annualized
return on the quarter's average common stock equity (Annualized ROE) of
22.6% and net interest margin of 4.8%. The comparable figures for the
year earlier period were 18.9% and 4.9% respectively.
The highlights of the first six months of 2002 include the following:
|_| Execution of a secured financing transaction to substantially reduce
the funding risk of the Company's credit sensitive securities,
|_| Reduction in the Company's exposure to short-term and long-term
interest rates,
|_| Increase of $70,000 in the Company's liquid assets available for
reinvestment,
|_| 32% year over year increase in six-month operating income per share,
from $0.65 to $0.86 per share, and
|_| 13% year over year increase in six-month dividends per share, from
$0.62 to $0.70 per share.
On May 29, 2002 the Company issued ten tranches of secured debt through a
collateralized debt obligation (CDO). In this transaction a wholly-owned
subsidiary of the Company issued secured debt in the par amount of $419,185
secured by the subsidiary's assets. Five tranches were issued at a fixed
rate coupon and five tranches were issued at a floating rate coupon. All
floating rate coupons were swapped to a fixed rate resulting in a total
fixed rate cost of funds for the CDO of approximately 7.21%. The CDO was
structured to match fund the cash flows from a significant portion of the
Company's subordinated CMBS and 100% of its unsecured real estate
investment trust debt portfolio (REIT debt). The par amount as of June 30,
2002 of the portfolio securing the CDO consists of 78% CMBS rated B or
higher and 22% REIT debt rated BBB or higher. Proceeds from the CDO were
used to pay off all of the financing of the Company's CMBS Below Investment
Grade portfolio, BBB portfolio, and its REIT debt portfolio. Prior to the
CDO, these portfolios were financed with thirty-day repurchase agreements
with various counterparties that marked the assets to market on a daily
basis at interest rates based on 30 day LIBOR. For accounting purposes, the
CDO is treated as a secured financing, and the CDO debt is non-recourse to
the Company.
The CDO issuance eliminates the funding risk, the short-term rate risk, and
mark to market risk currently associated with financing these assets. The
elimination of this funding risk is expected to provide a more sustainable
earnings stream over the long-term which should result in greater
consistency of the Company's dividend. There is no effect on the Company's
book value per share.
The CDO debt was sold to institutional investors on three continents in
eight countries. The cost of funds of the CDO for the AAA rated tranche was
lower than all commercial real estate CDO's previously executed. The
efficient execution of this transaction indicates that the global capital
markets consider the Company to be a premier platform in the commercial
real estate finance sector.
The CDO advance rates were significantly better than the repo market and
the advance rates permitted by the Company's financing facilities. This
generated approximately $70,000 of excess liquidity that will be utilized
to invest in additional commercial real estate opportunities. The current
uncertainty in the U.S. economy and capital markets in particular has
slowed the pace of the Company's reinvestment activity. The Company has
deployed more capital into its highly liquid Residential Mortgage Backed
securities strategy to continue generating consistent earnings while
maintaining its conservative underwriting discipline.
The GAAP book value per share at quarter end was $7.52. The net asset value
per common share of the Company at quarter end was $7.83 based upon market
prices provided by dealers. The net asset value per common share decreased
approximately 2% from $7.97 at March 31, 2002 and has increased 4% from
$7.53 as of December 31, 2001.
Market Conditions and Their Effect on Company Performance
Overview: The U.S. economic recovery is uneven. Despite an unexpected 5%
increase in first quarter GDP, apparent gains in manufacturing, a decline
in the pace of layoffs and continued strength in housing are being offset
by slumping consumer confidence, weak corporate spending, a plummeting
dollar and shattered investor confidence. With a 1.1% GDP growth number in
the second quarter which would have been negative absent inventory
building, talk of a "double-dip" recession has resurfaced.
The staggering US stock market is overwhelming and influencing economic
fundamentals. If one views market psychology as a pendulum swinging between
fear and greed, there is little doubt that the pendulum has swung towards
fear. So far in 2002, we have seen the largest outflows ever from equity
mutual funds, the largest inflows ever into municipal bond funds, the
highest price for gold in three years, the worst month ever in the high
yield market, the biggest ever corporate bankruptcy, the highest level
since September 2001 in the VIX index of equity volatility, and the first
period since 1975 that the average mutual fund had negative returns for the
trailing three years. In this type of environment we do not expect
businesses or consumers to spend aggressively which in turn suggests
weakness for real estate fundamentals.
The principal performance risks that the Company faces are (i) credit risk
on the CMBS and commercial real estate loans it underwrites; (ii) interest
rate risk, which affects the market value of the Company's assets and the
cost of funds needed to finance these assets and (iii) liquidity risk,
which affects the Company's ability to finance itself over the long term.
Of these risks, the greatest risk for the Company is credit risk.
Credit Risk and Company Performance: The Company's primary risk is
commercial real estate credit risk. These investments take two forms: (1)
below investment grade CMBS, and 2) commercial real estate loans.
CMBS Credit Risk:
Credit spreads represent the premium above the Treasury rates required by
the market to take credit risk. CMBS below investment grade bonds have
outperformed similarly rated corporate bonds during the second quarter.
