RAIT Financial Trust - FORM 10-Q

RAIT Financial Trust - FORM 10-Q - August 7, 2015

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EX-31.2 - EX-31.2 - RAIT Financial Trust	d948739dex312.htm
EX-32.1 - EX-32.1 - RAIT Financial Trust	d948739dex321.htm
EX-12.1 - EX-12.1 - RAIT Financial Trust	d948739dex121.htm
EX-32.2 - EX-32.2 - RAIT Financial Trust	d948739dex322.htm
EX-31.1 - EX-31.1 - RAIT Financial Trust	d948739dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2015

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 1-14760

RAIT FINANCIAL TRUST

(Exact name of registrant as specified in its charter)


Maryland		23-2919819
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
2929 Arch Street, 17^th Floor, Philadelphia, PA		19104
(Address of principal executive offices)		(Zip Code)

(215) 243-9000

(Registrant’s telephone number, including area code)

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. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

A total of 90,895,723 common shares of beneficial interest, par value $0.03 per share, of the registrant were outstanding as of August 7, 2015.

RAIT FINANCIAL TRUST

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION			1

Item 1.	Financial Statements (unaudited)		1

	Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014		1

	Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2015 and 2014		2

	Consolidated Statements of Comprehensive Income (Loss) for the Three-Month and Six-Month Periods Ended June 30, 2015 and 2014		3

	Consolidated Statement of Changes in Equity for the Six-Month Period Ended June 30, 2015		4

	Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2015 and 2014		5

	Notes to Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		40

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		55

Item 4.	Controls and Procedures		55

PART II—OTHER INFORMATION			56

Item 1.	Legal Proceedings		56

Item 1A.	Risk Factors		56

Item 6.	Exhibits		57

	Signatures		58

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

RAIT Financial Trust

Consolidated Balance Sheets

(Unaudited and dollars in thousands, except share and per share information)


	As of June 30, 2015			As of December 31, 2014
Assets
Investment in mortgages, loans and preferred equity interests, at amortized cost:
Commercial mortgages, mezzanine loans, and preferred equity interests	$	1,506,542		$	1,392,436
Allowance for loan losses		(12,796	)		(9,218	)

Total investment in mortgages, loans and preferred equity interests		1,493,746			1,383,218
Investments in real estate, net of accumulated depreciation of $178,572 and $168,480, respectively		1,605,316			1,671,971
Investments in securities and security-related receivables, at fair value		—			31,412
Cash and cash equivalents		104,772			121,726
Restricted cash		179,878			124,220
Accrued interest receivable		56,844			51,640
Other assets		77,708			72,023
Deferred financing costs, net of accumulated amortization of $30,896 and $26,056, respectively		25,117			27,802
Intangible assets, net of accumulated amortization of $20,935 and $13,911, respectively		32,195			29,463

Total assets	$	3,575,576		$	3,513,475

Liabilities and Equity
Indebtedness	$	2,661,528		$	2,615,666
Accrued interest payable		11,042			10,269
Accounts payable and accrued expenses		52,728			54,962
Derivative liabilities		12,154			20,695
Deferred taxes, borrowers’ escrows and other liabilities		172,621			144,733

Total liabilities		2,910,073			2,846,325
Series D cumulative redeemable preferred shares, $0.01 par value per share, 4,000,000 shares authorized, 4,000,000 and 4,000,000 shares issued and outstanding, respectively		82,513			79,308
Equity:
Shareholders’ equity:
Preferred shares, $0.01 par value per share, 25,000,000 shares authorized;
7.75% Series A cumulative redeemable preferred shares, liquidation preference $25.00 per share, 8,069,288 shares authorized, respectively, 5,303,591 and 4,775,569 shares issued and outstanding, respectively		53			48
8.375% Series B cumulative redeemable preferred shares, liquidation preference $25.00 per share, 4,300,000 shares authorized, 2,325,626 and 2,288,465 shares issued and outstanding, respectively		23			23
8.875% Series C cumulative redeemable preferred shares, liquidation preference $25.00 per share, 3,600,000 shares authorized, 1,640,100 shares issued and outstanding		17			17
Series E cumulative redeemable preferred shares, $0.01 par value per share, 4,000,000 shares authorized		—			—
Common shares, $0.03 par value per share, 200,000,000 shares authorized, 82,895,723 and 82,506,606 issued and outstanding, respectively, including 743,014 and 541,575 unvested restricted common share awards, respectively		2,487			2,473
Additional paid in capital		2,039,594			2,025,683
Accumulated other comprehensive income (loss)		(11,605	)		(20,788	)
Retained earnings (deficit)		(1,651,613	)		(1,633,911	)

Total shareholders’ equity		378,956			373,545
Noncontrolling interests		204,034			214,297

Total equity		582,990			587,842

Total liabilities and equity	$	3,575,576		$	3,513,475

The accompanying notes are an integral part of these consolidated financial statements.

RAIT Financial Trust

Consolidated Statements of Operations

(Unaudited and dollars in thousands, except share and per share information)


	For the Three-Month Periods Ended June 30						For the Six-Month Periods Ended June 30
	2015			2014			2015			2014
Revenue:
Investment interest income	$	24,107		$	34,646		$	47,355		$	69,609
Investment interest expense		(7,582	)		(7,523	)		(14,496	)		(14,706	)

Net interest margin		16,525			27,123			32,859			54,903
Rental income		55,473			39,214			109,442			74,390
Fee and other income		7,415			6,919			13,009			11,271

Total revenue		79,413			73,256			155,310			140,564
Expenses:
Interest expense		19,673			13,241			39,356			24,846
Real estate operating expense		26,357			19,690			52,336			37,773
Compensation expense		6,568			7,376			12,676			15,931
General and administrative expense		5,065			4,655			10,465			8,483
Acquisition expense		985			219			1,942			592
Provision for loan losses		2,000			1,000			4,000			2,000
Depreciation and amortization expense		17,005			13,441			36,022			25,483

Total expenses		77,653			59,622			156,797			115,108

Operating Income		1,760			13,634			(1,487	)		25,456
Other (expense) income		(241	)		5			(636	)		15
Gain (losses) on assets		17,281			(7,599	)		17,281			(5,375	)
Gain (losses) on extinguishment of debt		—			—			—			2,421
Change in fair value of financial instruments		8,356			(25,071	)		12,846			(49,210	)

Income (loss) before taxes		27,156			(19,031	)		28,004			(26,693	)
Income tax (provision) benefit		(715	)		21			(1,297	)		260

Net income (loss)		26,441			(19,010	)		26,707			(26,433	)
(Income) loss allocated to preferred shares		(8,221	)		(7,415	)		(16,080	)		(13,221	)
(Income) loss allocated to noncontrolling interests		736			775			1,232			(583	)

Net income (loss) allocable to common shares	$	18,956		$	(25,650	)	$	11,859		$	(40,237	)

Earnings (loss) per share-Basic:
Earnings (loss) per share-Basic	$	0.23		$	(0.31	)	$	0.14		$	(0.50	)

Weighted-average shares outstanding-Basic		82,150,475			81,778,947			82,115,941			80,636,895

Earnings (loss) per share-Diluted:
Earnings (loss) per share-Diluted	$	0.22		$	(0.31	)	$	0.14		$	(0.50	)

Weighted average shares outstanding-Diluted		89,268,462			81,778,947			84,134,040			80,636,895

The accompanying notes are an integral part of these consolidated financial statements.

RAIT Financial Trust

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited and dollars in thousands)


	For the Three-Month						For the Six-Month
	Periods Ended June 30						Periods Ended June 30
	2015			2014			2015			2014
Net income (loss)	$	26,441		$	(19,010	)	$	26,707		$	(26,433	)
Other comprehensive income (loss):
Change in fair value of interest rate hedges		(225	)		(644	)		(182	)		(1,196	)
Realized (gains) losses on interest rate hedges reclassified to earnings		4,398			7,243			9,365			14,780

Total other comprehensive income (loss)		4,173			6,599			9,183			13,584

Comprehensive income (loss) before allocation to noncontrolling interests		30,614			(12,411	)		35,890			(12,849	)
Allocation to noncontrolling interests		736			775			1,232			(583	)

Comprehensive income (loss)	$	31,350		$	(11,636	)	$	37,122		$	(13,432	)

The accompanying notes are an integral part of these consolidated financial statements.

RAIT Financial Trust

Consolidated Statement of Changes in Equity

(Unaudited and dollars in thousands, except share information)


	Preferred Shares— Series A		Par Value Preferred Shares— Series A		Preferred Shares— Series B		Par Value Preferred Shares— Series B		Preferred Shares— Series C		Par Value Preferred Shares— Series C		Common Shares		Par Value Common Shares		Additional Paid In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Deficit)			Total Shareholders’ Equity			Noncontrolling Interests			Total Equity
Balance, December 31, 2014		4,775,569	$	48		2,288,465	$	23		1,640,100	$	17		82,506,606	$	2,473	$	2,025,683		$	(20,788	)	$	(1,633,911	)	$	373,545		$	214,297		$	587,842
Net income (loss)		—		—		—		—		—		—		—		—		—			—			27,939			27,939			(1,232	)		26,707
Preferred dividends		—		—		—		—		—		—		—		—		—			—			(16,080	)		(16,080	)		—			(16,080	)
Common dividends declared		—		—		—		—		—		—		—		—		—			—			(29,561	)		(29,561	)		—			(29,561	)
Other comprehensive income (loss), net		—		—		—		—		—		—		—		—		—			9,183			—			9,183			—			9,183
Share-based compensation		—		—		—		—		—		—		—		—		(3,205	)		—			—			(3,205	)		—			(3,205	)
Issuance of noncontrolling interests		—		—		—		—		—		—		—		—		—			—			—			—			(367	)		(367	)
Distribution to noncontrolling interests		—		—		—		—		—		—		—		—		—			—			—			—			(9,327	)		(9,327	)
Deconsolidation of real estate owned property		—		—		—		—		—		—		—		—		—			—			—			—			663			663
Preferred shares issued, net		528,022		5		37,161		—		—		—		—		—		12,671			—			—			12,676			—			12,676
Common shares issued for equity compensation		—		—		—		—		—		—		385,428		14		5,019			—			—			5,033			—			5,033
Common shares issued, net		—		—		—		—		—		—		3,689		—		(574	)		—			—			(574	)		—			(574	)

Balance, June 30, 2015		5,303,591	$	53		2,325,626	$	23		1,640,100	$	17		82,895,723	$	2,487	$	2,039,594		$	(11,605	)	$	(1,651,613	)	$	378,956		$	204,034		$	582,990

The accompanying notes are an integral part of these consolidated financial statements.

RAIT Financial Trust

Consolidated Statements of Cash Flows

(Unaudited and dollars in thousands)


	For the Six-Month
	Periods Ended June 30
	2015			2014
Operating activities:
Net income (loss)	$	26,707		$	(26,433	)
Adjustments to reconcile net income (loss) to cash flow from operating activities:
Provision for losses		4,000			2,000
Share-based compensation expense		2,394			2,629
Depreciation and amortization		36,022			25,483
Amortization of deferred financing costs and debt discounts		9,458			4,646
Accretion of discounts on investments		(1,682	)		(1,986	)
Amortization of above/below market leases		(317	)		—
(Gains) losses on assets		(17,281	)		5,375
(Gains) losses on extinguishment of debt		—			(2,421	)
Change in fair value of financial instruments		(12,846	)		49,210
Provision (benefit) for deferred taxes		(897	)		(288	)
Changes in assets and liabilities:
(Decrease) in accrued interest receivable		(2,956	)		(7,196	)
(Decrease) in other assets		(2,640	)		(9,246	)
Increase (decrease) in accrued interest payable		2,459			(10,298	)
(Decrease) in accounts payable and accrued expenses		(1,609	)		(6,824	)
Increase in borrowers’ escrows and other liabilities		70,203			12,578
Origination of conduit loans		(251,959	)		(165,577	)
Sales of conduit loans		223,298			119,356

Net conduit loans (originated) sold		(28,661	)		(46,221	)

Cash flow from operating activities		82,354			(8,992	)

Investing activities:
Proceeds from sales or repayments of other securities		31,241			1,971
Purchase and origination of loans for investment		(191,892	)		(297,414	)
Principal repayments on loans		130,504			88,322
Investments in real estate		(37,500	)		(133,596	)
Proceeds from the disposition of real estate		20,596			3,820
(Increase) decrease in restricted cash		(90,590	)		34,739

Cash flow from investing activities		(137,641	)		(302,158	)

Financing activities:
Repayments on secured credit facilities and loans payable on real estate		(20,640	)		(12,596	)
Proceeds from secured credit facilities and loans payable on real estate		58,275			46,313
Repayments and repurchase of CDO notes payable		(120,194	)		(131,200	)
Proceeds from issuance of senior notes from floating rate CMBS transactions		181,215			155,001
Proceeds from issuance of 4.0% convertible senior notes		—			16,750
Proceeds from issuance of 7.625% convertible senior notes		—			60,000
Repayments of senior secured notes		(4,000	)		—
Net proceeds (repayments) related to conduit loan repurchase agreements		7,277			576
Net proceeds (repayments) related to floating rate loan repurchase agreements		(14,587	)		38,566
Distribution to noncontrolling interests		(9,694	)		49,428
Payments for deferred costs and convertible senior note hedges		(4,466	)		(7,528	)
Financing commitment fee		(4,000	)		—
Preferred share issuance, net of costs incurred		12,676			33,552
Common share issuance, net of costs incurred		(1,140	)		85,051
Distributions paid to preferred shareholders		(12,872	)		(11,291	)
Distributions paid to common shareholders		(29,517	)		(25,240	)

Cash flow from financing activities		38,333			297,382

Net change in cash and cash equivalents		(16,954	)		(13,768	)
Cash and cash equivalents at the beginning of the period		121,726			88,847

Cash and cash equivalents at the end of the period	$	104,772		$	75,079

The accompanying notes are an integral part of these consolidated financial statements.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 1: THE COMPANY

RAIT Financial Trust invests in and manages a portfolio of real-estate related assets, including direct ownership of real estate properties, and provides a comprehensive set of debt financing options to the real estate industry. References to “RAIT”, “we”, “us”, and “our” refer to RAIT Financial Trust and its subsidiaries, unless the context otherwise requires. RAIT is a self-managed and self-advised Maryland real estate investment trust, or REIT.

We finance a substantial portion of our investments through borrowing and securitization strategies seeking to match the maturities and terms of our financings with the maturities and terms of those investments, and to mitigate interest rate risk through derivative instruments.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles, or GAAP. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the included disclosures are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements should be read in conjunction with our audited financial statements as of and for the year ended December 31, 2014 included in our Annual Report on Form 10-K, or the 2014 annual report. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position and consolidated results of operations and cash flows are included. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year.

Certain prior period amounts have been reclassified to conform with the current period presentation.

During the six-month period ended June 30, 2015, we recorded the following adjustments in the accompanying consolidated statement of operations that related to transactions completed in a prior period: (a) investment interest income includes the write-off of accrued interest receivable of $842 that was associated with investments in loans that was determined to be not collectible and (b) depreciation and amortization expense includes $708 associated with capital additions associated with our investment in real estate which were not properly eliminated previously. We also recorded an adjustment to correct the deferred tax liability balance with an offset to goodwill for $2,257 related to our acquisition of Urban Retail Properties, LLC.

During the six-month period ended June 30, 2015, we revised the Consolidated Statements of Cash Flows for the six-month period ended June 30, 2014. The revision consisted of classifying the origination of conduit loans and the sale of conduit loans from cash flows from investing activities to cash flows from operating activities. The impact of this revision was a decrease to cash flows from operating activities and an increase to cash flows from investing activities of $46,221 for the period ended June 30, 2014. The revision had no impact to cash and cash equivalents as of June 30, 2014. In addition, the revision did not impact any other consolidated financial statement as of June 30, 2014 or for the six-month or three-month periods ended June 30, 2014.

We evaluated these revisions and reclassifications and determined, based on quantitative and qualitative factors, the changes were not material to the consolidated financial statements taken as a whole for any previously filed consolidated financial statements.

b. Principles of Consolidation

The consolidated financial statements reflect our accounts and the accounts of our majority-owned and/or controlled subsidiaries. We also consolidate entities that are variable interest entities, or VIEs, where we have determined that we are the primary beneficiary of such entities. The portions of these entities that we do not own are presented as noncontrolling interests as of the dates and for the periods presented in the consolidated financial statements. All intercompany accounts and transactions have been eliminated in consolidation.