Relative performance of CMBS has been supported by CDO accumulation,
insurance company purchases, and a new issue supply which has run below
2001 volume. The performance of corporate bonds has been driven by a
dramatic increase in credit event risk and extremely weak investor
sentiment. 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 June 30, 2002 571 549 22
As of March 31, 2002 589 415 174
B CMBS B Corporate Difference
------ ----------- ----------
As of June 30, 2002 1052 783 269
As of March 31, 2002 1046 614 432
*Source - Lehman Brothers CMBS High Yield Index & Lehman Brothers High Yield Index
The Company owns seven CMBS first loss securitizations. Five of the
seven were issued in 1998. The Company considers delinquency information
from the Lehman Brothers Conduit Guide for 1998 vintage transactions to
be the most relevant measure of credit performance market conditions
applicable to its CMBS first loss holdings. The broader measure of all
transactions tracked in the Conduit Guide since 1994 also provides
relevant comparable information. The delinquency statistics are shown in
the table below:
- ---------------- ------------------------------------------------------- --------------------------------------------------------
Lehman Brothers Conduit Guide For 1998 Vintage Lehman Brothers Conduit Guide For All Transactions
Transactions
- ---------------- -------------------- ----------------- ---------------- -------------------- ------------------- ---------------
Date Number of Collateral % Delinquent Number of Collateral Balance % Delinquent
Securitizations Balance Securitizations
- ---------------- -------------------- ----------------- ---------------- -------------------- ------------------- ---------------
6/30/02 39 $50,625 1.89% 230 $201,105 1.57%
- ---------------- -------------------- ----------------- ---------------- -------------------- ------------------- ---------------
3/31/02 39 $50,978 1.89% 222 $195,063 1.61%
- ---------------- -------------------- ----------------- ---------------- -------------------- ------------------- ---------------
Morgan Stanley Dean Witter (MSDW) also tracks CMBS loan delinquencies
using a slightly smaller universe. The MSDW 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 June 30,
2002 the MSDW index indicated that delinquencies on 183 securitizations
was 2.06%. As of March 31, 2002, this same index tracked 180
securitizations with delinquencies of 2.08%. See the section titled
"Quantitative and Qualitative Disclosures About Market Risks" for a
detailed discussion of how delinquencies and loan losses affect the
Company.
The Company's below investment grade CMBS portfolio has a total par
amount of $773,534. Of this amount, $126,010 is the par of the
securities that represent the first loss on the underlying mortgages,
and $546,502 is the par of the securities that represent the remaining
tranches owned by the Company when the Company owns the first loss
security. The Company, in performing its due diligence upon acquisition
of the securities, estimated $180,000 of principal would not be
recovered. This estimate was developed on a loan-by-loan basis and
represents in aggregate approximately 1.8% of the underlying principal
balance of the collateral. In aggregate this loss estimate equates to
cumulative expected defaults of approximately 5% over the life of the
portfolio, and an average assumed loss severity of 34% of loan balance
(which is equivalent to the long-term historical average including both
principal and interest calculated in a study of thirty years of loan
data). Actual results could materially differ from estimated results.
See "Risk Disclosures" for a discussion of how differences between
estimated and actual losses could affect Company earnings. There are
currently 1,899 underlying first mortgage loans supporting the Company's
first loss CMBS with an aggregate principal balance of over $9.7 billion
as of June 30, 2002. The average loan to value (LTV) and debt service
coverage ratios (DSCR) at the origination of these loans were 69.9% and
1.46 times respectively.
The Company manages its credit risk through disciplined underwriting,
diversification, active monitoring of loan performance and exercise of
its right to control the workout process 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
are:
- ------------------------------------------------------------------------------------------------
6/30/02 3/31/02
Exposure Exposure
- ------------------------------------------------------------------------------------------------
Property Type Loan Balance % of Total Loan Balance % of Total
- ------------------------------------------------------------------------------------------------
Multifamily $3,375,486 34.5% $3,402,871 34.6%
Retail 2,729,418 27.9 2,740,315 27.9
Office 1,849,196 18.9 1,855,873 18.9
Lodging 845,327 8.7 849,527 8.6
Industrial 594,654 6.1 602,157 6.1
Healthcare 350,024 3.6 351,837 3.6
Parking 29,970 0.3 30,079 0.3
- ------------------------------------------------------------------------------------------------
Total $9,774,075 100% $9,832,659 100%
- ------------------------------------------------------------------------------------------------
Of the 39 delinquent loans shown on the chart in Note 6, three were
delinquent due to technical reasons, five were Real Estate Owned and being
marketed for sale, six were in foreclosure, and the remaining 15 loans were
in some form of workout negotiations. Aggregate realized losses of $319
were taken in the second quarter of 2002. This brings cumulative net losses
realized to $5,609, which is 3.1% of total estimated losses. This
experience to-date is in line with the Company's loss expectations.
Realized losses are expected to increase on the underlying loans as the
portfolio ages.
The Company reports income based on an assumption that losses will occur
over time. The Company reviews its loss estimates on a quarterly basis.
This review includes analysis of monthly payment experience and a quarterly
review of reported debt service coverage ratios of the underlying
properties. To date no adjustments to the loss estimates have been made.
During the second quarter of 2002 the Company also experienced early
payoffs of $24,191, which represents 0.25% of the year-end pool balance.
These loans were paid-off at par with no loss. The anticipated losses
attributable to these loans will be reallocated to the loans remaining in
the pools.