Under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 810, “Consolidation”, the determination of whether to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

be significant to the VIE. We define the power to direct the activities that most significantly impact the VIE’s economic performance as the ability to buy, sell, refinance, or recapitalize assets or entities, and solely control other material operating events or items of the respective entity. For our commercial mortgages, mezzanine loans, and preferred equity investments, certain rights we hold are protective in nature and would preclude us from having the power to direct the activities that most significantly impact the VIE’s economic performance. Assuming both criteria are met, we would be considered the primary beneficiary and would consolidate the VIE. We will continually assess our involvement with VIEs and consolidate the VIEs when we are the primary beneficiary. See Note 9 for additional disclosures pertaining to VIEs.

c. Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. The items that include significant estimates are fair value of financial instruments and allowance for losses. Actual results could differ from those estimates.

d. Investments in Loans

We invest in commercial mortgages, mezzanine loans, and preferred equity interests. We account for our investments in commercial mortgages, mezzanine loans and other loans at amortized cost. The carrying value of these investments is adjusted for origination discounts/premiums, nonrefundable fees and direct costs for originating loans which are amortized into income on a level yield basis over the terms of the loans.

e. Allowance for Losses, Impaired Loans and Non-accrual Status

We maintain an allowance for losses on our investments in commercial mortgages, mezzanine loans and preferred equity interests. Management’s periodic evaluation of the adequacy of the allowance is based upon expected and inherent risks in the portfolio, the estimated value of underlying collateral, and current economic conditions. Management reviews loans for impairment and establishes specific reserves when a loss is probable under the provisions of FASB ASC Topic 310, “Receivables.” A loan is impaired when it is probable that we may not collect all principal and interest payments according to the contractual terms. As part of the detailed loan review, we consider many factors about the specific loan, including payment history, asset performance, borrower’s financial capability and other characteristics. If any trends or characteristics indicate that it is probable that other loans, with similar characteristics to those of impaired loans, have incurred a loss, we consider whether an allowance for loss is needed pursuant to FASB ASC Topic 450, “Contingencies.” Management evaluates loans for non-accrual status each reporting period. A loan is placed on non-accrual status when the loan payment deficiencies exceed 90 days. Payments received for non-accrual or impaired loans are applied to principal until the loan is removed from non-accrual status or no longer impaired. Past due interest is recognized on non-accrual loans when they are removed from non-accrual status and are making current interest payments. The allowance for losses is increased by charges to operations and decreased by charge-offs (net of recoveries). Management charges off loans when the investment is no longer realizable and legally discharged.

f. Investments in Real Estate

Investments in real estate are shown net of accumulated depreciation. We capitalize those costs that have been evaluated to improve the real property and depreciate those costs on a straight-line basis over the useful life of the asset. We depreciate real property using the following useful lives: buildings and improvements—30 to 40 years; furniture, fixtures, and equipment—5 to 10 years; and tenant improvements—shorter of the lease term or the life of the asset. Costs for ordinary maintenance and repairs are charged to expense as incurred.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

Acquisitions of real estate assets and any related intangible assets are recorded initially at fair value under FASB ASC Topic 805, “Business Combinations.” Fair value is determined by management based on market conditions and inputs at the time the asset is acquired. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based in each case on their fair values. Purchase accounting is applied to assets and liabilities associated with the real estate acquired. Transaction costs and fees incurred related to acquisitions are expensed as incurred.

Upon the acquisition of properties, we estimate the fair value of acquired tangible assets (consisting of land, building and improvements) and identified intangible assets and liabilities (consisting of above and below-market leases, in-place leases and tenant relationships), and assumed debt at the date of acquisition, based on the evaluation of information and estimates available at that date. In determining the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the differences between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the lease. The capitalized above-market lease values and the capitalized below-market lease values are amortized as an adjustment to rental income over the lease term.

The aggregate value of in-place leases is determined by evaluating various factors, including an estimate of carrying costs during the expected lease-up periods, current market conditions and similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs. The value assigned to this intangible asset is amortized over the assumed lease up period.

Management reviews our investments in real estate for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a long-lived asset, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property.

g. Revenue Recognition

Interest income—We recognize interest income from investments in commercial mortgages, mezzanine loans, and preferred equity interests on a yield to maturity basis. Many of our commercial mortgages and mezzanine loans provide for the accrual of interest at specified rates which differ from current payment terms. Interest income is recognized on such loans at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible. Management will cease accruing interest on these loans when it determines that the interest income is not collectible based on the ultimate value of the underlying collateral using discounted cash flow models and market based assumptions. Management will recognize interest on these loans on a cash basis.

For investments that we did not elect to record at fair value under FASB ASC Topic 825, “Financial Instruments”, origination fees and direct loan origination costs are deferred and amortized to net investment income, using the effective interest method, over the contractual life of the underlying loan security or loan, in accordance with FASB ASC Topic 310, “Receivables.”

For investments that we elected to record at fair value under FASB ASC Topic 825, origination fees and direct loan costs are recorded in income and are not deferred.

We recognize interest income from interests in certain securitized financial assets on an estimated effective yield to maturity basis. Management estimates the current yield on the amortized cost of the investment based on estimated cash flows after considering prepayment and credit loss experience.

Rental income—We generate rental income from tenant rent and other tenant-related activities at our consolidated real estate properties. For multi-family real estate properties, rental income is recorded when due from residents and recognized monthly as it is earned and realizable, under lease terms which are generally for periods of one year or less. For retail and office real estate properties, rental income is recognized on a straight-line basis from the later of the date of

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

the commencement of the lease or the date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. Leases also typically provide for tenant reimbursement of a portion of common area maintenance and other operating expenses to the extent that a tenant’s pro rata share of expenses exceeds a base year level set in the lease.

Fee and other income—We generate fee and other income through our various subsidiaries by (a) funding conduit loans for sale into unaffiliated commercial mortgage-backed securities, or CMBS, securitizations, (b) providing or arranging to provide financing to our borrowers, (c) providing ongoing asset management services to investment portfolios under cancelable management agreements, and (d) providing property management services to third parties. We recognize revenue for these activities when the fees are fixed or determinable, are evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided. While we may receive asset management fees when they are earned, we eliminate earned asset management fee income from securitizations while such securitizations are consolidated.

h. Fair Value of Financial Instruments

In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined in FASB ASC Topic 820, “Fair Value Measurements and Disclosures” and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, are as follows:

•

Level 1: Valuations are based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at level 1 fair value generally are equity securities listed in active markets. As such, valuations of these investments do not entail a significant degree of judgment.

•

Level 2: Valuations are based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Fair value assets and liabilities that are generally included in this category are unsecured REIT note receivables, commercial mortgage-backed securities, or CMBS, receivables and certain financial instruments classified as derivatives where the fair value is based primarily on observable market inputs.

•

Level 3: Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset. Generally, assets and liabilities carried at fair value and included in this category were TruPS and subordinated debentures, trust preferred obligations and CDO notes payable where significant observable market inputs do not exist.

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of investment, whether the investment is new, whether the investment is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in level 3.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that management believes market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that management believes are current as of the measurement

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be transferred from Level 1 to Level 2 or Level 2 to Level 3.

Many financial instruments have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that buyers in the market are willing to pay for an asset. Ask prices represent the lowest price that sellers in the market are willing to accept for an asset. For financial instruments whose inputs are based on bid-ask prices, we do not require that fair value always be a predetermined point in the bid-ask range. Our policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that results in our best estimate of fair value.

Fair value for certain of our Level 3 financial instruments is derived using internal valuation models. These internal valuation models include discounted cash flow analyses developed by management using current interest rates, estimates of the term of the particular instrument, specific issuer information and other market data for securities without an active market. In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, the impact of our own credit spreads is also considered when measuring the fair value of financial assets or liabilities, including derivative contracts. Where appropriate, valuation adjustments are made to account for various factors, including bid-ask spreads, credit quality and market liquidity. These adjustments are applied on a consistent basis and are based on observable inputs where available. Management’s estimate of fair value requires significant management judgment and is subject to a high degree of variability based upon market conditions, the availability of specific issuer information and management’s assumptions.

i. Deferred Financing Costs and Intangible Assets

Costs incurred in connection with debt financing are capitalized as deferred financing costs and charged to interest expense over the terms of the related debt agreements, under the effective interest method. Intangible assets on our consolidated balance sheets represent identifiable intangible assets acquired in business acquisitions. We amortize identified intangible assets to expense over their estimated lives using the straight-line method. We evaluate intangible assets for impairment as events and circumstances change, in accordance with FASB ASC Topic 360, “Property, Plant, and Equipment.” The gross carrying amount for our customer relationships was $19,149 as of June 30, 2015 and December 31, 2014. The gross carrying amount for our in-place leases, above market leases, and ground lease was $32,481 and $22,725 as of June 30, 2015 and December 31, 2014, respectively. The gross carrying amount for our trade name was $1,500 as of June 30, 2015 and December 31, 2014. The accumulated amortization for our intangible assets was $20,935 and $13,911 as of June 30, 2015 and December 31, 2014, respectively. We recorded amortization expense of $3,108 and $2,449 for the three-month periods ended June 30, 2015 and 2014, respectively, and $7,039 and $4,396 for the six-month periods ended June 30, 2015 and 2014, respectively. Based on the intangible assets identified above, we expect to record amortization expense of intangible assets of $3,133 for the remainder of 2015, $5,289 for 2016, $3,848 for 2017, $3,172 for 2018, $2,997 for 2019 and $13,756 thereafter. As of June 30, 2015, we have determined that no impairment exists on our intangible assets.

j. Goodwill

Goodwill on our consolidated balance sheet represented the amounts paid in excess of the fair value of the net assets acquired from business acquisitions accounted for under FASB ASC Topic 805, “Business Combinations.” Pursuant to FASB ASC Topic 350, “Intangibles-Goodwill and Other”, goodwill is not amortized to expense but rather is analyzed for impairment. We evaluate goodwill for impairment on an annual basis and as events and circumstances change, in accordance with FASB ASC Topic 350. As of June 30, 2015 and December 31, 2014, we have $8,757 and $11,014 of goodwill, respectively, that is included in Other Assets in the accompanying consolidated balance sheets. The change in goodwill is attributable to the correction discussed in the Basis of Presentation section within this Note above. As of June 30, 2015, we have determined that no triggering events occurred that would indicate an impairment on our goodwill.

k. Recent Accounting Pronouncements

On January 1, 2015, we adopted the accounting standard classified under FASB ASC Topic 205, “Presentation of Financial Statements”. This accounting standard amends existing guidance to change reporting requirements for discontinued operations by requiring the disposal of an entity to be reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. This standard is effective for interim and annual reporting periods beginning on or after December 15, 2014. The adoption of this standard did not have a material effect on our consolidated financial statements.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

In May 2014, the FASB issued an accounting standard classified under FASB ASC Topic 606, “Revenue from Contracts with Customers”. This accounting standard generally replaces existing guidance by requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This standard is currently effective for annual reporting periods beginning after December 15, 2016. On July 9, 2015, the FASB affirmed its proposal to defer the effective date of this accounting standard by one year. Management is currently evaluating the impact that this standard may have on our consolidated financial statements.

In February 2015, the FASB issued an accounting standard classified under FASB ASC Topic 810, “Consolidation”. This accounting standard amends the consolidation analysis required under GAAP and requires management to reevaluate all previous consolidation conclusions. This standard considers limited partnerships as VIEs, unless the limited partners have either substantive kick-out or participating rights. The presumption that a general partner should consolidate a limited partnership has also been eliminated. The standard amends the effect that fees paid to a decision maker or service provider have on the consolidation analysis, as well as amends how variable interests held by a reporting entity’s related parties affect the consolidation conclusion. This standard also clarifies how to determine whether equity holders as a group have power over an entity. This standard is effective for interim and annual reporting periods beginning on or after December 15, 2015, with early adoption permitted. Management is currently evaluating the impact that this standard may have on our consolidated financial statements.

In April 2015, the FASB issued an accounting standard classified under FASB ASC Topic 835, “Interest”. This accounting standard amends existing guidance to change reporting requirements for debt issuance costs by requiring debt issuance costs to be presented on the balance sheet as a direct deduction from the debt liability. This standard is effective for interim and annual reporting periods beginning on or after December 15, 2015, with an early adoption permitted. Retrospective application to prior periods is required. Management does not expect that this accounting standard will have a significant impact on our consolidated financial statements.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 3: INVESTMENTS IN LOANS

Investments in Commercial Mortgages, Mezzanine Loans, and Preferred Equity Interests

The following table summarizes our investments in commercial mortgages, mezzanine loans, and preferred equity interests as of June 30, 2015:


	Unpaid Principal Balance		Unamortized (Discounts) Premiums			Carrying Amount		Number of Loans		Weighted- Average Coupon (1)			Range of Maturity Dates
Commercial Real Estate (CRE)
Commercial mortgages (2)	$	1,282,154	$	(14,428	)	$	1,267,726		108		5.3	%	Sep. 2015 to Jan. 2029
Mezzanine loans		202,694		(1,024	)		201,670		62		9.8	%	Jul. 2015 to May 2025
Preferred equity interests		39,311		(2,335	)		36,976		9		7.3	%	Feb. 2016 to Aug. 2033

Total CRE		1,524,159		(17,787	)		1,506,372		179		6.0	%
Deferred fees, net		170		—			170

Total	$	1,524,329	$	(17,787	)	$	1,506,542

(1)	Weighted-average coupon is calculated on the unpaid principal balance, which does not necessarily correspond to the carrying amount.

(2)	Commercial mortgages includes eleven conduit loans with an unpaid principal balance and carrying amount of $114,048 a weighted-average coupon of 4.3% and maturity dates ranging from November 2022 through July 2025. These commercial mortgages are accounted for as loans held for sale.

The following table summarizes our investments in commercial mortgages, mezzanine loans, other loans and preferred equity interests as of December 31, 2014:


	Unpaid Principal Balance			Unamortized (Discounts) Premiums			Carrying Amount			Number of Loans		Weighted- Average Coupon (1)			Range of Maturity Dates
Commercial Real Estate (CRE)
Commercial mortgages (2)	$	1,148,290		$	(14,519	)	$	1,133,771			95		5.9	%	Jan. 2015 to Jan. 2025
Mezzanine loans		226,105			(1,602	)		224,503			74		9.8	%	Mar. 2015 to Jan. 2029
Preferred equity interests		34,859			(1	)		34,858			9		7.1	%	Feb. 2016 to Aug. 2025

Total CRE		1,409,254			(16,122	)		1,393,132			178		6.5	%
Deferred fees, net		(696	)		—			(696	)

Total	$	1,408,558		$	(16,122	)	$	1,392,436

(1)	Weighted-average coupon is calculated on the unpaid principal amount of the underlying instruments, which does not necessarily correspond to the carrying amount.

(2)	Commercial mortgages includes 11 conduit loans with an unpaid principal balance and carrying amount of $93,925, a weighted-average coupon of 4.6% and maturity dates ranging from November 2019 through January 2025. These commercial mortgages are accounted for as loans held for sale.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

During the six-month period ended June 30, 2015, we did not convert any commercial real estate loans to owned real estate property. During the six-month period ended June 30, 2014, we completed the conversion of one commercial real estate loan with a carrying value of $28,588 to real estate owned property and we recorded a gain on asset of $112 as the value of the real estate exceeded the carrying amount of the converted loan.

The following table summarizes the delinquency statistics of our commercial real estate loans as of June 30, 2015 and December 31, 2014:


	As of June 30, 2015
Delinquency Status	Commercial Mortgages		Mezzanine Loans		Preferred Equity		Total
Current	$	1,282,154	$	181,493	$	35,661	$	1,499,308
30 to 59 days		—		—		—		—
60 to 89 days		—		—		—		—
90 days or more		—		19,953		3,650		23,603
In foreclosure or bankruptcy proceedings		—		1,248		—		1,248

Total	$	1,282,154	$	202,694	$	39,311	$	1,524,159


	As of December 31, 2014
Delinquency Status	Commercial Mortgages		Mezzanine Loans		Preferred Equity		Total
Current	$	1,148,290	$	202,919	$	31,209	$	1,382,418
30 to 59 days		—		—		—		—
60 to 89 days		—		1,555		—		1,555
90 days or more		—		19,953		3,650		23,603
In foreclosure or bankruptcy proceedings		—		1,678		—		1,678

Total	$	1,148,290	$	226,105	$	34,859	$	1,409,254

As of June 30, 2015 and December 31, 2014, all $24,851 and $25,281, respectively, of our commercial real estate loans that were 90 days or more past due or in foreclosure or bankruptcy were on non-accrual status and had a weighted-average interest rate of 5.7% and 5.8%, respectively. Also, as of June 30, 2015, two loans, with a recorded investment of $68,155 and a weighted average interest rate of 9.2%, were recognizing interest on the cash basis. Additionally, as of June 30, 2015, one loan, with an unpaid principal balance of $18,500, which had previously been restructured in a troubled debt restructuring, does not accrue interest in accordance with its restructured terms as it may be prepaid at par.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

Allowance For Loan Losses And Impaired Loans

We closely monitor our loans which require evaluation for loan loss in two categories: satisfactory and watchlist/impaired. Loans classified as impaired are generally loans which have credit weaknesses or whose credit quality has temporarily deteriorated or have been restructured in troubled debt restructuring. As of June 30, 2015 and December 31, 2015, we have classified our investment in loans by credit risk category as follows:


	As of June 30, 2015
Credit Status	Commercial Mortgages		Mezzanine Loans		Preferred Equity		Total
Satisfactory	$	1,247,234	$	154,493	$	31,365	$	1,433,092
Watchlist/Impaired		34,920		48,201		7,946		91,067

Total	$	1,282,154	$	202,694	$	39,311	$	1,524,159


	As of December 31, 2014
Credit Status	Commercial Mortgages		Mezzanine Loans		Preferred Equity		Total
Satisfactory	$	1,125,370	$	175,915	$	26,849	$	1,328,134
Watchlist/Impaired		22,920		50,190		8,010		81,120

Total	$	1,148,290	$	226,105	$	34,859	$	1,409,254

The following tables provide roll-forwards of our allowance for loan losses for our commercial mortgages, mezzanine loans and preferred equity interests for the three-month periods ended June 30, 2015 and 2014:


	For the Three-Month Period Ended June 30, 2015
	Commercial Mortgages		Mezzanine Loans			Preferred Equity		Total
Beginning balance	$	—	$	9,471		$	1,326	$	10,797
Provision for loan losses		—		2,000			—	$	2,000
Charge-offs, net of recoveries		—		(1	)		—	$	(1	)

Ending balance	$	—	$	11,470		$	1,326	$	12,796


	For the Three-Month Period Ended June 30, 2014
	Commercial Mortgages		Mezzanine Loans		Preferred Equity		Total
Beginning balance	$	—	$	12,960	$	1,319	$	14,279
Provision for loan losses		—		1,000		—		1,000
Charge-offs, net of recoveries		—		57		—		57

Ending balance	$	—	$	14,017	$	1,319	$	15,336

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

The following tables provide roll-forwards of our allowance for loan losses for our commercial mortgages, mezzanine loans and preferred equity interests for the six-month periods ended June 30, 2015 and 2014:


	For the Six-Month Period Ended June 30, 2015
	Commercial Mortgages		Mezzanine Loans			Preferred Equity		Total
Beginning balance	$	—	$	7,892		$	1,326	$	9,218
Provision for loan losses		—		4,000			—	$	4,000
Charge-offs, net of recoveries		—		(422	)		—	$	(422	)

Ending balance	$	—	$	11,470		$	1,326	$	12,796


	For the Six-Month Period Ended June 30, 2014
	Commercial Mortgages		Mezzanine Loans			Preferred Equity		Total
Beginning balance	$	—	$	21,636		$	1,319	$	22,955
Provision for loan losses		—		2,000			—		2,000
Charge-offs, net of recoveries		—		(9,619	)		—		(9,619	)

Ending balance	$	—	$	14,017		$	1,319	$	15,336

Information related to those loans on our watchlist or considered to be impaired was as follows:


	As of June 30, 2015
Watchlist/Impaired Loans	Commercial Mortgages		Mezzanine Loans		Preferred Equity		Total
Watchlist/Impaired loans expecting full recovery	$	34,920	$	8,500	$	4,296	$	47,716
Watchlist/Impaired loans with reserves		—		39,701		3,650		43,351

Total Watchlist/Impaired Loans(1)	$	34,920	$	48,201	$	7,946	$	91,067

Allowance for losses	$	—	$	11,470	$	1,326	$	12,796

(1)	As of June 30, 2015, this includes $5,500 of unpaid principal relating to previously identified troubled debt restructurings (TDRs) that are on accrual status.


	As of December 31, 2014
Watchlist/Impaired Loans	Commercial Mortgages		Mezzanine Loans		Preferred Equity		Total
Watchlist/Impaired loans expecting full recovery	$	22,920	$	40,559	$	4,360	$	67,839
Watchlist/Impaired loans with reserves		—		9,631		3,650		13,281

Total Watchlist/Impaired Loans(1)	$	22,920	$	50,190	$	8,010	$	81,120

Allowance for losses	$	—	$	7,892	$	1,326	$	9,218

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

(1)	As of December 31, 2014, this includes $5,500 of unpaid principal relating to previously identified TDRs that are on accrual status.

The average unpaid principal balance and recorded investment of total impaired loans was $53,179 and $60,230 during the three-month periods ended June 30, 2015 and 2014, respectively, and $53,333 and $60,378 during the six-month periods ended June 30, 2015 and 2014, respectively. We recorded interest income of $634 and $882 on loans that were impaired for the three-month periods ended June 30, 2015 and 2014, respectively. We recorded interest income of $685 and $882 on loans that were impaired for the six-month periods ended June 30, 2015 and 2014, respectively.

We have evaluated restructurings of our commercial real estate loans to determine if the restructuring constitutes a troubled debt restructuring (TDR) under FASB ASC Topic 310, “Receivables”. During the six-month period ended June 30, 2015, there were no restructurings of our commercial real estate loans that constituted a TDR. As of June 30, 2015, there were no TDRs that subsequently defaulted for restructurings that occurred within the previous 12 months.

NOTE 4: INVESTMENTS IN SECURITIES

Our investments in securities and security-related receivables are accounted for at fair value. On December 19, 2014, our subsidiary assigned or delegated its rights and responsibilities as collateral manager for the T8 and T9 securitizations, as referenced in our 2014 annual report. As a result of the assignment and delegation, we determined that we are no longer the primary beneficiary of T8 and T9 and deconsolidated the two securitizations. During the first quarter of 2015, we sold all of our remaining securities with an aggregate fair value of $31,412 and we had no investments in securities as of June 30, 2015.

The following table summarizes our investments in securities as of December 31, 2014:


Investment Description	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Weighted Average Coupon (1)			Weighted Average Years to Maturity
Available-for-sale securities (2)	$	210,600	$	2,053	$	(193,486	)	$	19,167		3.5	%		23.1
Security-related receivables
Unsecured REIT note receivables		10,000		995		—			10,995		6.7	%		3.0
CMBS receivables (3)		5,000		—		(3,750	)		1,250		5.7	%		34.5

Total security-related receivables		15,000		995		(3,750	)		12,245		6.3	%		13.5

Total investments in securities	$	225,600	$	3,048	$	(197,236	)	$	31,412		3.6	%		22.7

(1)	Weighted-average coupon is calculated on the unpaid principal amount of the underlying instruments, which does not necessarily correspond to the carrying amount.

(2)	As of December 31, 2014, this includes available-for-sale securities that are accounted for under the fair value option other than an available-for-sale security that has an amortized cost of $3,600 and a carrying value of $3,606.

(3)	CMBS receivables include securities with a fair value totaling $1,250 that are rated “D” by Standard & Poor’s.

The following table summarizes the non-accrual status of our investments in securities:


	As of December 31, 2014
	Principal /Par Amount on Non- Accrual		Weighted Average Coupon			Fair Value
Other securities	$	210,600		3.5	%	$	17,120
CMBS receivables		5,000		5.7	%		1,250

The assets of our consolidated CDOs collateralize the debt of such entities and are not available to our creditors. As of December 31, 2014, investment in securities of $0 in principal amount of TruPS and subordinated debentures, and $10,000 in principal amount of unsecured REIT note receivables and CMBS receivables, collateralized the consolidated CDO notes payable of such entities.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 5: INVESTMENTS IN REAL ESTATE

The table below summarizes our investments in real estate:


	Book Value
	As of June 30, 2015			As of December 31, 2014
Multi-family real estate properties (a)	$	1,234,056		$	1,286,898
Office real estate properties		364,077			370,114
Retail real estate properties		133,471			132,117
Parcels of land		52,284			51,322

Subtotal		1,783,888			1,840,451
Less: Accumulated depreciation and amortization (a)		(178,572	)		(168,480	)

Investments in real estate (b)	$	1,605,316		$	1,671,971

(a)	As of June 30, 2015, includes properties owned by Independence Realty Trust, Inc., or IRT, with a book value of $716,581 and accumulated depreciation of $31,188. As of December 31, 2014, includes properties owned by IRT, with a book value of $689,112 and accumulated depreciation of $23,376.

(b)	Investments in real estate includes one real estate asset held for sale as of June 30, 2015. This asset had a carrying amount of $1,196 and a fair value of $3,000.

As of June 30, 2015 and December 31, 2014, our investments in real estate were comprised of land of $324,595 and $338,057, respectively, and investments in real estate and improvements of $1,459,293 and $1,502,394, respectively.

As of June 30, 2015, our investments in real estate of $1,605,316 are financed through $639,493 of mortgages held by third parties and $845,620 of mortgages held by our RAIT I and RAIT II CDO securitizations. As of December 31, 2014, our investments in real estate of $1,671,971 are financed through $641,874 of mortgages held by third parties and $878,856 of mortgages held by our RAIT I and RAIT II CDO securitizations. Together, along with commercial real estate loans held by RAIT I and RAIT II, these mortgages serve as collateral for the CDO notes payable issued by the RAIT I and RAIT II CDO securitizations. All intercompany balances and interest charges are eliminated in consolidation.

Acquisitions:

During the six-month period ended June 30, 2015, Independence Realty Trust, Inc., or IRT, whom we consolidate, acquired one multi-family property with a purchase price of $25,250. Upon acquisition, we recorded the investment in real estate, including any related working capital and intangible assets, at fair value of $25,250.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

The following table summarizes the aggregate estimated fair value of the assets and liabilities associated with the one property acquired during the six-month period ended June 30, 2015 on the date of acquisition, which is accounted for under FASB ASC Topic 805.


Description	Estimated Fair Value
Assets acquired:
Investments in real estate	$	25,031
Other assets		87
Intangible assets		219

Total assets acquired		25,337
Liabilities assumed:
Loans payable on real estate		—
Accounts payable and accrued expenses		488
Other liabilities		103

Total liabilities assumed		591

Estimated fair value of net assets acquired	$	24,746

The following table summarizes the consideration transferred to acquire the real estate properties and the amounts of identified assets acquired and liabilities assumed at the respective conversion date:


Description	Estimated Fair Value
Fair value of consideration transferred:
Cash	$	24,808
Other considerations		(62	)

Total fair value of consideration transferred	$	24,746

During the six-month period ended June 30, 2015, this investment contributed revenue of $597 and a net income allocable to common shares of $240. During the six-month period ended June 30, 2015, we incurred $88 of third-party acquisition-related costs, which is included in general and administrative expense in the accompanying consolidated statements of operations.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

The table below presents the revenue, net income and earnings per share effect of the acquired property, as reported in our consolidated financial statements and on a pro forma basis as if the acquisition occurred on January 1, 2014. These pro forma results are not necessarily indicative of the results which actually would have occurred if the acquisition had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods.


Description	For the Six-Month Period Ended June 30, 2015		For the Six-Month Period Ended June 30, 2014
Total revenue of real estate property acquired, as reported	$	597	$	—
Net income (loss) allocable to common shares of real estate property acquired, as reported		240		—
Earnings (loss) per share attributable to common shareholders of real estate property acquired
Basic and diluted—as reported		0.00		0.00

Pro forma revenue of real estate property acquired (unaudited)		1,469		1,257
Pro forma net income (loss) allocable to common shares of real estate property acquired (unaudited)		562		424
Earnings (loss) per share attributable to common shareholders of real estate property acquired
Basic and diluted—as pro forma (unaudited)		0.01		0.01

During the six-month period ended June 30, 2015, we updated our allocation for a real estate acquisition from a prior period. This resulted in $4,374 being allocated between buildings (decrease) and intangible assets (increase). The cumulative catch up effect of the allocation (based on the different useful lives) was an increase to net income of $56.

Dispositions:

During the six-month period ended June 30, 2015, we disposed of two multi-family real estate properties for a total sale price of $68,037. We recorded a gain on the sale of one of these assets of $17,281, which is included in the accompanying consolidated statements of operations during the six-month period ended June 30, 2015, and deferred a gain on the sale for one of these assets of $3,136 which is classified within other liabilities and will be recognized under the installment method as the buyer’s initial investment was insufficient.

During the six-month period ended June 30, 2015, we deconsolidated one multi-family real estate property with a total carrying value of $23,897 as we agreed to amend our consent rights in the related limited partnership agreement. We did not record a gain or loss on the deconsolidation of this property.

On July 22, 2015, the company entered into a purchase and sale agreement to sell one multi-family property with a purchase price of $17,500. The sale is subject to customary closing conditions and, if completed, we expect to record a gain on sale of real estate.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 6: INDEBTEDNESS

We maintain various forms of short-term and long-term financing arrangements. Generally, these financing agreements are collateralized by assets within securitizations.

The following table summarizes our total recourse and non-recourse indebtedness as of June 30, 2015:


Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
7.0% convertible senior notes (1)	$	34,066	$	33,658		7.0	%	Apr. 2031
4.0% convertible senior notes (2)		141,750		135,752		4.0	%	Oct. 2033
7.625% senior notes		60,000		60,000		7.6	%	Apr. 2024
7.125% senior notes		71,905		71,905		7.1	%	Aug. 2019
Secured credit facilities		14,848		14,848		2.7	%	Oct. 2016
Senior secured notes		74,000		65,559		7.0	%	Apr. 2017 to Apr. 2019
Junior subordinated notes, at fair value (3)		18,671		12,866		4.3	%	Mar. 2035
Junior subordinated notes, at amortized cost		25,100		25,100		2.8	%	Apr. 2037
CMBS facilities		77,742		77,742		2.5	%	Nov. 2015 to Jul. 2016

Total recourse indebtedness		518,082		497,430		5.2	%

Non-recourse indebtedness:
CDO notes payable, at amortized cost (4)(5)		987,813		986,891		0.6	%	2045 to 2046
CMBS securitizations (6)		537,375		536,796		2.0	%	Jan. 2029 to Dec. 3031
Loans payable on real estate (7)		639,493		640,411		4.5	%	Sep. 2015 to May 2040

Total non-recourse indebtedness		2,164,681		2,164,098		2.1	%

Total indebtedness	$	2,682,763	$	2,661,528		2.7	%

(1)	Our 7.0% convertible senior notes are redeemable at par, at the option of the holder, in April 2016, April 2021, and April 2026.

(2)	Our 4.0% convertible senior notes are redeemable at par, at the option of the holder, in October 2018, October 2023, and October 2028.

(3)	Relates to liabilities which we elected to record at fair value under FASB ASC Topic 825.

(4)	Excludes CDO notes payable purchased by us which are eliminated in consolidation.