The subordinated CMBS owned by the Company has a delinquency experience of
1.98%, compared to 1.89% for the Lehman Brothers Conduit Guide for 1998
vintage transactions. Although delinquencies on the Company's CMBS
collateral as a percent of principal declined since March 31, 2002, the
Company expects delinquencies to continue to rise throughout 2002 in line
with expectations.
The Company owns six subordinate tranches of the GMAC 98 C-1 CMBS
securitization, included in securities held to maturity. On May 14, 2002, a
borrower whose loan is included in the securitization filed Chapter 11
bankruptcy. The $209,305 loan is secured by mortgages on 82 skilled nursing
facilities as well as a surety bond from a A1- rated surety. When the
borrower ceased making payments in November 2000 the surety began making
the monthly debt service payments; at that time the surety's total
obligation was set at approximately $215,000 as per the terms of the surety
agreement which covers both principal and interest. As of June 30, 2002,
the surety's remaining obligation to pay the borrowers scheduled debt
service payments was approximately $184,000. The bankruptcy court has
approved of the surety providing debtor in possession financing for up to
$20,000. At this time, the Company does not believe that an adjustment is
required for possible losses on this loan.
As of June 30, 2002 the fair market value of the Company's holdings of CMBS
is $86,472 lower than the adjusted cost for these securities. 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 June 30, 2002
represents approximately 62% of its par amount. The market value of the
Company's CMBS portfolio as of June 30, 2002 represents approximately 49%
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. As of June
30, 2002 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 which would negatively affect the market value.
The Company's GAAP income for its CMBS securities is computed based upon a
yield which assumes credit losses would 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. As a
result, for the years 1998 through June 30, 2002, the Company's GAAP income
accrued on its CMBS assets was approximately $14,600 lower than the taxable
income accrued on the CMBS assets.
As part of the acquisition of CORE Cap, Inc. in May 2000 the Company
acquired securities backed by franchise loans originated by Franchise
Mortgage Acceptance Corporation ("FMAC 1998-B Trust"). The Trust is
collateralized by loans on 320 properties to 71 borrowers. The properties
are largely franchise restaurants and gas station convenience stores. The
Company owns the class B tranche in the par amount of $16,366. As of June
30, 2002 this security was rated BB by Fitch (on ratings watch negative),
and rated B by Standards and Poors (not on credit watch) and was current
with respect to principal and interest. The adjusted cost of the security
is 87% of par or $14,218 and is currently held as available for sale at 27%
of par or $4,419. The $9,797 difference between adjusted cost and carrying
value is reflected as a balance sheet item in Other Comprehensive Income.
Were the Company to conclude based on subsequent information that actual
cash flows were to differ materially from expected cash flows then the
Company would take an impairment charge through income to reflect the
difference between original expected cash flows and its estimate at that
time. Although data received in the future may suggest otherwise, based on
currently available data, the Company does not feel that an impairment
charge is required. The principle factors relating to this determination at
this time are the existence of approximately $30 million of structural
subordination below the Company's position, generally stable defaults and
delinquencies on underlying loans over the past year, a stabilization in
aggregate delinquencies and defaults industry wide in the franchise
receivables market, and the fact that the servicing of the underlying loans
is now being performed by a more credible servicer in the form of GMAC. In
addition, the bond class subordinate to the Company's position remains
current.
Commercial Real Estate Markets:
Despite the very strong relative performance of the real estate equity
indices, fundamental property performance is weak. Demand has been negative
in all property segments with the exception of retail. Office vacancies are
at the highest level in a decade, multifamily is weak for the first time in
a decade, lodging is struggling to recover pricing power and industrial has
experienced its largest ever deterioration in occupancy. While retailers
(principally discounters) have performed well on the strength of
extraordinary levels of consumer spending, the Company will be very
selective in this asset class in a world of slower consumer spending.
Despite historically low interest rates, commercial lending volume is down
from a near record in 2001. This decline in lending volume can be
attributed to: the concern over terrorism insurance, the smaller need for
acquisition financing given the continued bid/offer gap between buyers and
sellers, and a general lower amount of debt which is maturing which would
need to be refinanced. The pricing for high yield real estate debt has
gotten tighter reflecting greater investor interest in the sector rather
than improving real estate fundamentals. Using new issue BB CMBS spreads as
a proxy, spreads on new issue BB CMBS have tightened by approximately 100
basis points, or 20%, in the past 12 months.
Commercial Real Estate Loans:
The Company owns $134,526 in principal balance comprising of seven loans
and two preferred equity interests in partnerships that own office
buildings. The Company's commercial real estate loan portfolio generally
emphasizes larger transactions located in metropolitan markets, as compared
to the typical loan in the CMBS portfolio. There are no delinquencies in
the Company's commercial real estate loan portfolio which is relatively
small and heterogeneous. The Company has determined it is not necessary to
establish a loan loss reserve.
Interest Rate Risk and Company Performance:
Long-term interest rates rallied during the second quarter 2002. Both
long-term and short-term interest rates affect Company performance. The
majority of the Company's asset values are indexed off of Ten Year Treasury
securities. The amount of financing available for portfolio assets that are
not in the CDO is based on their market values. The Company is currently
not borrowing on its CMBS portfolio outside of the CDO. The total amount of
borrowing on the RMBS portfolio is $848,051.
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 ten-year U.S.
Treasury securities to the one-month LIBOR rate.