(5)

Collateralized by $1,478,859 principal amount of commercial mortgages, mezzanine loans, other loans and preferred equity interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(6)

Excludes the RAIT FL1 junior notes, RAIT FL2 junior notes, RAIT FL3 junior notes and RAIT FL4 junior notes purchased by us which are eliminated in consolidation. Collateralized by $676,161 principal amount of commercial mortgages loans and participation interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(7)	Includes $403,360 of unpaid principal balance with a carrying amount of $404,279 of third party mortgage indebtedness that encumbers properties owned by IRT. The weighted-average interest rate is 3.7% and has a range of maturity dates from April 2016 to May 2025.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

The following table summarizes our total recourse and non-recourse indebtedness as of December 31, 2014:


Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
7.0% convertible senior notes (1)	$	34,066	$	33,417		7.0	%	Apr. 2031
4.0% convertible senior notes (2)		141,750		134,418		4.0	%	Oct. 2033
7.625% senior notes		60,000		60,000		7.6	%	Apr. 2024
7.125% senior notes		71,905		71,905		7.1	%	Aug. 2019
Secured credit facilities		18,392		18,392		2.7	%	Oct. 2016
Senior secured notes		78,000		68,314		7.0	%	Apr. 2017 to Apr. 2019
Junior subordinated notes, at fair value (3)		18,671		13,102		0.5	%	Mar. 2035
Junior subordinated notes, at amortized cost		25,100		25,100		2.7	%	Apr. 2037
CMBS facilities		85,053		85,053		2.5	%	Nov. 2015 to Jul. 2016

Total recourse indebtedness		532,937		509,701		4.0	%

Non-recourse indebtedness:
CDO notes payable, at amortized cost (4)(5)		1,074,102		1,073,145		0.6	%	2045 to 2046
CMBS securitizations (6)		389,994		389,415		1.9	%	Jan. 2029 to Dec. 2031
Loans payable on real estate (7)		641,874		643,405		4.6	%	Sep. 2015 to May 2040

Total non-recourse indebtedness		2,105,970		2,105,965		2.1	%

Total indebtedness	$	2,638,907	$	2,615,666		2.6	%

(1)	Our 7.0% convertible senior notes are redeemable at par, at the option of the holder, in April 2016, April 2021, and April 2026.

(2)	Our 4.0% convertible senior notes are redeemable at par, at the option of the holder, in October 2018, October 2023, and October 2028.

(3)	Relates to liabilities which we elected to record at fair value under FASB ASC Topic 825.

(4)	Excludes CDO notes payable purchased by us which are eliminated in consolidation.

(5)

Collateralized by $1,572,126 principal amount of commercial mortgages, mezzanine loans, other loans and preferred equity interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(6)

Excludes the RAIT FL1 junior notes, RAIT FL2 junior notes and RAIT FL3 junior notes purchased by us which are eliminated in consolidation. Collateralized by $490,863 principal amount of commercial mortgages loans and participation interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(7)	Includes $360,902 of unpaid principal balance with a carrying amount of $362,434 of third party mortgage indebtedness that encumbers properties owned by IRT. The weighted-average interest rate is 3.8% and has a range of maturity dates from April 2016 to January 2025.

Recourse indebtedness refers to indebtedness that is recourse to our general assets, including the loans payable on real estate that are guaranteed by us. Non-recourse indebtedness consists of indebtedness of consolidated VIEs (i.e. securitization vehicles) and loans payable on real estate which is recourse only to specific assets pledged as collateral to the lenders. The creditors of each consolidated VIE have no recourse to our general credit.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

The current status or activity in our financing arrangements occurring as of or during the six-month period ended June 30, 2015 is as follows:

Recourse Indebtedness

7.0% convertible senior notes. The 7.0% convertible senior notes are convertible at the option of the holder at a current conversion rate of 167.8233 common shares per $1 principal amount of 7.0% convertible senior notes (equivalent to a current conversion price of $5.96 per common share). Upon conversion of 7.0% convertible senior notes by a holder, the holder will receive cash, our common shares or a combination of cash and our common shares, at our election. We include the 7.0% convertible senior notes in diluted earnings per share using the if-converted method if the conversion value in excess of the par amount is considered in the money during the respective periods.

4.0% convertible senior notes. The 4.0% convertible senior notes are convertible at the option of the holder at a current conversion rate of 105.8429 common shares per $1 principal amount of 4.0% convertible senior notes (equivalent to a current conversion price of $9.45 per common share). Upon conversion of 4.0% convertible senior notes by a holder, the holder will receive cash, our common shares or a combination of cash and our common shares, at our election. We include the 4.0% convertible senior notes in earnings per share using the if-converted method if the conversion value in excess of the par amount is considered in the money during the respective periods.

7.625% senior notes. On April 14, 2014, we issued and sold in a public offering $60,000 aggregate principal amount of our 7.625% Senior Notes due 2024, or the 7.625% senior notes. After deducting the underwriting discount and the estimated offering costs, we received approximately $57,500 of net proceeds. Interest on the 7.625% senior notes is paid quarterly with a maturity date of April 15, 2024. The 7.625% senior notes are subject to redemption at our option, in whole or in part, at any time on or after April 15, 2017, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date and are subject to repurchase by us at the option of the holders following a defined fundamental change, at a repurchase price equal to 101% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The senior notes are not convertible into equity securities of RAIT. They contain financial covenants that are consistent with our other debt agreements.

7.125% senior notes. In August 2014, we issued and sold in a public offering $71,905 aggregate principal amount of our 7.125% Senior Notes due 2019, or the 7.125% senior notes. After deducting the underwriting discount and the offering costs, we received approximately $69,209 of net proceeds. Interest on the 7.125% senior notes is paid quarterly with a maturity date of August 30, 2019. The 7.125% senior notes are subject to redemption at our option, in whole or in part, at any time on or after August 30, 2017, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date and are subject to repurchase by us at the option of the holders following a defined fundamental change, at a repurchase price equal to 101% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The senior notes are not convertible into equity securities of RAIT. They contain financial covenants that are consistent with our other debt agreements.

Secured credit facilities. On October 25, 2013, our subsidiary, Independence Realty Operating Partnership, LP, or IROP, the operating partnership of IRT, entered into a $20,000 secured revolving credit agreement, or the IROP credit agreement, with The Huntington National Bank to be used to acquire properties, for capital expenditures and for general corporate purposes. The IROP credit agreement has a 3-year term, bears interest at LIBOR plus 2.75% and contains customary financial covenants for this type of revolving credit agreement. IRT guaranteed IROP’s obligations under the IROP credit agreement. On September 9, 2014, IRT and IROP entered into an amendment to the IROP credit agreement that increased the lender’s maximum commitment under the credit agreement from $20,000 to $30,000, changed the interest rate from LIBOR plus 2.75% to LIBOR plus 2.50% and amended certain financial covenants. As of June 30, 2015, we have $14,848 outstanding under the IROP credit agreement.

Senior secured notes. On October 5, 2011, we entered into an exchange agreement with T8 pursuant to which we issued four senior secured notes, or the senior secured notes, with an aggregate principal amount equal to $100,000 to T8 in exchange for a portfolio of real estate related debt securities, or the exchanged securities, held by T8. The senior secured notes and the exchanged securities were determined to have approximately equivalent fair market value at the time of the exchange. Prior to December 19, 2014, T8 was a consolidated subsidiary and the senior secured notes and their related interest were eliminated in consolidation. When T8 was deconsolidated on December 19, 2014, these senior secured notes were no longer eliminated.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

The senior secured notes were issued pursuant to an indenture agreement dated October 5, 2011 which contains customary events of default, including those relating to nonpayment of principal or interest when due and defaults based upon events of bankruptcy and insolvency. The senior secured notes are each $25,000 principal amount with a weighted average interest rate of 7.0% and have maturity dates ranging from April 2017 to April 2019. Interest is at a fixed rate and accrues from October 5, 2011 and is payable quarterly in arrears on October 30, January 30, April 30 and July 30 of each year, beginning October 30, 2011. The senior secured notes are secured and are not convertible into equity securities of RAIT.

During the six-month period ended June 30, 2015, we prepaid $4,000 of the senior secured notes. As of June 30, 2015 we have $74,000 of outstanding senior secured notes.

Junior subordinated notes, at fair value. On October 16, 2008, we issued two junior subordinated notes with an aggregate principal amount of $38,052 to a third party and received $15,459 of net cash proceeds. One junior subordinated note, which we refer to as the first $18,671 junior subordinated note, has a principal amount of $18,671, a fixed interest rate of 8.65% through March 30, 2015 with a floating rate of LIBOR plus 400 basis points thereafter and a maturity date of March 30, 2035. The second junior subordinated note, which we refer to as the $19,381 junior subordinated note, had a principal amount of $19,381, a fixed interest rate of 9.64% and a maturity date of October 30, 2015. At issuance, we elected to record these junior subordinated notes at fair value under FASB ASC Topic 825, with all subsequent changes in fair value recorded in earnings.

On October 25, 2010, pursuant to a securities exchange agreement, we exchanged and cancelled the first $18,671 junior subordinated note for another junior subordinated note, which we refer to as the second $18,671 junior subordinated note, in aggregate principal amount of $18,671 with a reduced interest rate and provided $5,000 of our 6.875% convertible senior notes as collateral for the second $18,671 junior subordinated note. This $18,671 junior subordinated note has a fixed rate of interest of 0.5% through March 30, 2015 and thereafter has a floating rate of three-month LIBOR plus 400 basis points, with such floating rate not to exceed 7.0%. The maturity date is March 30, 2035. At issuance, of these notes, we elected to record the second $18,671 junior subordinated note at fair value under FASB ASC Topic 825, with all subsequent changes in fair value recorded in earnings. The fair value, or carrying amount, of this indebtedness was $12,866 as of June 30, 2015.

CMBS facilities. As of June 30, 2015, we had $40,962 of outstanding borrowings under the amended and restated master repurchase agreement, or the Amended MRA. As of June 30, 2015, we were in compliance with all financial covenants contained in the Amended MRA.

As of June 30, 2015, we had $22,272 of outstanding borrowings under the $150,000 CMBS facility. As of June 30, 2015, we were in compliance with all financial covenants contained in the $150,000 CMBS facility.

As of June 30, 2015, we had $9,752 of outstanding borrowings under the $75,000 commercial mortgage facility. As of June 30, 2015, we were in compliance with all financial covenants contained in the $75,000 commercial mortgage facility.

As of June 30, 2015, we had $4,756 of outstanding borrowings under the $150,000 commercial mortgage facility. As of June 30, 2015, we were in compliance with all financial covenants contained in the $150,000 commercial mortgage facility.

Non-Recourse Indebtedness

CDO notes payable, at amortized cost. CDO notes payable at amortized cost represent notes issued by consolidated CDO securitizations which are used to finance the acquisition of unsecured REIT notes, CMBS securities, commercial mortgages, mezzanine loans, and other loans in our commercial real estate loan portfolio. Generally, CDO notes payable are comprised of various classes of notes payable, with each class bearing interest at variable or fixed rates. Both RAIT I and RAIT II are meeting all of their over collateralization, or OC, and interest coverage, or IC, trigger tests as of June 30, 2015.

CMBS securitizations. As of June 30, 2015, our subsidiary, RAIT 2013-FL1 Trust, or RAIT FL 1, has $55,011 of total collateral at par value. RAIT FL1 has classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $27,805 to investors. We currently own the unrated classes of junior notes, including a class with an aggregate principal balance of $27,206, and the equity, or the retained interests, of RAIT FL1. RAIT FL1 does not have OC triggers or IC triggers. We are evaluating whether or not to redeem the current aggregate principal balance outstanding of the investment grade senior notes issued by RAIT FL1 in accordance with their terms.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

As of June 30, 2015, our subsidiary, RAIT 2014-FL2 Trust, or RAIT FL 2, had $185,572 of total collateral at par value. RAIT FL2 had classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $150,558 to investors. We currently own the unrated classes of junior notes, including a class with an aggregate principal balance of $35,014, and the equity, or the retained interests, of RAIT FL2. RAIT FL2 does not have OC triggers or IC triggers.

As of June 30, 2015, our subsidiary, RAIT 2014-FL3 Trust, or RAIT FL 3, had $216,293 of total collateral at par value. RAIT FL3 had classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $177,797 to investors. We currently own the unrated classes of junior notes, including a class with an aggregate principal balance of $38,496, and the equity, or the retained interests, of RAIT FL3. RAIT FL3 does not have OC triggers or IC triggers.

As of June 30, 2015, our subsidiary, RAIT 2015-FL4 Trust, or RAIT FL 4, had $219,284 of total collateral at par value. RAIT FL4 had classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $181,215 to investors. We currently own the unrated classes of junior notes, including a class with an aggregate principal balance of $38,069, and the equity, or the retained interests, of RAIT FL4. RAIT FL4 does not have OC triggers or IC triggers. We closed RAIT FL4 on May 22, 2015.

Loans payable on real estate. As of June 30, 2015 and December 31, 2014, we had $639,493 and $641,874, respectively, of other indebtedness outstanding relating to loans payable on consolidated real estate. These loans are secured by specific consolidated real estate and commercial loans included in our consolidated balance sheets.

During the six-month period ended June 30, 2015, IRT obtained two first mortgages on its investment in real estate from third party lenders that have a total aggregate principal balance of $43,427, a maturity dates ranging from February 2025 to May 2025, and have interest rates ranging from 3.2% to 3.4%.

NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS

We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions. The counterparties to these contractual arrangements are major financial institutions with which we and our affiliates may also have other financial relationships. In the event of nonperformance by the counterparties, we are potentially exposed to credit loss. However, because of the high credit ratings of the counterparties, we do not anticipate that any of the counterparties will fail to meet their obligations.

Interest Rate Swaps

We have entered into various interest rate swap contracts to hedge interest rate exposure on floating rate indebtedness. We designate interest rate hedge agreements at inception and determine whether or not the interest rate hedge agreement is highly effective in offsetting interest rate fluctuations associated with the identified indebtedness. At designation, certain of these interest rate swaps had a fair value not equal to zero. However, we concluded, at designation, that these hedging arrangements were highly effective during their term using regression analysis and determined that the hypothetical derivative method would be used in measuring any ineffectiveness. At each reporting period, we update our regression analysis and, as of June 30, 2015, we concluded that these hedging arrangements were highly effective during their remaining term and used the hypothetical derivative method in measuring the ineffective portions of these hedging arrangements.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

The following table summarizes the aggregate notional amount and estimated net fair value of our derivative instruments as of June 30, 2015 and December 31, 2014:


	As of June 30, 2015							As of December 31, 2014
	Notional		Fair Value of Assets		Fair Value of Liabilities			Notional		Fair Value of Assets		Fair Value of Liabilities
Cash flow hedges:
Interest rate swaps	$	381,286	$	278	$	(12,154	)	$	496,025	$	—	$	(20,695	)

Net fair value	$	381,286	$	278	$	(12,154	)	$	496,025	$	—	$	(20,695	)

During the period July 1, 2015 through December 31, 2015, interest rate swap agreements relating to RAIT I and RAIT II with a notional amount of $83,641 and a weighted average strike rate of 5.1% as of June 30, 2015, will terminate in accordance with their terms.

For interest rate swaps that are considered effective hedges, we reclassified realized losses of $4,398 and $7,243, respectively, to earnings for the three-month periods ended June 30, 2015 and 2014 and $9,365 and $14,780 for the six-month periods ended June 30, 2015 and 2014.

Effective interest rate swaps are reported in accumulated other comprehensive income and the fair value of these hedge agreements is included in other assets or derivative liabilities.

NOTE 8: FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments” requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The fair value of investments in mortgages and loans, investments in securities, CDO notes payable, convertible senior notes, junior subordinated notes and derivative assets and liabilities is based on significant observable and unobservable inputs. The fair value of cash and cash equivalents, restricted cash, secured credit facilities, CMBS facilities and commercial mortgage facilities approximates cost due to the nature of these instruments.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

The following table summarizes the carrying amount and the fair value of our financial instruments as of June 30, 2015:


Financial Instrument	Carrying Amount		Estimated Fair Value
Assets
Commercial mortgages, mezzanine loans, other loans and preferred equity interests, net	$	1,493,746	$	1,448,755
Cash and cash equivalents		104,772		104,772
Restricted cash		179,878		179,878
Derivative assets		278		278
Liabilities
Recourse indebtedness:
7.0% convertible senior notes		33,658		36,882
4.0% convertible senior notes		135,752		120,480
7.625% senior notes		60,000		55,440
7.125% senior notes		71,905		71,330
Secured credit facilities		14,848		14,848
Junior subordinated notes, at fair value		12,866		12,866
Junior subordinated notes, at amortized cost		25,100		14,107
CMBS facilities		77,742		77,742
Senior secured notes		65,559		75,777
Non-recourse indebtedness:
CDO notes payable, at amortized cost		986,891		807,995
CMBS securitizations		536,796		536,528
Loans payable on real estate		640,411		667,791
Derivative liabilities		12,154		12,154

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

The following table summarizes the carrying amount and the fair value of our financial instruments as of December 31, 2014:


Financial Instrument	Carrying Amount		Estimated Fair Value
Assets
Commercial mortgages, mezzanine loans, other loans and preferred equity interests, net	$	1,392,436	$	1,316,796
Investments in securities and security-related receivables		31,412		31,412
Cash and cash equivalents		121,726		121,726
Restricted cash		124,220		124,220
Liabilities
Recourse indebtedness:
7.0% convertible senior notes		33,417		41,901
4.0% convertible senior notes		134,418		123,677
7.625% senior notes		60,000		56,016
7.125% senior notes		71,905		70,064
Secured credit facilities		18,392		18,392
Junior subordinated notes, at fair value		13,102		13,102
Junior subordinated notes, at amortized cost		25,100		14,471
CMBS facilities		55,956		55,956
Commercial mortgage facility		29,097		29,097
Senior secured notes		68,314		79,594
Non-recourse indebtedness:
CDO notes payable, at amortized cost		1,073,145		913,050
CMBS securitizations		389,415		389,771
Loans payable on real estate		643,405		678,306
Derivative liabilities		20,695		20,695
Warrants and investor SARs		35,384		35,384

Fair Value Measurements

The following tables summarize information about our assets and liabilities measured at fair value on a recurring basis as of June 30, 2015, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:


Assets:	Quoted Prices in Active Markets for Identical Assets (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3) (a)		Balance of June 30, 2015
Available-for-sale securities	$	—	$	—	$	—	$	—
Security-related receivables
Unsecured REIT note receivables		—		—		—		—
CMBS receivables		—		—		—		—
Other securities		—		—		—		—
Derivative assets		—		278		—		278

Total assets	$	—	$	278	$	—	$	278

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)


Liabilities:	Quoted Prices in Active Markets for Identical Assets (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3) (a)		Balance of June 30, 2015
Junior subordinated notes, at fair value	$	—	$	—	$	12,866	$	12,866
Derivative liabilities		—		12,154		—		12,154
Warrants and investor SARs		—		—		22,181		22,181

Total liabilities	$	—	$	12,154	$	35,047	$	47,201

(a)	During the six-month period ended June 30, 2015, there were no transfers between Level 1 and Level 2, nor were there any transfers into and out of Level 3.

The following tables summarize information about our assets and liabilities measured at fair value on a recurring basis as of December 31, 2014, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:


Assets:	Quoted Prices in Active Markets for Identical Assets (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3) (a)		Balance of December 31, 2014
Available-for-sale securities	$	—	$	19,167	$	—	$	19,167
Security-related receivables
Unsecured REIT note receivables		—		10,995		—		10,995
CMBS receivables		—		1,250		—		1,250
Other securities		—		—		—		—
Derivative assets		—		—		—		—

Total assets	$	—	$	31,412	$	—	$	31,412


Liabilities:	Quoted Prices in Active Markets for Identical Assets (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3) (a)		Balance of December 31, 2014
Junior subordinated notes, at fair value	$	—	$	—	$	13,102	$	13,102
Derivative liabilities		—		20,695		—		20,695
Warrants and investor SARs		—		—		35,384		35,384

Total liabilities	$	—	$	20,695	$	48,486	$	69,181

(a)	During the year ended December 31, 2014, there were no transfers between Level 1 and Level 2, nor were there any transfers into and out of Level 3.

When estimating the fair value of our Level 3 financial instruments, management uses various observable and unobservable inputs. These inputs include yields, credit spreads, duration, effective dollar prices and overall market conditions on not only the exact financial instrument for which management is estimating the fair value, but also financial instruments that are similar or issued by the same issuer when such inputs are unavailable. Generally, an increase in the yields, credit spreads or estimated duration will decrease the fair value of our financial instruments. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value, as determined by management, may fluctuate from period to period and any ultimate liquidation or sale of the investment may result in proceeds that may be significantly different than fair value.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

The following tables summarize additional information about liabilities that are measured at fair value on a recurring basis for which we have utilized level 3 inputs to determine fair value for the three-month period ended June 30, 2015:


Liabilities	Warrants and investor SARs			Junior Subordinated Notes, at Fair Value			Total Level 3 Liabilities
Balance, as of December 31, 2014	$	35,384		$	13,102		$	48,486
Change in fair value of financial instruments		(13,203	)		(236	)		(13,439	)
Purchases		—			—			—
Sales		—			—			—
Principal repayments		—			—			—

Balance, as of June 30, 2015	$	22,181		$	12,866		$	35,047

Our non-routine fair value measurements relate primarily to our commercial real estate loans that are considered impaired and for which we maintain an allowance for loss. In determining the allowance for losses, we estimate the fair value of the respective commercial real estate loan and compare that fair value to our total investment in the loan. When estimating the fair value of the commercial real estate loan, management uses discounted cash flow analyses and capitalization rates on the underlying property’s net operating income. The discounted cash flow analyses and capitalization rates are based on market information and comparable sales of similar properties.

The following tables summarize the valuation technique and the level of the fair value hierarchy for financial instruments that are not fair valued in the accompanying consolidated balance sheets but for which fair value is required to be disclosed. The fair value of cash and cash equivalents, restricted cash, secured credit facilities, CMBS facilities and commercial mortgage facility approximates cost due to the nature of these instruments and are not included in the tables below.


						Fair Value Measurement
	Carrying Amount as of June 30, 2015		Estimated Fair Value as of June 30, 2015		Valuation Technique	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
Commercial mortgages, mezzanine loans and other loans	$	1,493,746	$	1,448,755	Discounted cash flows	$	—	$	—	$	1,448,755
7.0% convertible senior notes		33,658		36,882	Trading price		36,882		—		—
4.0% convertible senior notes		135,752		120,480	Trading price		120,480		—		—
7.625% senior notes		60,000		55,440	Trading price		55,440		—		—
7.125% senior notes		71,905		71,330	Trading price		71,330		—		—
Senior Secured Notes		65,559		75,777	Discounted cash flows		—		—		75,777
Junior subordinated notes, at amortized cost		25,100		14,107	Discounted cash flows		—		—		14,107
CDO notes payable, at amortized cost		986,891		807,995	Trading price		807,995		—		—
CMBS securitization		536,796		536,528	Trading price		536,528		—		—
Loans payable on real estate		640,411		667,791	Discounted cash flows		—		—		667,791

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)


						Fair Value Measurement
	Carrying Amount as of December 31, 2014		Estimated Fair Value as of December 31, 2014		Valuation Technique	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
Commercial mortgages, mezzanine loans and other loans	$	1,392,436	$	1,316,796	Discounted cash flows	$	—	$	—	$	1,316,796
7.0% convertible senior notes		33,417		41,901	Trading price		41,901		—		—
4.0% convertible senior notes		134,418		123,677	Trading price		123,677		—		—
7.625% senior notes		60,000		56,016	Trading price		56,016		—		—
7.125% senior notes		71,905		70,064	Trading price		70,064		—		—
Senior Secured Notes		68,314		79,594	Discounted cash flows		—		—		79,594
Junior subordinated notes, at amortized cost		25,100		14,471	Discounted cash flows		—		—		14,471
CDO notes payable, at amortized cost		1,073,145		913,050	Trading price		913,050		—		—
CMBS securitization		389,415		389,771	Trading price		389,771		—		—
Loans payable on real estate		643,405		678,306	Discounted cash flows		—		—		678,306

Change in Fair Value of Financial Instruments

The following table summarizes realized and unrealized gains and losses on assets and liabilities for which we elected the fair value option of FASB ASC Topic 825, “Financial Instruments” and derivatives as reported in change in fair value of financial instruments in the accompanying consolidated statements of operations:


	For the Three-Month Periods Ended June 30					For the Six-Month Periods Ended June 30
Description	2015		2014			2015			2014
Change in fair value of trading securities and security- related receivables	$	—	$	2,132		$	(173	)	$	8,574
Change in fair value of CDO notes payable and trust preferred obligations		316		(18,937	)		236			(49,333	)
Change in fair value of derivatives		1,627		(7,484	)		(420	)		(11,711	)
Change in fair value of warrants and investor SARs		6,413		(782	)		13,203			3,260

Change in fair value of financial instruments	$	8,356	$	(25,071	)	$	12,846		$	(49,210	)

The changes in the fair value for the trading securities and security-related receivables, CDO notes payable, and other liabilities for which the fair value option was elected for the three-month and six-month periods ended June 30, 2015 and 2014 was primarily attributable to changes in instrument specific credit risks. The changes in the fair value of the CDO notes payable for which the fair value option was elected was due to required repayments at par of senior CDO notes due of OC failures when the CDO notes being repaid have a fair value of less than par. The changes in the fair value of derivatives for which the fair value option was elected for the three-month and six-month periods ended June 30, 2015 and 2014 was mainly due to changes in interest rates. The change in fair value of the warrants and investor SARs was due to changes in the reference stock price.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 9: VARIABLE INTEREST ENTITIES

The determination of when to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. We evaluated our investments and determined that, as of June 30, 2015 and December 31, 2014, our consolidated VIEs were: RAIT I, RAIT II, IRT, Willow Grove and Cherry Hill (RAIT VIE Properties). The following table presents the assets and liabilities of our consolidated VIEs as of each respective date.


	As of June 30, 2015
	RAIT Securitizations			IRT			RAIT VIE Properties			Total
Assets
Investments in mortgages and loans, at amortized cost:
Commercial mortgages, mezzanine loans, other loans and preferred equity interests	$	1,446,541		$	—		$	—		$	1,446,541
Allowance for losses		421			—			—			421

Total investments in mortgages and loans		1,446,962			—			—			1,446,962
Investments in real estate
Investments in real estate		—			716,582			24,116			740,698
Accumulated depreciation		—			(31,189	)		(4,211	)		(35,400	)

Total investments in real estate		—			685,393			19,905			705,298
Investments in securities and security-related receivables, at fair value		—			—			—			—
Cash and cash equivalents		—			21,568			247			21,815
Restricted cash		13,540			6,335			357			20,232
Accrued interest receivable		74,942			—			—			74,942
Other assets		11,140			6,689			7,197			25,026
Deferred financing costs
Deferred financing costs		26,028			3,807			345			30,180
Accumulated amortization		(21,752	)		(815	)		(272	)		(22,839	)

Total deferred financing costs		4,276			2,992			73			7,341
Intangible assets
Intangible assets		—			7,816			—			7,816
Accumulated amortization		—			(7,633	)		—			(7,633	)

Total intangible assets		—			183			—			183

Total assets	$	1,550,860		$	723,160		$	27,779		$	2,301,799

Liabilities and Equity
Indebtedness	$	1,228,741		$	457,202		$	21,206		$	1,707,149
Accrued interest payable		584			30			4,057			4,671
Accounts payable and accrued expenses		5			10,922			3,305			14,232
Derivative liabilities		11,553			—			—			11,553
Deferred taxes, borrowers’ escrows and other liabilities		—			3,876			3,458			7,334

Total liabilities		1,240,883			472,030			32,026			1,744,939

Equity:
Shareholders’ equity:
Accumulated other comprehensive income (loss)		(11,605	)		—			—			(11,605	)
RAIT investment		163,604			80,380			845			244,829
Retained earnings (deficit)		157,978			(28,065	)		(5,092	)		124,821

Total shareholders’ equity		309,977			52,315			(4,247	)		358,045
Noncontrolling Interests		—			198,815			—			198,815

Total liabilities and equity	$	1,550,860		$	723,160		$	27,779		$	2,301,799

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)


	As of December 31, 2014
	RAIT Securitizations			IRT			RAIT VIE Properties			Total
Assets
Investments in mortgages and loans, at amortized cost:
Commercial mortgages, mezzanine loans, other loans and preferred equity interests	$	1,535,097		$	—		$	—		$	1,535,097
Allowance for losses		(8,423	)		—			—			(8,423	)

Total investments in mortgages and loans		1,526,674			—			—			1,526,674
Investments in real estate
Investments in real estate		—			689,112			23,899			713,011
Accumulated depreciation		—			(23,376	)		(3,686	)		(27,062	)

Total investments in real estate		—			665,736			20,213			685,949
Investments in securities and security-related receivables, at fair value		10,995			—			—			10,995
Cash and cash equivalents		—			14,763			216			14,979
Restricted cash		14,715			5,205			244			20,164
Accrued interest receivable		74,904			—			—			74,904
Other assets		136			(420	)		6,908			6,624
Deferred financing costs
Deferred financing costs		26,028			3,431			346			29,805
Accumulated amortization		(20,095	)		(507	)		(239	)		(20,841	)

Total deferred financing costs		5,933			2,924			107			8,964
Intangible assets
Intangible assets		—			7,596			—			7,596
Accumulated amortization		—			(4,345	)		—			(4,345	)

Total intangible assets		—			3,251			—			3,251

Total assets	$	1,633,357		$	691,459		$	27,688		$	2,352,504

Liabilities and Equity
Indebtedness	$	1,315,103		$	418,900		$	21,280		$	1,755,283
Accrued interest payable		670			31			3,661			4,362
Accounts payable and accrued expenses		3			8,371			3,290			11,664
Derivative liabilities		20,051			—			—			20,051
Deferred taxes, borrowers’ escrows and other liabilities		—			1,124			2,950			4,074

Total liabilities		1,335,827			428,426			31,181			1,795,434

Equity:
Shareholders’ equity:
Accumulated other comprehensive income (loss)		(20,788	)		—			—			(20,788	)
RAIT investment		114,207			71,024			743			185,974
Retained earnings (deficit)		204,111			(16,729	)		(4,236	)		183,146

Total shareholders’ equity		297,530			54,295			(3,493	)		348,332
Noncontrolling Interests		—			208,738			—			208,738

Total liabilities and equity	$	1,633,357		$	691,459		$	27,688		$	2,352,504

The assets of the VIEs can only be used to settle obligations of the VIEs and are not available to our creditors. Certain amounts included in the table above are eliminated upon consolidation with our other subsidiaries that maintain investments in the debt or equity securities issued by these entities. We do not have any contractual obligation to provide the VIEs listed above with any financial support. We have not and do not intend to provide financial support to these VIEs that we were not previously contractually required to provide.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 10: SERIES D PREFERRED SHARES

On October 1, 2012, we entered into a Securities Purchase Agreement, or the purchase agreement, with ARS VI Investor I, LLC, or the investor, an affiliate of Almanac Realty Investors, LLC, or Almanac. During the period from the effective date of the purchase agreement through June 30, 2015, we sold to the investor on a private placement basis in four sales between October 2012 and March 2014 for an aggregate purchase price of $100,000, or the total commitment, the following securities, in the aggregate: (i) 4,000,000 Series D Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share, of RAIT, or the Series D Preferred Shares, (ii) common share purchase warrants, or the warrants, exercisable for 9,931,000 of our common shares, or the common shares (which have subsequently adjusted to 11,014,048 shares as of the date of filing this report), and (iii) common share appreciation rights, or the investor SARs with respect to up to 6,735,667 common shares (which have subsequently adjusted to 7,470,241 shares as of the date of filing this report).

The warrants and investor SARs had an initial strike price of $6.00 per common share, subject to adjustment. As of the filing of this report, the strike price has adjusted to $5.41.

The warrants and investor SARs were both determined to be classified as liabilities and had a combined fair value of $22,181 as of June 30, 2015. The initial fair value of the warrants and investor SARs are recorded as a liability and re-measured at each reporting period until the warrants and investor SARs are settled. Changes in fair value will be recorded in earnings as a component of the change in fair value of financial instruments in the consolidated statement of operations.

The following table summarizes the sales activity of the Series D Preferred Shares from the effective date of the agreement through June 30, 2015:


Aggregate purchase price			$	100,000
Initial value of warrants and investor SARs issued to-date	(21,805	)
Costs incurred	(6,384	)

Total discount				(28,189	)
Discount amortization to-date				10,702

Carrying amount of Series D Preferred Shares			$	82,513

NOTE 11: SHAREHOLDERS’ EQUITY

Preferred Shares

Dividends:

On February 10, 2015, our board of trustees declared a first quarter 2015 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares, $0.5546875 per share on our 8.875% Series C Preferred Shares and $0.4687500 per share on our Series D Preferred Shares. The dividends were paid on March 31, 2015 to holders of record on March 2, 2015 and totaled $6,296.

On May 20, 2015, our board of trustees declared a second quarter 2015 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares, $0.5546875 per share on our 8.875% Series C Preferred Shares and $0.4687500 per share on our Series D Preferred Shares. The dividends were paid on June 30, 2015 to holders of record on June 1, 2015 and totaled $6,569.