Ten Year U.S Treasury One month
Securities LIBOR Difference
--------------------- --------- ----------
June 30, 2002 4.82% 1.84% 2.98%
March 31, 2002 5.41% 1.88% 3.53%
The Company actively hedges its exposure to both short-term and long-term
rates. The degree of hedging and the choice of hedging instruments depends
on market conditions. This information is reviewed on a daily basis and
changes are made accordingly. The Company uses a combination of interest
rate futures contracts and interest rate swap agreements to hedge these
exposures. The cost of the Company's hedging strategy during the second
quarter was $5,384, or $0.12 per share.
Liquidity Risk:
The Company acquires its investments using its capital and borrowed funds.
The availability of funds is a key component of the Company's operations.
During times of market uncertainty the availability of this type of
financing can be very limited. The Company currently funds itself mainly
through its long-term match funded CDO debt and short-term secured lending
arrangements with various counterparties. The Company also recently renewed
its committed borrowing facility from Deutsche Bank in the amount of
$185,000. This facility matured in July 2002 and was extended to July 2005.
Additionally, on July 8, 2002 the Company entered into a $75,000 committed
credit facility with Greenwich Capital, Inc. The facility provides the
Company with the ability to borrow only in the first year, with the
repayment of principal not due for three years.
During the quarter ended June 30, 2002, the Company's weighted average
credit rating of invested equity increased from BB- to BB based on the
additional liquidity raised from the CDO. Aggregate leverage declined from
4.0:1 debt to capital at March 31, 2002 to 3.3:1 as of June 30, 2002 as the
Company paid down existing liabilities coincident with the CDO and
decreased its investment in RMBS assets. The three investment operations of
the Company are all financed on a secured basis at levels that take into
account the specific risks of that asset class. As of June 30, 2002 the
Company's CMBS portfolio that was not included in the CDO was not financed.
The commercial real estate loan portfolio was financed at a debt to capital
ratio of 0.33:1, and the RMBS was financed at a ratio of 9.35:1.
The Company's RMBS portfolio continues to enjoy exceptional carry, as the
yield curve remained steep. The Company's residential portfolio is
comprised of 15-year agency residential mortgages with coupons of 5.5% or
6.0%. The attractive interest spread between RMBS and short-term rates is
expected to continue, as the Fed recently switched to an easing bias
indicating it will not raise short-term rates in the near term. Refinancing
was moderate during the quarter ended June 30, 2002 but lower rates at
quarter end and beyond is creating greater supply expectations in the low
coupon fixed as well as adjustable rate mortgage markets. These supply
expectations are preventing mortgages from increasing in value in line with
reduced interest rates. The Company will maintain its commitment to this
sector until compelling long-term commercial real estate loan investments
become available. The RMBS portfolio contributed approximately $0.20 per
share to the Operating Income of the Company but can contribute to greater
variability of reported results due to the mark to market requirement.
Within the residential mortgage portfolio the Company maintains an active
trading strategy designed to take advantage of market opportunities and
generate realized capital gains. During the second quarter the Company
maintained a trade where it entered into contracts to purchase up to
$500,000 of 5.5% and 6.0% fixed coupon 15-year agency residential mortgages
offset by over $500,000 notional amounts of five year interest rate swaps
and various treasury futures contracts. At the beginning of the second
quarter the spread between the mortgage contracts and swaps was
historically wide. This trade was intended to profit from that gap
narrowing. The mortgages performed poorly as prepayment fears took hold and
volatility increased. While the low coupons of the Company's mortgages
generally have less prepayment risk, fears of increased supply overwhelmed
the positive aspects of the position. In addition, swap spreads tightened
as high volatility caused investors to seek higher quality spread assets.
The differential between RMBS and five year swaps increased significantly
during the second quarter from 65 basis points to 90 basis points causing a
loss of 1% of the notional amount of the trade. This caused the Company to
experience losses of $5,145.
The Company's risk parameters on this type of trading activity are that it
will not be sensitive to general interest rates, it will not exceed $200,000
of ten year duration equivalents (i.e. maximum of $500,000 of mortgages), and
it will constitute a low volatility trade. The Company continues to utilize
these active trading strategies as it has been since the fourth quarter of
1998 to generate gains to offset capital loss carry forwards.
Recent Events:
On July 19, 2002, the Company extended its $185,000 committed credit
facility with Deutsche Bank, AG for three years until July 18, 2005. The
Company's leverage constraint of 5.0 to 1, as provided for in the Deutsche
Bank facility, was revised to be 5.5 to 1.
On July 8, 2002 the Company entered into a $75,000 committed credit
facility with Greenwich Capital, Inc. The facility provides the Company
with the ability to borrow only in the first year, with the repayment of
principal not due for three years. As of August 13, 2002, no amounts were
drawn under this facility. Interest expense is based on one month LIBOR.