On July 28, 2015, our board of trustees declared a third quarter 2015 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares, $0.5546875 per share on our 8.875% Series C Preferred Shares and $0.4687500 per share on our Series D Preferred Shares. The dividends will be paid on September 30, 2015 to holders of record on September 1, 2015.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

At Market Issuance Sales Agreement (ATM):

On June 13, 2014, we entered into an At Market Issuance Sales Agreement, or the 2014 Preferred ATM agreement, with MLV & Co. LLC, or MLV, providing that, from time to time during the term of the 2014 Preferred ATM agreement, on the terms and subject to the conditions set forth therein, we may issue and sell through MLV, up to $150,000 aggregate amount of preferred shares.

With respect to each series of preferred shares, the maximum amount issuable is as follows: 4,000,000 Series A Preferred Shares, 1,000,000 Series B Preferred Shares, and 1,000,000 Series C Preferred Shares. Unless the 2014 Preferred ATM agreement is earlier terminated by MLV or us, the 2014 Preferred ATM agreement automatically terminates upon the issuance and sale of all of the Series A Preferred Shares, Series B Preferred Shares, and Series C Preferred Shares.

During the three- and six-month periods ended June 30, 2015, we issued a total of 528,022 Series A Preferred Shares pursuant to this agreement at a weighted-average price of $23.10 and we received $11,832 of net proceeds. During the three- and six-month periods ended June 30, 2015, we issued a total of 37,161 Series B Preferred Shares pursuant to this agreement at a weighted-average price of $24.26 per share and we received $875 of net proceeds. During the three- and six-month periods ended June 30, 2015, we did not issue any Series C Preferred Shares.

As of June 30, 2015, 2,765,697 Series A Preferred Shares, 962,839 Series B Preferred Shares, and 1,000,000 Series C Preferred Shares remain available for issuance under the 2014 Preferred ATM agreement.

Common Shares

Dividends:

On March 16, 2015, the board of trustees declared a $0.18 dividend on our common shares to holders of record as of April 10, 2015. The dividend was paid on April 30, 2015 and totaled $14,773.

On June 22, 2015, the board of trustees declared a $0.18 dividend on our common shares to holders of record as of July 10, 2015. The dividend was paid on July 31, 2015 and totaled $14,775.

Equity Compensation:

On February 10, 2015, the compensation committee awarded 48,405 common share awards, valued at $350 using our closing stock price of $7.23, to the board’s non-management trustees. These awards vested immediately. On February 10, 2015, the compensation committee awarded 338,500 restricted common share awards, valued at $2,447 using our closing stock price of $7.23, to our executive officers and non-executive officer employees. These awards generally vest over three-year periods.

On February 10, 2015, the compensation committee awarded 1,177,500 stock appreciation rights, or SARs, valued at $1,126 based on Black-Scholes option pricing model at the date of grant, to our executive officers and non-executive officer employees. The SARs vest over a three-year period and may be exercised between the date of vesting and January 29, 2019, the expiration date of the SARs.

On March 31, 2015, the compensation committee adopted a 2015 Annual Incentive Compensation Plan, or the annual cash bonus plan, and made awards to three of our executive officers, or the eligible officers, setting forth the basis on which 2015 target cash bonus awards are earned. In addition, the compensation committee adopted a 2015 Long Term Incentive Plan, or the LTIP, and made awards to the eligible officers setting forth the basis on which the eligible officers could earn equity compensation for the years 2015 through 2018. Pursuant to the LTIP, each eligible officer was granted an initial long term equity award, consisting of both a performance share unit award for a three year performance period and an annual restricted share award vesting over a four year period. Three components of the performance share unit award have market conditions and had grant date fair values of $3.35, $3.26 and $2.17 per share. Both the annual cash bonus plan and the LTIP were adopted pursuant to our 2012 Incentive Award Plan. From the date of adoption through June 30, 2015, we recorded $122 of compensation expense related to the LTIP.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

The total compensation awarded under our new short term annual cash bonus plan is at-risk and tied to pre-determined performance criteria. For 2015, 75% of the target cash bonus awards is payable based on the following objective performance goals and weightings; cash available for distribution per share of 35%, adjusted book value per share of 20% and return on equity at 20%. The amounts are earned based on our annual performance relative to threshold, target and maximum performance goals for these objective measures, with 50% of target incentive opportunity payable based on threshold performance achieved, 100% based on target performance achieved and 150% based on maximum performance achieved. The remaining 25% of the target cash bonus award is based on the achievement of various individual performance criterion that may be earned based on individual performance factors deemed relevant by the compensation committee.

The long term incentive plan is an equity program whereby long-term performance awards are granted each year and earned based on our performance over a three year period. Compensation awarded under the long term equity plan is based on predefined performance for 75% of the award, performance measures and weighting for the performance component of the 2015-2017 awards are based on the following objective performance measures relating to the total shareholder return (stock price appreciation plus aggregate dividends or TSR); TSR as compared to a peer group of public companies over the same period at 40%, TSR as compared to the TSR for the NAREIT Mortgage Index at 20%, company’s absolute TSR at 20%, and strategic objective at 20%. The remaining 25% of the compensation award is time-based vesting over three years.

Dividend Reinvestment and Share Purchase Plan (DRSPP):

We have a dividend reinvestment and share purchase plan, or DRSPP, under which we registered and reserved for issuance, in the aggregate, 10,500,000 common shares. During the six-month period ended June 30, 2015, we issued a total of 3,689 common shares pursuant to the DRSPP at a weighted-average price of $6.81 per share and we received $25 of net proceeds. As of June 30, 2015, 7,766,850 common shares, in the aggregate, remain available for issuance under the DRSPP.

Capital on Demand™ Sales Agreement (COD):

On November 21, 2012, we entered into a Capital on Demand™ Sales Agreement, or the COD sales agreement, with JonesTrading Institutional Services LLC, or JonesTrading, pursuant to which we may issue and sell up to 10,000,000 of our common shares from time to time through JonesTrading acting as agent and/or principal, subject to the terms and conditions of the COD sales agreement. Unless the COD sales agreement is earlier terminated by JonesTrading or us, the COD sales agreement automatically terminates upon the issuance and sale of all of the common shares subject to the COD sales agreement. During the six-month period ended June 30, 2015, we did not issue any common shares pursuant to this agreement. As of June 30, 2015, 7,918,919 common shares, in the aggregate, remain available for issuance under the COD sales agreement.

Common Share Public Offering:

On August 5, 2015, we completed an 8,000,000 common share offering at a net price of $5.40 per common share. Our net proceeds were $43,200. In connection with this offering, we have granted the underwriters the right to purchase up to 1,200,000 additional common shares within 30 days after July 31, 2015 at $5.40 per share. We cannot provide any assurance whether the underwriters will exercise this right.

Noncontrolling Interests

On January 29, 2014, IRT completed an underwritten public offering selling 8,050,000 shares of IRT common stock for $8.30 per share raising net proceeds of $62,718. We purchased 1,204,819 shares of common stock in the offering, at the public offering price, for which no underwriting discounts and commissions were paid to the underwriters. On July 21, 2014, IRT completed an underwritten public offering selling 8,050,000 shares of IRT common stock for $9.50 per share raising net proceeds of $72,002. We purchased 300,000 shares of common stock in the offering, at the public offering price, for which no underwriting discounts and commissions were paid to the underwriters. On November 25, 2014, IRT completed an underwritten public offering selling 6,000,000 shares of IRT common stock for $9.60 per share raising net proceeds of $54,648. As of June 30, 2015 and December 31, 2014, we held 7,269,719 shares, respectively, of IRT common stock representing 22.8% and 22.9%, respectively, of the outstanding shares of IRT common stock. We consolidate IRT as it is a VIE and we are the primary beneficiary. See Note 9 for additional disclosures pertaining to VIEs.

On May 11, 2015, IRT entered into a definitive merger agreement to acquire the common stock of Trade Street Residential, Inc. (NASDAQ: TSRE). Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations, Independence Realty Trust, Inc., for further information regarding the merger.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 12: EARNINGS (LOSS) PER SHARE

The following table presents a reconciliation of basic and diluted earnings (loss) per share for the three-month and six-month periods ended June 30, 2015 and 2014:


	For the Three-Month						For the Six-Month
	Periods Ended June 30						Periods Ended June 30
	2015			2014			2015			2014
Net income (loss)	$	26,441		$	(19,010	)	$	26,707		$	(26,433	)
(Income) loss allocated to preferred shares		(8,221	)		(7,415	)		(16,080	)		(13,221	)
(Income) loss allocated to noncontrolling interests		736			775			1,232			(583	)

Net income (loss) allocable to common shares	$	18,956		$	(25,650	)	$	11,859		$	(40,237	)

Plus: Impact of assumed conversions	$	617		$	—		$	—		$	—

Net income (loss) allocable to common shares plus assumed conversions	$	19,573		$	(25,650	)	$	11,859		$	(40,237	)

Weighted-average shares outstanding—Basic		82,150,475			81,778,947			82,115,941			80,636,895
Dilutive securities		7,117,987			—			2,018,099			—

Weighted-average shares outstanding—Diluted		89,268,462			81,778,947			84,134,040			80,636,895

Earnings (loss) per share—Basic:
Earnings (loss) per share—Basic	$	0.23		$	(0.31	)	$	0.14		$	(0.50	)

Earnings (loss) per share—Diluted:
Earnings (loss) per share—Diluted	$	0.22		$	(0.31	)	$	0.14		$	(0.50	)

For the three-month and six-month periods ended June 30, 2015, securities convertible into 15,124,221 and 20,599,422 common shares, respectively, were excluded from the earnings (loss) per share computations because their effect would have been anti-dilutive. For the three-month and six-month periods ended June 30, 2014, securities convertible into 30,602,086 and 30,691,078 common shares, respectively, were excluded from the earnings (loss) per share computations because their effect would have been anti-dilutive.

NOTE 13: RELATED PARTY TRANSACTIONS

In the ordinary course of our business operations, we have ongoing relationships and have engaged in transactions with the related entities described below. All of these relationships and transactions were approved or ratified by our audit committee as being on terms comparable to those available on an arm’s-length basis from an unaffiliated third party or otherwise not creating a conflict of interest.

Andrew M. Silberstein serves as a trustee on our board of trustees, as designated pursuant to the purchase agreement. Mr. Silberstein is an equity owner of Almanac and an officer of the investor and holds indirect equity interests in the investor. The transactions pursuant to the purchase agreement are described above in Note 10.

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)

NOTE 14: SUPPLEMENTAL DISCLOSURE TO STATEMENT OF CASH FLOWS

The following are supplemental disclosures to the statements of cash flows for the six-month periods ended June 30, 2015 and 2014:


	For the Six-Month
	Periods Ended June 30
	2015		2014
Cash paid for interest	$	33,918	$	17,727
Cash paid (refunds received) for taxes		54		62
Non-cash increase in investments in real estate from conversion of loans		—		28,700
Non-cash increase in non-controlling interest from property acquisition		—		1,986
Non-cash increase (decrease) in indebtedness from conversion to shares or debt extinguishments		—		(2,421	)
Non-cash increase in indebtedness from the assumption of debt from property acquisitions		—		111,986
Non-cash increase in other assets from business combination		—		7,302

Also, during the six months ended June 30, 2015, we deconsolidated a real estate property which resulted in a non-cash decrease of $23,897 to investments in real estate, a non-cash increase of $4,791 to investment in mortgages, loans and preferred equity interests, and a non-cash decrease of $18,382 to indebtedness. During the six months ended June 30, 2015, we sold a real estate property whose purchase price was financed by an existing RAIT loan on the property that was assumed by the buyer. This resulted in a non-cash decrease of $15,751 to investments in real estate and a non-cash increase of $18,000 to investment in mortgages, loans and preferred equity interests.

NOTE 15: SEGMENT REPORTING

As a group, our executive officers act as the Chief Operating Decision Maker (“CODM”). The CODM reviews operating results of our reportable segments to make decisions about investments and resources and to assess performance for each of these reportable segments. We conduct our business through the following reportable segments:

•

Our real estate lending, owning and managing segment concentrates on lending, owning and managing commercial real estate assets throughout the United States. The form of our investment may range from first mortgage loans to equity ownership of a commercial real estate property. We manage our investments in-house through our asset management and property management professionals.

•

Our IRT segment concentrates on the ownership of apartment properties in opportunistic markets throughout the United States. As of June 30, 2015, IRT owns properties totaling $716,581 in gross real estate investments, before accumulated depreciation.

•

Our Taberna Securitization segment included the management of three real estate trust preferred securitizations, two of which we consolidated. Up to December 19, 2014, we managed these securitizations and received fees for services provided. On December 19, 2014, we sold these remaining collateral management contracts and deconsolidated the securitizations from our financial statements. The following tables present segment reporting:

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)


	Real Estate Lending Owning and Management			IRT		Eliminations (a)			Consolidated
Three-Month Period Ended June 30, 2015:
Net interest margin	$	16,766		$	—	$	(241	)		16,525
Rental income		32,661			22,812		—			55,473
Fee and other income		11,835			—		(4,420	)		7,415
Provision for losses		2,000			—		—			2,000
Depreciation and amortization expense		11,285			5,720		—			17,005
Operating income		1,406			353		1			1,760
Change in fair value of financial instruments		8,356			—		—			8,356
Income tax benefit (provision)		(715	)		—		—			(715	)

Net income (loss)		27,396			353		(1,308	)		26,441


Six-Month Period Ended June 30, 2015:
Net interest margin	$	33,338		$	—	$	(479	)		32,859
Rental income		64,930			44,512		—			109,442
Fee and other income		21,625			—		(8,616	)		13,009
Provision for losses		4,000			—		—			4,000
Depreciation and amortization expense		24,264			11,758		—			36,022
Operating income		(1,598	)		111		—			(1,487	)
Change in fair value of financial instruments		12,846			—		—			12,846
Income tax benefit (provision)		(1,297	)		—		—			(1,297	)

Net income (loss)		29,213			112		(2,618	)		26,707

(a)	The transactions that occur between the reportable segments include advisory and property management services, as well as, providing commercial mortgages on our owned real estate.


	Real Estate Lending Owning and Management			IRT			Taberna			Eliminations (a)			Consolidated
Three-Month Period Ended June 30, 2014:
Net interest margin	$	25,075		$	—		$	8,109		$	(6,061	)	$	27,123
Rental income		27,565			11,649			—			—			39,214
Fee and other income		8,770			—			332			(2,183	)		6,919
Provision for losses		1,000			—			—			—			1,000
Depreciation and amortization expense		10,176			3,232			33			—			13,441
Operating income		7,433			(129	)		9,085			(2,755	)		13,634
Change in fair value of financial instruments		(1,388	)		—			(23,683	)		—			(25,071	)
Income tax benefit (provision)		292			—			(271	)		—			21

Net income (loss)		8,106			(128	)		(22,941	)		(4,047	)		(19,010	)

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2015

(Unaudited and dollars in thousands, except share and per share amounts)



Six-Month Period Ended June 30, 2014:
Net interest margin	$	49,347	$	—		$	17,305		$	(11,749	)	$	54,903
Rental income		54,606		19,784			—			—			74,390
Fee and other income		14,171		—			616			(3,516	)		11,271
Provision for losses		2,000		—			—			—			2,000
Depreciation and amortization expense		20,061		5,355			67			—			25,483
Operating income		12,347		(80	)		16,175			(2,986	)		25,456
Change in fair value of financial instruments		2,318		—			(51,528	)		—			(49,210	)
Income tax benefit (provision)		772		—			(512	)		—			260

Net income (loss)		19,870		2,807			(43,577	)		(5,533	)		(26,433	)

NOTE 16: COMMITMENTS AND CONTINGENCIES

We are involved from time to time in litigation on various matters, including disputes with tenants of owned properties, disputes arising out of agreements to purchase or sell properties and disputes arising out of our loan portfolio. Given the nature of our business activities, these lawsuits are considered routine to the conduct of our business. The result of any particular lawsuit cannot be predicted, because of the very nature of litigation, the litigation process and its adversarial nature, and the jury system. We do not expect that the liabilities, if any, that may ultimately result from such routine legal actions will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

On March 13, 2012, the staff of the SEC notified us that the SEC had initiated a non-public investigation concerning our investment advisory subsidiary, Taberna Capital Management, LLC, or TCM. The investigation relates to TCM’s receipt of approximately $15 million of restructuring fees from issuers of securities collateralizing Taberna securitizations for which TCM served as collateral manager in connection with certain exchange transactions involving these securities and securitizations. TCM participated in these exchange transactions between March 2, 2009 and November 28, 2012 and has not subsequently participated in any exchange transactions in which it has collected a fee. The SEC staff has issued administrative subpoenas seeking testimony and information from us in connection with this matter, and we are cooperating fully in providing such information.