Results of Operations: Net income for the three months ended June 30, 2002
was $12,741 or $0.25 per share ($0.25 diluted). Net income for the three
months ended June 30, 2001 was $13,102 or $0.33 per share ($0.32 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 June 30,
2002 2001
----------------------------- ------------------------------
Interest Interest
Income Income
----------------------------- ------------------------------
CMBS $14,470 $14,207
Other securities 12,468 4,997
Commercial mortgage loans 3,427 4,209
Mortgage loan pools - 137
Cash and cash equivalents 491 875
----------------------------- ------------------------------
Total $30,856 $24,425
============================= ==============================
For the Six Months Ended June 30,
2002 2001
----------------------------- ------------------------------
Interest Interest
Income Income
----------------------------- ------------------------------
CMBS $27,749 $24,514
Other securities 27,868 11,937
Commercial mortgage loans 7,046 10,196
Mortgage loan pools - 1,575
Cash and cash equivalents 810 1,072
----------------------------- ------------------------------
Total $63,473 $49,294
============================= ==============================
In addition to the foregoing, the Company earned $7,420 and $13,708 in
interest income from securities held for trading, $262 and $523 in earnings
from real estate joint ventures, and $194 and $379 in earnings from an
equity investment for the three and six months ended June 30, 2002. In
addition to the foregoing, the Company earned $3,663 and $4,767 in interest
income from securities held for trading, and $317 and $684 in earnings from
real estate joint ventures for the three and six months ended June 30,
2001. The company had no earnings from equity investments for the three and
six months ended June 30, 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 June 30,
2002 2001
---------------------------------- ------------------------------
Interest Interest
Expense Expense
---------------------------------- ------------------------------
Reverse repurchase agreements $ 7,862 $ 10,087
Lines of credit and term loan 852 2,465
CDO liabilities 1,376 -
---------------------------------- ------------------------------
Total $10,090 $ 12,552
================================== ==============================
For the Six Months Ended June 30,
2002 2001
---------------------------------- ------------------------------
Interest Interest
Expense Expense
---------------------------------- ------------------------------
Reverse repurchase agreements $ 16,009 $ 19,015
Lines of credit and term loan 1,547 6,173
CDO liabilities 1,376 -
================================== ==============================
Total $ 18,932 $ 25,188
================================== ==============================
The foregoing interest expense amounts for the three and six months
ended June 30, 2002, do not include $963 and ($212) of interest expense
related to hedge ineffectiveness, and $4,421 and $8,394 of interest
expense related to swaps. The foregoing interest expense amounts for the
three and six months ended June 30, 2001, do not include ($1,615) and
($1,615) of interest expense related to hedge ineffectiveness, and $920
and $748 of interest expense related to swaps. See Note 10, Derivative
Instruments, for further description of the Company's hedge
ineffectiveness.
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.
The following interest income and expense amounts exclude income and
expense related to real estate joint ventures, equity investment, and
hedge ineffectiveness.
For the Three Months Ended June 30,
2002 2001
--------------------------------- ---------------------------------
Interest income $38,276 $28,088
Interest expense $14,498 $11,624
Net interest margin 4.67% 4.95%
Net interest spread 4.12% 3.54%
Other Expenses: Expenses other than interest expense consist primarily
of management fees and general and administrative expenses. The Company
incurred $2,278 and $4,496 in base management fees in accordance with
the terms of the Management Agreement for the three and six months ended
June 30, 2002 and $2,109 and $3,980 in base management fees for the six
months ended June 30, 2001. The Company incurred $3,189 in incentive
compensation for the six months ended June 30, 2002 and $559 and $1,137
for the three and six months ended June 30, 2001. The Company did not
incur incentive compensation for the three months ended June 30, 2002.
In accordance with the provisions of the Management Agreement, the
Company recorded reimbursements to the Manager of $6 and $11 for certain
expenses incurred on behalf of the Company during the three and six
months ended June 30, 2002 and $68 and $156 for the three and six months
ended June 30, 2001. Other expenses/income-net of $497 and $1,073 for
the three and six months ended June 30, 2002, and $283 and $969 for the
three and six months ended June 30, 2001, respectively, were comprised
of accounting agent fees, custodial agent fees, directors' fees, fees
for professional services, insurance premiums, broken deal expenses, and
due diligence costs. Other expenses/income-net for the three and six
months ended June 30, 2001 includes the amortization of negative
goodwill of $425 and $960, respectively; negative goodwill was written
off effective January 1, 2002.
Other Gains (Losses): During the six months ended June 30, 2002 and
2001, the Company sold a portion of its securities available-for-sale
for total proceeds of $678,724 and $842,238, resulting in a realized
gain of $4,154 and $5,134 for the three months ended June 30, 2002 and
2001, respectively; and $75 and $7,081 for the six months ended June 30,
2002 and 2001, respectively. The (losses) gains on securities held for
trading were $(11,914) and $(124) for the three months ended June 30,
2002 and 2001, respectively; and $(7,900) and $568 for the six months
ended June 30, 2002 and 2001, respectively. The foreign currency gains
(losses) of $18 and $5 for the three months ended June 30, 2002 and
2001, respectively; and $(229) and $109 for the six months ended June
30, 2002 and 2001, respectively, relate to the Company's net investment
in a commercial mortgage loan denominated in pounds sterling and
associated hedging.
Dividends Declared: On June 20, 2002, the Company declared distributions
to its shareholders of $.35 per share, payable on July 31, 2002 to
shareholders of record on June 28, 2002.