On September 16, 2014, we reached an agreement in principle with SEC staff to resolve a non-public investigation initiated by the SEC staff regarding our subsidiary, TCM. This agreement in principle remains subject to final documentation and approval by the SEC. Under the terms of the agreement in principle, among other things, TCM will pay $21.5 million and RAIT will guarantee this payment obligation. As a result of this agreement in principle, RAIT took a charge of $21.5 million in 2014. We cannot assure you that the settlement with the SEC will be finalized and/or approved or that any final settlement will not have different or additional material terms.

In addition, on October 8, 2014, two former executive officers and a former employee of RAIT received “Wells Notices” from the SEC staff relating to the subject of such investigation. We cannot provide any assurance what the ultimate resolution of these Wells Notices or any related action will be or whether any such resolution may have an adverse effect on us. A Wells Notice is neither a formal allegation of wrongdoing nor a finding that any of the recipients violated any law. Rather, it provides a recipient an opportunity to respond to issues raised by the SEC staff and to present any reasons of law, policy or fact why the SEC staff should not recommend that the SEC initiate an enforcement action. The Wells Notices in this matter indicate the SEC staff has made a preliminary determination to recommend to the SEC that the SEC file an action against each of the named individuals relating to the individuals’ activities on behalf of TCM in connection with the matters that were the subject of the investigation described above. The former executive officers left RAIT as of December 31, 2014 and the former employee left RAIT in 2010.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

In addition to historical information, this discussion and analysis contains forward-looking statements. These statements can be identified by the use of forward-looking terminology including “may,” “believe,” “will,” “expect,” “anticipate,” “estimate,” “continue” or similar words. These forward-looking statements are subject to risks and uncertainties, as more particularly set forth in our filings with the Securities and Exchange Commission, including those described in the “Forward Looking Statements” and “Risk Factors” sections of our Annual Report on Form 10-K for the year ended December 31, 2014, that could cause actual results to differ materially from those projected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report, except as may be required by applicable law.

Overview

We are a multi-strategy commercial real estate company that is a self-managed and self-advised Maryland real estate investment trust, or REIT. We use our vertically integrated platform to originate commercial real estate loans, acquire commercial real estate properties and invest in, manage and service commercial real estate assets. We offer a comprehensive set of debt financing options to the commercial real estate industry and provide asset and property management services. We also own and manage a portfolio of commercial real estate properties and manage real estate assets for third parties. We believe this approach delivers diversification to our investment portfolio blending the higher-yielding lending business with the stability and recurring income stream from owning and managing properties.

In order to take advantage of market opportunities in the future, and to maximize shareholder value over time, we will continue to focus on:

•

expanding RAIT’s commercial real estate revenue by investing in commercial real estate-related assets, managing and servicing investments for our own account or for others, and providing property management services;

•

creating value through investing in our commercial real estate properties and implementing cost savings programs to help maximize property value over time;

•

identifying opportunities to generate gains through the sale of commercial real estate properties;

•

maintaining and expanding our sources of liquidity;

•

managing our leverage to provide risk-adjusted returns for our shareholders; and

•

managing our investment portfolios to reposition under-performing assets to seek to increase our cash flows and the value of our assets over time.

Our implementation of these strategies has contributed to our revenue growth and stable credit performance. During the six-month period ended June 30, 2015, we originated $437.4 million of commercial real estate loans, had conduit loan sales of $223.3 million and CRE loan repayments of $130.5 million, resulting in net loan growth of $83.6 million. Our rental income increased due to the acquisition of 29 properties since December 31, 2013 and improving occupancy and rental rates in our historical portfolio. Improving occupancy and rental rates in our historical portfolio also increased our rental income and net operating income. Our cash available for distribution, a non-GAAP financial measure, for the six-month period ended June 30, 2015 increased to $0.56 per common share, including $0.16 per share of gains from property sales, from $0.46 per common share for the comparable period in 2014. See “Non-GAAP Financial Measures” below for further disclosure regarding cash available for distribution.

We generated GAAP net income allocable to common shares of $11.9 million, or $0.14 per common share-diluted, during the six-month period ended June 30, 2015.

For the six-month period ended June 30, 2015, the net change in fair value of financial instruments increased net income by $12.8 million. This increase was comprised of a non-cash mark to market increase in the fair value of warrants and SARs we have issued to the investor, partially offset by decreases in the fair value of other financial instruments we hold.

Key Statistics

Set forth below are key statistics relating to our business through June 30, 2015 (dollars in thousands, except per share data):


	As of or For the Three-Month Periods Ended
	June 30, 2015			March 31, 2015			December 31, 2014			September 30, 2014			June 30, 2014
Financial Statistics:
Total revenue	$	79,413		$	75,897		$	73,857		$	75,293		$	73,256
Earnings (loss) per share, diluted	$	0.22		$	(0.09	)	$	(3.11	)	$	(0.28	)	$	(0.31	)
Funds from operations per share	$	0.15		$	0.05		$	(2.97	)	$	(0.17	)	$	(0.20	)
Cash available for distribution per share,	$	0.37		$	0.19		$	0.26		$	—	^(f)	$	0.24
Common dividend declared per share	$	0.18		$	0.18		$	0.18		$	0.18		$	0.18
Assets under management	$	4,764,259		$	4,607,413		$	4,485,525		$	5,417,579		$	5,266,296
Commercial Real Estate (“CRE”) Loan Portfolio (a):
Reported CRE Loans—unpaid principal	$	1,524,159		$	1,518,969		$	1,409,254		$	1,369,138		$	1,325,748
Non-accrual loans—unpaid principal	$	24,851		$	24,851		$	25,281		$	40,741		$	30,269
Non-accrual loans as a % of reported loans		1.6	%		1.6	%		1.8	%		3.0	%		2.3	%
Reserve for losses	$	12,796		$	10,797		$	9,218		$	15,662		$	15,336
Reserves as a % of non-accrual loans		51.5	%		43.4	%		36.5	%		38.4	%		50.7	%
Provision for losses	$	2,000		$	2,000		$	2,000		$	1,500		$	1,000
CRE Property Portfolio:
Reported investments in real estate, net (b)	$	1,605,316		$	1,658,659		$	1,671,971		$	1,400,715		$	1,268,769
Net operating income (b)	$	29,116		$	27,990		$	23,148		$	20,932		$	19,524
Number of properties owned (b)		87			89			89			80			74
RAIT Multifamily units owned		5,911			7,043			7,043			7,043			7,043
IRT Multifamily units owned		9,055			8,819			8,819			6,473			5,345
Office square feet owned		2,498,803			2,498,803			2,498,803			2,286,284			2,248,321
Retail square feet owned		1,378,171			1,378,171			1,356,487			1,356,487			986,427
Redevelopment square feet owned		436,719			435,307			434,482			434,482			434,482
Acres of land owned		21.92			21.92			21.92			21.92			21.92
Average physical occupancy data:
RAIT Multifamily properties		93.3	%		93.5	%		92.0	%		92.8	%		92.7	%
IRT Multifamily properties		92.5	%		94.0	%		92.7	%		92.6	%		93.1	%
Office properties		77.7	%		75.0	%		75.6	%		75.0	%		74.3	%
Retail properties (f)		69.1	%		70.4	%		70.5	%		71.1	%		62.1	%
Average effective rent per unit/square foot (c)
RAIT Multifamily (d)	$	834		$	817		$	785		$	783		$	773
IRT Multifamily (d)	$	840		$	824		$	789		$	789		$	765
Office (e)	$	21.44		$	21.01		$	21.53		$	19.64		$	20.10
Retail (e) (f)	$	15.30		$	14.53		$	15.11		$	14.11		$	13.82

(a)	CRE Loan Portfolio includes commercial mortgages, mezzanine loans, and preferred equity interests only and does not include other loans. See Note 3—“Investments in Loans” in the Notes to Consolidated Financial Statements for information relating to all loans held by us.

(b)	Includes 31 apartment properties owned by IRT and a book value of $685.4 million as of June 30, 2015.

(c)	Based on properties owned as of June 30, 2015.

(d)	Average effective rent is rent per unit per month.

(e)	Average effective rent is rent per square foot per year.

(f)	Excludes Murrels Retail, a retail property in re-development with an occupancy of 52.5% and average effective rent per square foot of $9.93 for the quarter ended June 30, 2015.

Investors should read Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, or the Annual Report, for a detailed discussion of the following items:

•

Commercial Real Estate Lending Environment.

•

Trends Relating to Originating and Financing Conduit Loans and Bridge Loans.

•

Trends Relating to Investments in Real Estate.

•

Interest rate environment.

•

Prepayment rates.

•

Commercial real estate performance.

Our Investment Portfolio

Our consolidated investment portfolio is currently comprised of the following asset classes:

Commercial mortgages, mezzanine loans, and preferred equity interests. We originate and own senior long-term conduit mortgage loans, short-term bridge loans, subordinated, or “mezzanine,” financing and preferred equity interests. These assets are in most cases “non-recourse” or limited recourse loans secured by commercial real estate assets or real estate entities. This means that we look primarily to the assets securing the loan for repayment, subject to certain standard exceptions. We originate loans that are eligible to be sold to securitizations issuing commercial mortgage backed securities, or CMBS, which we refer to as conduit loans. We may from time to time acquire existing commercial real estate loans from third parties who have originated such loans, including banks, other institutional lenders or third-party investors. Where possible, we seek to maintain direct lending relationships with borrowers, as opposed to investing in loans controlled by third party lenders.

The tables below describe certain characteristics of our commercial mortgages, mezzanine loans, and preferred equity interests as of June 30, 2015 (dollars in thousands):


	Carrying Value		Weighted- Average Coupon			Range of Maturities		Number of Loans
Commercial Real Estate (CRE) Loans
Commercial mortgages	$	1,267,726		5.3	%		Sep. 2015 to Jan. 2029		108
Mezzanine loans		201,670		9.8	%		Jul. 2015 to May. 2025		62
Preferred equity interests		36,976		7.3	%		Feb. 2016 to Aug. 2033		9

Total investments in loans	$	1,506,372		6.0	%				179

During the six-month period ended June 30, 2015, we originated $437.4 million of commercial real estate loans, had conduit loan sales of $223.3 million and CRE loan repayments of $130.5 million, resulting in net loan growth of $83.6 million.

The charts below describe the property types and the geographic breakdown of our commercial mortgages, mezzanine loans, other loans, and preferred equity interests as of June 30, 2015:

LOGO

(a)	Based on carrying amount.

Investments in real estate. We invest in real estate properties, primarily multi-family properties, throughout the United States. The table below describes certain characteristics of our investments in real estate as of June 30, 2015 (dollars in thousands):


	Investments in Real Estate (a)		Average Physical Occupancy			Units/ Square Feet/ Acres		Number of Properties
RAIT Multi-family real estate properties	$	517,475		93.3	%		5,911		25
IRT Multi-family real estate properties	$	716,581		92.5	%		9,055		31
Office real estate properties		364,077		77.7	%		2,498,803		15
Retail real estate properties		133,471		69.1	%		1,814,890		6
Parcels of land		52,284		N/A			21.9		10

Total	$	1,783,888							87

The charts below describe the property types and the geographic breakdown of our investments in real estate as of June 30, 2015:

LOGO

(a)	Based on book value.

Securitization Summary

Overview. We have used securitizations to match fund the interest rates and maturities of our assets with the interest rates and maturities of the related financing. This strategy has helped us reduce interest rate and funding risks on our loan portfolios. A securitization is a structure in which multiple classes of debt and equity are issued by a special purpose entity to finance a portfolio of assets. Cash flow from the portfolio of assets is used to repay the securitization liabilities sequentially, in order of seniority. The most senior classes of debt typically have credit ratings of “AAA” through “BBB–” and therefore can be issued at yields that are lower than the average yield of the loans collateralizing the securitization. The debt tranches are typically rated based on portfolio quality, diversification and structural subordination. The equity securities issued by the securitization are the “first loss” piece of the capital structure, but they are entitled to all residual amounts available for payment after the obligations to the debt holders have been satisfied. Our retained interests described below included in our investments in our consolidated securitizations are typically in such “first loss” piece. Historically, the stated maturity of the debt issued by a securitization we have sponsored and consolidated has been between 15 and 17 years. However, we expect the weighted average life of such debt to be shorter than the stated maturity due to the financial condition of the borrowers on the underlying loans and the characteristics of such loans, including the existence and frequency of exercise of any permitted prepayment, the prevailing level of interest rates, the actual default rate and the actual level of any recoveries on any defaulted loans. Debt issued by these securitizations is non-recourse to RAIT and payable solely from the payments by the borrowers on the loans collateralizing these securitizations. These assets are in most cases “non-recourse” or limited recourse loans secured by commercial real estate assets or real estate entities. This means that we look primarily to the assets securing the loan for repayment, subject to certain standard exceptions.

As of June 30, 2015, we have sponsored six securitizations with varying amounts of retained or residual interests held by us which we consolidate in our financial statements as follows: RAIT I, RAIT II, RAIT 2013-FL1 Trust, or RAIT FL1, RAIT 2014-FL2 Trust, or RAIT FL2, RAIT 2014-FL3 Trust, or RAIT FL3 and RAIT 2014-FL4 Trust, or RAIT FL4. We refer to RAIT FL1, RAIT FL2, RAIT FL3 and RAIT FL4 as the FL securitizations. The assets and liabilities of these securitizations are presented at amortized cost in our consolidated financial statements. We originated substantially all of the loans collateralizing RAIT I, RAIT II and the FL securitizations. We serve as the collateral manager, servicer and special servicer on RAIT I and RAIT II and as servicer and special servicer for each of the FL securitizations.

Securitization Performance. RAIT I and RAIT II contain interest coverage triggers, or IC triggers, and over collateralization triggers, or OC triggers, which must be met in order for us to receive our subordinated management fees and our lower-rated debt or residual equity returns. If the IC triggers or OC triggers are not met in a given period, then the cash flows are redirected from lower rated tranches and used to repay the principal amounts to the senior tranches of CDO notes payable. These conditions and the re-direction of cash flow continue until the triggers are met by curing the underlying payment defaults, paying down the CDO notes payable or other actions permitted under the relevant securitization indenture. As of the most recent payment information, all applicable IC triggers and OC triggers are being met for our two commercial real estate securitizations, RAIT I and RAIT II, and we are receiving all of our management fees, interest and residual returns from these securitizations. The FL securitizations do not have IC triggers and OC triggers.

We expect repayment of the loans collateralizing RAIT I and RAIT II outside their contractual maturities to increase in 2015 through 2019. We expect this will reduce our returns from these securitizations and we will evaluate alternative strategies seeking to replace these returns. We expect to undertake a similar evaluation for any securitization we sponsor as the notes issued by such securitization approach their respective weighted average lives.

A summary of the investments in our consolidated securitizations as of the most recent payment information is as follows:

•

RAIT I—RAIT I has $843.3 million of total collateral at par value, of which $18.2 million is defaulted. The current overcollateralization, or OC, test is passing at 129.6% with an OC trigger of 116.2%. We currently own $67.0 million of the securities that were originally rated investment grade and $200.0 million of the non-investment grade securities issued by this securitization. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our collateral management fees. We pledged $32.4 million of the securities we own issued by RAIT I as collateral for a senior secured note we issued.

•

RAIT II—RAIT II has $667.1 million of total collateral at par value, of which $19.5 million is defaulted. The current OC test is passing at 122.9% with an OC trigger of 111.7%. We currently own $108.5 million of the securities that were originally rated investment grade and $140.7 million of the non-investment grade securities issued by this securitization. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our collateral management fees. We pledged $77.2 million of the securities we own issued by RAIT II as collateral for a senior secured note we issued.