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 June 30, 2002 and December 31, 2001:
June 30, 2002 December 31,
Estimated 2001 Estimated
Fair Fair
Value Value
Security Description Percentage Percentage
- ----------------------------------------------------------- ------------------ --------------- ----------------- ----------------
Commercial mortgage-backed securities:
CMBS IOs $ 42,378 10.0% $ 79,204 5.5%
Investment grade CMBS - - 14,590 1.0
Non-investment grade rated subordinated securities - - 328,532 22.7
Non-rated subordinated securities - - 31,627 2.2
------------------ --------------- ----------------- ----------------
42,378 10.0 453,953 31.4
------------------ --------------- ----------------- ----------------
Single-family residential mortgage-backed securities:
Agency adjustable rate securities 46,778 11.0 75,035 5.2
Agency fixed rate securities 296,272 69.9 804,759 55.7
Residential CMOs 17,259 4.1 33,522 2.3
Home equity loans - - 27,299 1.9
Hybrid arms 21,437 5.0 51,386 3.5
------------------ --------------- ----------------- ----------------
381,746 90.0 992,001 68.6
------------------ --------------- ----------------- ----------------
------------------ --------------- ----------------- ----------------
Total securities available for sale $ 424,124 100.0% $ 1,445,954 100.0%
================== =============== ================= ================
Borrowings: As of June 30, 2002, the Company's debt consisted of
line-of-credit borrowings, CDO debt, term loans and reverse repurchase
agreements, collateralized by a pledge of most of the Company's
securities available for sale, securities held for trading, and its
commercial mortgage loans. The Company's financial flexibility is
affected by its ability to renew or replace on a continuous basis its
maturing short-term borrowings. As of June 30, 2002, 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 Six Months Ended
June 30, 2002
-------------------------------------------------------------------
June 30, 2002 Maximum Range of
Balance Balance Maturities
--------------------- ------------------- -------------------------
CDO debt* $403,688 $403,688 9.5 to 12.2 years
Reverse repurchase agreements 858,015 1,741,005 5 to 25 days
Line of credit and term loan borrowings 37,352 162,746 20 to 649 days
--------------------- ------------------- -------------------------
* Disclosed as adjusted issue price. Total par of CDO debt is $419,185
Hedging Instruments: From time to time the Company may reduce its
exposure to market interest rates by entering into various financial
instruments that adjust portfolio duration. These financial instruments
are intended to mitigate the effect of changes in interest rates on the
value of certain assets in the Company's portfolio. At June 30, 2002,
the Company had outstanding a long position of 645 five-year U.S.
Treasury Note future contracts and a short position of 2,735 ten-year
U.S. Treasury Note future contracts. At December 31, 2001, the Company
had outstanding short positions of 80 thirty-year U.S. Treasury Bond
futures, 500 ten-year U.S. Treasury Note future contracts, and a short
call swaption with a notional amount of $400,000.
Interest rate swap agreements as of June 30, 2002 and December 31, 2001
consisted of the following:
June 30, 2002 December 31, 2001
Weighted Weighted
Average Average
Notional Estimated Unamortized Remaining Notional Estimated Unamortized Remaining
Value Fair Value Cost Term Value Fair Value Cost Term
- ------------------------------------------------------ -------------------------------------------------------
$(1,138,640) $(26,223) $ - 6.32 years $(792,000) $(9,380) $4,764 8.12 years
As of June 30, 2002, the Company had designated $866,495 of the interest
rate swap agreements as cash flow hedges of borrowings under reverse
repurchase agreements.
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, collateralized debt
obligations, and will consider resecuritization or other achievable term
funding of existing assets.
Prior to the CDO, the portfolio of assets were financed with thirty-day
repurchase agreements with various counterparties that marked the assets
to market on a daily basis at interest rates based on 30 day LIBOR. The
CDO issuance eliminates the funding risk, the short-term rate risk, and
mark to market risk currently associated with financing these assets.
In March 2002, the Series A Preferred shareholder converted its
remaining 10,000 shares of the Series A Preferred Stock into 34,427
shares of Company Common Stock at a price of $7.26 per share pursuant to
the terms of such preferred stock, which is $0.09 lower than the
original conversion price due to the effects of anti-dilution provisions
of the Series A Preferred Stock.
For the three and six months ended June 30, 2002, the Company issued
302,665 and 821,968 shares of Common Stock under its Dividend
Reinvestment and Stock Purchase Plan. Net proceeds to the Company were
approximately $9,120.
In May, 2002, the Company entered into sales agency agreements to sell
up to 4,000,000 shares of common stock from time to time through an
equity shelf program. Sales of the shares, if any, will be made by means
of ordinary brokers' transactions on the New York Stock Exchange at
market prices. The Company intends to pursue such sales when it feels
the issuance of stock would be accretive to shareholders. The sales
agents for the equity shelf program will be UBS Warburg and Brinson
Patrick Securities Corporation. No shares were sold during the quarter
ended June 30, 2002.
As of June 30, 2002 $168,996 of the Company's $185,000 committed credit
facility with Deutsche Bank, AG was available for future borrowings. On
July 16, 2002, the Company extended its $185,000 committed credit
facility with Deutsche Bank, AG for three years until July 15, 2005. The
Company also has the option to extend the facility for one additional
year. The terms of the renewed facility are the same as the prior
facility except that the debt to capital ratio was increased from 5.0:1
to 5.5:1. There were no borrowings under the Company's $200,000 term
facility with Merrill Lynch as of June 30, 2002.
The Company's operating activities provided (used) cash flows of $77,603
and $(364,872) during the six months ended June 30, 2002 and 2001,
respectively, primarily through net income and purchases of trading
securities in excess of sales.
The Company's investing activities provided (used) cash flows totaling
$461,031 and $(352,100), during the six months ended June 30, 2002 and
2001, respectively, primarily to purchase securities available for sale
and to fund commercial mortgage loans, offset by significant sales of
securities.
The Company's financing activities (used) provided $(562,140) and
$700,767 during the six months ended June 30, 2002 and 2001,
respectively, primarily from secondary and follow on offerings in 2001
and reductions of the level of short-term borrowings in 2002.
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 have sufficient
cash flows from its portfolio to fund distributions to 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 5.5 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 June
30, 2002, 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. Current conditions in the capital markets for
REITS such as the Company have made permanent financing transactions
difficult and more expensive than at the time of the Company's initial
public offering. Consequently, 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 therefore
must 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 majority of the Company's assets are fixed rate securities valued based
on a market credit spread to U.S. Treasuries. As U.S. Treasury securities
are priced to a higher yield and/or the spread to U.S. Treasuries used to
price the Company's assets is increased, the market value of the Company's
portfolio may decline. Conversely, as U.S. Treasury securities are priced
to a lower yield and/or the spread to U.S. Treasuries used to price the
Company's assets is decreased, the market value of the Company's portfolio
may increase. Changes in the market 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. The majority of the
Company's liabilities are floating rate based on a market spread to U.S.
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, 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 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 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 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
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 June 30, 2002.
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
- ------------------------------- ------------------------
-200 (4.1)%
-100 (0.6)%
-50 0.1%
Base Case 0
+50 (0.8)%
+100 (2.3)%
+200 (7.6)%
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
- ------------------------------- --------------------------
-200 8.5%
-100 5.7%
-50 3.2%
Base Case 0
+50 (4.0)%
+100 (8.6)%
+200 (20.2)%
As of June 30, 2002, the Company's change in portfolio net market value
given changes in the U.S. Treasury yield curve and changes in credit
spreads is represented above; at August 1, 2002, the Company's exposure
changed due to the Company acquiring additional residential mortgage
backed securities. As of August 1, 2002 the projected change in
portfolio net market value given a 100 basis point increase and decrease
in the treasury yield curve and 100 basis point increase and decrease in
credit spreads is 8.1%, (1.3)%, (15.1)%, and 8.3%, respectively.
Projected Percentage Change In Portfolio Net Interest Income and Change in Net
Income per Share Given LIBOR Movements
Projected Change in
Projected Change in Portfolio Net
Change in LIBOR, Portfolio Interest Income per
+/- Basis Points Net Interest Income Share
- ----------------------------- ------------------------- -----------------------
-200 3.6% $0.08
-100 1.8% $0.04
-50 0.9% $0.02
Base Case 0 0
+50 (0.9) % $(0.02)
+100 (1.8)% $(0.04)
+200 (3.6)% $(0.08)
As of June 30, 2002, the Company's change in portfolio net interest
income and net interest income per share is represented above; at August
1, 2002, the Company's exposure to changes in LIBOR increased due to the
Company acquiring additional residential mortgage backed securities. As
of August 1, 2002 the projected change in portfolio net interest income
per share for 50, 100 and 200 basis point changes in LIBOR was $0.035,
$0.07, and $0.14 respectively.
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 is 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
10.1% to approximately 8.77%. This would reduce GAAP income going
forward by approximately $0.16 per common share per annum and cause a
significant write down in assets at the time the loss assumption is
changed to reduce the affected securities to their then fair value.
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 June 30, 2002, the Company's duration on
equity was approximately 0.74 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
0.74%. The difference in the value change when rates rise versus fall is
attributable to the prepayment characteristics of the Company's RMBS
portfolio. 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 Anthracite
Capital, Inc. (the "Company") with the SEC, in the Company's press
releases or in the Company's other public or stockholder 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, currency risk management, the
financial and securities markets, the real estate markets, and the
availability of and costs associated with sources of liquidity. 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 June 30, 2002 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
10.1 Fourth Amendment to the Investment Advisory Agreement between the
Company and the Manager, dated May 13, 2002.
(b) Reports on Form 8-K
A current report on Form 8-K was filed on April 29, 2002, under Item 5,
announcing (i) the Company's proposal to sell approximately $520
million (face amount) of its assets which including certain commercial
mortgaged-backed securities and unsecured real estate investment trust
obligations to Anthracite CDO I Ltd. (the "Issuer"), a newly formed
company incorporated with limited liability under the laws of the
Cayman Islands and a wholly-owned subsidiary of the Company and (ii)
the Issuer's intention to sell notes secured by such assets.
A current report on Form 8-K was filed on May 10, 2002, under Item
5, announcing, among other things, net income for the quarter ended
March 31, 2002. Unaudited Consolidated Statements of Financial
Condition and Operations were included.
A current report on Form 8-K was filed on May 16, 2002, under Item
5, announcing, among other things, that the transaction contemplated
in the Form 8-K filed on April 29, 2002, had priced. Additionally,
the Company announced it had entered into sales agency agreements to
sell up to 4,000,000 shares of common stock from time to time
through an equity shelf program by means of ordinary brokers'
transactions on the New York Stock Exchange at market prices. Copies
of the sales agency agreements were filled as exhibits.
A current report on Form 8-K was filed on June 3, 2002, under Item
5, announcing that the transaction contemplated in the Form 8-K
filed on April 29, 2002, had closed.
A current report on Form 8-K was filed on June 20, 2002, under Item
5, announcing, among other things, a cash dividend of $0.35 per
share of common stock of the Company for the quarter ended June 30,
2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANTHRACITE CAPITAL, INC.
Dated: August 14, 2002 By: /s/ Hugh R. Frater
-----------------
Name: Hugh R. Frater
Title: President and Chief Executive
Officer
(authorized officer of registrant)
Dated: August 14, 2002 By: /s/ Richard M. Shea
-------------------
Name: Richard M. Shea
Title: Chief Operating Officer and Chief
Financial Officer (principal
accounting officer)
Certification of CEO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Anthracite Capital,
Inc. (the "Company") for the quarterly period ending June 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Hugh R. Frater, as Chief Executive Officer of the Company,
hereby certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss.
906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations of
the Company.
/s/ Hugh R. Frater
- ------------------------------
Name: Hugh R. Frater
Title: Chief Executive Officer
Date: August 14, 2002
Certification of CFO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Anthracite Capital,
Inc. (the "Company") for the quarterly period ending June 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Richard M. Shea, as Chief Financial Officer of the Company,
hereby certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss.
906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations of
the Company.
/s/ Richard M. Shea
- ------------------------------
Name: Richard M. Shea
Title: Chief Financial Officer
Date: August 14, 2002
Exhibit 10.1
FOURTH AMENDMENT, dated as of May 13, 2002 (the "Fourth
Amendment"), to the Investment Advisory Agreement (the "Agreement"), dated
as of March 27, 1998 between Anthracite Capital, Inc., a Maryland
corporation (the "Company"), and BlackRock Financial Management, Inc., a
Delaware corporation (the "Manager"), as amended by that certain (i) First
Amendment, dated as of January 1, 1999 between the Company and the Manager,
(ii) Second Amendment, dated as of July 1, 2001, and (iii) Third Amendment,
dated as of March 25, 2002 (the "Third Amendment"), and as extended by that
certain (i) letter agreement dated May 5, 2000 between the Company and the
Manager and (ii) letter agreement dated the date hereof between the Company
and the Manager.
R E C I T A L S
Section 12 of the Agreement provides, among other things,
that the Company and the Manager may amend the Agreement, if, but only if,
such amendment is in writing and is signed by the parties thereto.
The Company and the Manager, intending to be legally
bound, hereby enter into this Fourth Amendment pursuant to Section 12 of
the Agreement, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged.
All things necessary to make this Fourth Amendment a
valid agreement between the Company and the Manager in accordance with its
terms have been done.
In the event that any term or provision contained herein
shall conflict or be inconsistent with any provision contained in the
Agreement, the terms and provisions of this Fourth Amendment shall govern.
All terms used in this Fourth Amendment which are defined
in the Agreement have the meanings assigned to such terms in the Agreement.
ARTICLE I
AMENDMENTS
(a) Amendment of Section 5(a) of the Agreement. Section
5(a)(ii)(A)(1)(a) of the Agreement is hereby amended by adding the words
"plus $534,623.47 (the "Fixed Amount") for each fiscal quarter for which a
calculation is made under this Section (provided, that, if this Agreement
is not renewed pursuant to Section 7 hereof or, in the event this Agreement
is so renewed, if the terms of this Section 5(a)(ii)(A)(1)(a) are amended
to modify the Fixed Amount, then the Fixed Amounts which would have been
payable through and including the quarter ended December 31, 2005 shall be
included in the final calculation made pursuant to this Section
5(a)(ii)(A)(1)(a) prior to giving effect to any such non-renewal or
modification; provided, further, that the Fixed Amount for the quarter
ended December 31, 2005 shall be deemed to be $446,141.80)" immediately
after the words "net income (determined in accordance with GAAP)" and
immediately prior to the words "of the Company (before incentive fee)". For
purposes of clarity, it is acknowledged that the Third Amendment (i)
amended Section 5(a)(ii)(A)(1)(a) of the Agreement by deleting the words
"Funds From Operations" and substituting therefor the words "net income
(determined in accordance with GAAP)", and (ii) deleted section
5(a)(ii)(A)(1)(b) of the Agreement.
ARTICLE II
MISCELLANEOUS
Section 2.1 Governing Law. This Fourth Amendment shall be
construed in accordance with the laws of the State of New York for
contracts to be performed entirely therein without reference to choice of
law principles thereof.
Section 2.2 Severability. The invalidity or
unenforceability of any provision of this Fourth Amendment shall not affect
the validity of any other provision, and all other provisions shall remain
in full force and effect.
Section 2.3 Counterparts. This Fourth Amendment may be
signed by the parties in counterparts which together shall constitute one
and the same agreement among the parties.
Section 2.4 Ratification of the Agreement. As amended by
this Fourth Amendment, the Agreement is in all respects ratified and
confirmed and the Agreement as so amended by this Fourth Amendment shall be
read, taken and construed as one and the same instrument.
Section 2.5 Effectiveness. This Fourth Amendment shall
take effect as of January 1, 2002.
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Amendment to be duly executed all as of the date first written above.
ANTHRACITE CAPITAL, INC.
By: /s/ Hugh R. Frater
------------------------------------
Name: Hugh R. Frater
Title: President and Chief Executive Officer
BLACKROCK FINANCIAL MANAGEMENT, INC.
By: /s/ Laurence D. Fink
------------------------------------
Name: Laurence D. Fink
Title: Chairman and Chief Executive Officer