•

RAIT FL1—RAIT FL1 has $55.0 million of total collateral at par value, of which there is no collateral that is in default. RAIT FL1 does not have OC triggers or IC triggers. RAIT FL1, has classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $21.2 million to investors. We currently own the unrated classes of junior notes, including a class with an aggregate principal balance of $33.8 million, and the equity, or the retained interests, of RAIT FL1. It should be noted that this most recent payment information includes collateral repayments of $6.6 million which have yet to be passed through to investors. We are evaluating whether or not to redeem the current aggregate principal balance outstanding of the investment grade senior notes issued by RAIT FL1 in accordance with their terms.

•

RAIT FL2—RAIT FL2 has $185.6 million of total collateral at par value, of which there is no collateral that is in default. RAIT FL2 does not have OC triggers or IC triggers. RAIT FL2, has classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $145.4 million to investors. We currently own the unrated classes of junior notes, including a class with an aggregate principal balance of $40.2 million, and the equity, or the retained interests, of RAIT FL2. It should be noted that this most recent payment information includes a collateral repayment of $5.2 million which has yet to be passed through to investors.

•

RAIT FL3—RAIT FL3 has $216.1 million of total collateral at par value, of which there is no collateral that is in default. RAIT FL3 does not have OC triggers or IC triggers. RAIT FL3, has classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $177.8 million to investors. We currently own the unrated classes of junior notes, including a class with an aggregate principal balance of $37.4 million, and the equity, or the retained interests, of RAIT FL3.

•

RAIT FL4—RAIT FL4 has $219.3 million of total collateral at par value, of which there is no collateral that is in default. This excludes an additional $3.8 million of collateral related to a loan that is expected to close during the third quarter of 2015. RAIT FL4 does not have OC triggers or IC triggers. RAIT FL4, has classes of investment grade senior notes with an aggregate principal balance outstanding of approximately $177.9 million. We currently own the unrated classes of junior notes, including a class with an aggregate principal balance of $41.4 million, and the equity, or the retained interests, of RAIT FL4.

Independence Realty Trust, Inc.

IRT common stock trades on the NYSE MKT under the symbol “IRT” with a closing price of $7.94 as of August 6, 2015. We currently hold 7,269,719 shares of IRT common stock representing 22.8% percent of the outstanding shares of IRT common stock as of August 6, 2015. We continue to consolidate IRT in our financial results as of June 30, 2015. For the six-month period ended June 30, 2015, we reflected IRT’s operating results in our financial results, including $0.1 million of net income. As of June 30, 2015, IRT owned 31 multi-family properties with 9,055 units and a book value of $685.4 million which were reflected on our balance sheet. For the six-month period ended June 30, 2015, we earned $1.2 million of fees from IRT under our advisory agreement with IRT and received $1.3 million of distributions declared on our IRT common stock, both of which are eliminated in consolidation. We characterize IRT as one of our operating segments and break out its financial performance in our financial statements.

In January 2014, IRT completed an underwritten public offering of 8,050,000 shares of IRT common stock for total net proceeds of approximately $62.7 million. We purchased 1,204,819 shares of IRT common stock in this offering, at the public offering price, for which no underwriting discounts and commissions were paid to the underwriters. On July 21, 2014, IRT completed an underwritten public offering selling 8,050,000 shares of IRT common stock for $9.50 per share raising net proceeds of $72.0 million. We purchased 300,000 shares of common stock in the offering, at the public offering price, for which no underwriting discounts and commissions were paid to the underwriters. On November 25, 2014, IRT completed an underwritten public offering selling 6,000,000 shares of IRT common stock for $9.60 per share raising net proceeds of $54.6 million.

On May 11, 2015, IRT entered into a definitive merger agreement, or the IRT TRSE merger agreement, to acquire the common stock of Trade Street Residential, Inc., or TSRE. IRT has disclosed that, upon completion of the merger, or the IRT TRSE merger, contemplated by the IRT TRSE merger agreement, it expects to have over $1.4 billion of total capitalization and 50 properties with 14,044 units which IRT expects will provide it with enhanced scale, improved portfolio quality, accelerated market penetration and immediate financial benefit. By October 1, 2015, RAIT and IRT intend to amend the advisory agreement between IRT and the RAIT subsidiary serving as IRT’s external advisor such that the advisor will receive (i) a quarterly base management fee of 0.375% of IRT’s cumulative equity raised and (ii) a quarterly incentive fee equal to 20% of Core FFO, as defined in the advisory agreement, in excess of $0.20 per share. The amendment to the advisory agreement would also extend the term of the advisory agreement until 2020. We expect the IRT TRSE merger to benefit us through our ownership of IRT common stock, increased assets under management, and, though our advisory agreement with IRT will reflect a lower fee rate, due to the large increase in portfolio size, increased advisory fees from IRT. IRT and TRSE have scheduled special meetings of their respective shareholders on September 15, 2015. We expect that the IRT TRSE Merger will be completed shortly after they receive approval of their respective shareholders and the satisfaction or waiver of closing conditions set forth in the IRT TRSE merger agreement.

Assets Under Management

Assets under management, or AUM, is an operating measure representing the total assets that we own or are managing for third parties. While not all AUM generates fee income, it is an important operating measure to gauge our asset growth, volume of originations, size and scale of our operations and our performance. AUM includes our total investment portfolio and assets associated with unconsolidated securitizations for which we derive asset management fees.

The table below summarizes our AUM as of June 30, 2015 and December 31, 2014 (dollars in thousands):


	AUM as of June 30, 2015		AUM as of December 31, 2014
Commercial real estate loan portfolio (1)	$	1,516,740	$	1,409,254
Investments in real estate (2)		1,783,888		1,840,451
Property management (3)		1,463,631		1,235,820

Total	$	4,764,259	$	4,485,525

(1)

As of June 30, 2015 and December 31, 2014, our commercial real estate loan portfolio was comprised of $658.8 million and $671.7 million, respectively, of assets collateralizing RAIT I and RAIT II and $182.9 million and $246.7 million, respectively, of commercial mortgages, mezzanine loans and preferred equity interests that were not securitized. As of June 30, 2015 and December 31, 2014, our commercial real estate loan portfolio was also comprised of $55.0 million and $79.6 million, respectively, of assets collateralizing RAIT FL1, $185.6 million and $196.1 million of assets collateralizing RAIT FL2, $215.2 million and $215.2 million of assets collateralizing RAIT FL3 and $219.3 million and $0 million of assets collateralizing RAIT FL4.

(2)	As of June 30, 2015 and December 31, 2014, includes $716.6 million and $689.1 million, respectively, of investments in real estate of IRT.

(3)

In the fourth quarter of 2013, we exercised our rights under a preferred equity investment we had made in Urban Retail Properties, LLC, or Urban Retail, to assume control of Urban Retail. We completed our acquisition of the equity of Urban Retail in March 2014. Urban Retail manages 67 properties representing 20,178,302 square feet in 25 states as of June 30, 2015. In addition, on July 1, 2015 we exercised our rights under the operating agreement for our subsidiary, RAIT Residential, to acquire the 25% of its equity held by unaffiliated investors making RAIT Residential our wholly owned subsidiary. RAIT Residential provides property management services to apartment properties, including IRT’s properties.

Non-GAAP Financial Measures

Cash Available for Distribution

Cash available for distribution, or CAD, is a non-GAAP financial measure. We believe that CAD provides investors and management with a meaningful indicator of operating performance. Management also uses CAD, among other measures, to evaluate profitability and our board of trustees considers CAD in determining our quarterly cash distributions. We also believe that CAD is useful because it adjusts for a variety of noncash items (such as depreciation and amortization, equity-based compensation, realized non-cash gain (loss) on assets, provision for loan losses and non-cash interest income and expense items). Furthermore, CAD removes the effect of our previous consolidation of the legacy securitizations, T8 and T9, which we deconsolidated as part of our exit of the Taberna business in December 2014.

We calculate CAD by subtracting from or adding to net income (loss) attributable to common shareholders the following items: depreciation and amortization items including depreciation and amortization, straight-line rental income or expense, amortization of in place leases, amortization of deferred financing costs, amortization of discount on financings and equity-based compensation; changes in the fair value of our financial instruments; realized noncash gain (loss) on assets and other; provision for loan losses; impairment on depreciable property; acquisition gains or losses and transaction costs; certain fee income eliminated in consolidation that is attributable to third parties; and one-time events pursuant to changes in U.S. GAAP and certain other non-routine items.

CAD should not be considered as an alternative to net income (loss) or cash generated from operating activities, determined in accordance with U.S. GAAP, as an indicator of operating performance. For example, CAD does not adjust for the accrual of income and expenses that may not be received or paid in cash during the associated periods. Please refer to our consolidated financial statements prepared in accordance with U.S. GAAP in Part I, Item 1. In addition, our methodology for calculating CAD may differ from the methodologies used by other comparable companies, including other REITs, when calculating the same or similar supplemental financial measures and may not be comparable with these companies.

Set forth below is a reconciliation of CAD to GAAP net income (loss) allocable to common shares for the three-month periods ended June 30, 2015 and 2014 (dollars in thousands, except share information):


	For the Three-Month Period Ended June 30, 2015						For the Three-Month Period Ended June 30, 2014
	Amount			Per Share (1)			Amount			Per Share (2)
Cash Available for Distribution:
Net income (loss) allocable to common shares	$	18,956		$	0.23		$	(25,650	)	$	(0.31	)
Adjustments:
Depreciation and amortization expense		17,005			0.21			13,441			0.16
Change in fair value of financial instruments		(8,356	)		(0.10	)		25,071			0.32
(Gains) losses on assets		(4,196	)		(0.05	)		7,599			0.09
(Gains) losses on extinguishment of debt		—			—			—			—
Taberna VIII and Taberna IX securitizations, net effect		—			—			(7,028	)		(0.09	)
Straight-line rental adjustments		23			0.00			24			—
Share-based compensation		1,046			0.01			1,180			0.01
Origination fees and other deferred items		8,253			0.10			5,181			0.06
Provision for losses		2,000			0.02			1,000			0.01
Noncontrolling interest effect of certain adjustments		(4,421	)		(0.05	)		(1,095	)		(0.01	)

Cash Available for Distribution	$	30,310		$	0.37		$	19,723		$	0.24

(1)	Based on 82,150,475 weighted-average shares outstanding for the three-month period ended June 30, 2015.

(2)	Based on 81,778,947 weighted-average shares outstanding for the three-month period ended June 30, 2014.

Set forth below is a reconciliation of CAD to net income (loss) allocable to common shares for the six-month periods ended June 30, 2015 and 2014 (dollars in thousands, except share information):


	For the Six-Month Period Ended June 30, 2015						For the Six-Month Period Ended June 30, 2014
	Amount			Per Share (1)			Amount			Per Share (2)
Cash Available for Distribution:
Net income (loss) allocable to common shares	$	11,859		$	0.14		$	(40,237	)	$	(0.50	)
Adjustments:
Depreciation and amortization expense		36,022			0.45			25,483			0.32
Change in fair value of financial instruments		(12,846	)		(0.16	)		49,210			0.61
(Gains) losses on assets		(3,371	)		(0.04	)		5,375			0.07
(Gains) losses on extinguishment of debt		—			—			(2,421	)		(0.03	)
Taberna VIII and Taberna IX securitizations, net effect		—			—			(14,088	)		(0.18	)
Straight-line rental adjustments		25			0.00			(91	)		—
Share-based compensation		2,394			0.03			2,629			0.03
Origination fees and other deferred items		16,636			0.20			9,732			0.12
Provision for losses		4,000			0.05			2,000			0.03
Noncontrolling interest effect of certain adjustments		(9,134	)		(0.11	)		(635	)		(0.01	)

Cash Available for Distribution	$	45,585		$	0.56		$	36,957		$	0.46

(1)	Based on 82,115,941 weighted-average shares outstanding for the six-month period ended June 30, 2015.

(2)	Based on 80,636,895 weighted-average shares outstanding for the six-month period ended June 30, 2014.

Funds from Operations

We believe that funds from operations, or FFO, which is a non-GAAP measure, is an additional appropriate measure of the operating performance of a REIT. We compute FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT, as net income or loss allocated to common shares (computed in accordance with GAAP), excluding real estate-related depreciation and amortization expense, gains or losses on sales of real estate and the cumulative effect of changes in accounting principles. Our management utilizes FFO as a measure of our operating performance. FFO is not an equivalent to net income or cash generated from operating activities determined in accordance with U.S. GAAP. Furthermore, FFO does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. FFO should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity.

Set forth below is a reconciliation of FFO to net income (loss) allocable to common shares for the three-month periods ended June 30, 2015 and 2014 (dollars in thousands, except share information):


	For the Three-Month Period Ended June 30, 2015						For the Three-Month Period Ended June 30, 2014
	Amount			Per Share (1)			Amount			Per Share (2)
Funds From Operations:
Net income (loss) allocable to common shares	$	18,956		$	0.23		$	(25,650	)	$	(0.31	)
Adjustments:
Real estate depreciation and amortization		10,246			0.12			9,315			0.11
(Gains) losses on the sale of real estate		(17,281	)		(0.20	)		—			—

Funds From Operations	$	11,921		$	0.15		$	(16,335	)	$	(0.20	)

(1)	Based on 82,150,475 weighted-average shares outstanding for the three-month period ended June 30, 2015.

(2)	Based on 81,778,947 weighted-average shares outstanding for the three-month period ended June 30, 2014.

Set forth below is a reconciliation of FFO to net income (loss) allocable to common shares for the six-month periods ended June 30, 2015 and 2014 (dollars in thousands, except share information):


	For the Six-Month Period Ended June 30, 2015						For the Six-Month Period Ended June 30, 2014
	Amount			Per Share (1)			Amount			Per Share (2)
Funds From Operations:
Net income (loss) allocable to common shares	$	11,859		$	0.14		$	(40,237	)	$	(0.50	)
Adjustments:
Real estate depreciation and amortization		21,444			0.26			18,134			0.23
(Gains) losses on the sale of real estate		(17,281	)		(0.20	)		321			—

Funds From Operations	$	16,022	)	$	0.20		$	(21,782	)	$	(0.27	)

(1)	Based on 82,115,941 weighted-average shares outstanding for the six-month period ended June 30, 2015.

(2)	Based on 80,636,895 weighted-average shares outstanding for the six-month period ended June 30, 2014.

Adjusted Book Value

Management views adjusted book value as a useful and appropriate supplement to shareholders’ equity and book value. The measure serves as an additional performance measure of our value because it facilitates evaluation of us without the effects of various items that we are required to record in accordance with GAAP but which have limited economic impact on our business. Those adjustments primarily reflect the effect of consolidated securitizations where we do not currently receive cash flows on our retained interests, accumulated depreciation and amortization, the valuation of long-term derivative instruments and a valuation of our recurring collateral and property management fees. Adjusted book value is a non-GAAP financial measurement, and does not purport to be an alternative to reported shareholders’ equity, determined in accordance with GAAP, as a measure of book value. Adjusted book value should be reviewed in connection with shareholders’ equity as set forth in our consolidated balance sheets, to help analyze our value to investors. Adjusted book value may be defined in various ways throughout the REIT industry. Investors should consider these differences when comparing our adjusted book value to that of other REITs.

Set forth below is a reconciliation of adjusted book value to shareholders’ equity as of June 30, 2015 (dollars in thousands, except share information):


	As of June 30, 2015
	Amount			Per Share (1)
Total shareholders’ equity	$	378,956		$	4.57
Liquidation value of preferred shares characterized as equity (2)		(231,733	)		(2.80	)

Book value		147,223			1.77
Adjustments:
RAIT I and RAIT II derivative liabilities		12,154			0.15
Change in fair value for warrants and investor SARs		22,181			0.27
Accumulated depreciation and amortization		263,464			3.17
Valuation of recurring collateral and property management fees		75,106			0.91

Total adjustments		372,905			4.50

Adjusted book value	$	520,128		$	6.27

(1)	Based on 82,895,723 common shares outstanding as of June 30, 2015.

(2)	Based on 5,303,591 Series A preferred shares, 2,325,626 Series B preferred shares, and 1,640,100 Series C preferred shares outstanding as of June 30, 2015, all of which have a liquidation preference of $25.00 per share.

Results of Operations

Three-Month Period Ended June 30, 2015 Compared to the Three-Month Period Ended June 30, 2014

Revenue

Net interest margin. Net interest margin decreased $10.6 million to $16.5 million for the three-month period ended June 30, 2015 from $27.1 million for the three-month period ended June 30, 2014. Investment interest income decreased $5.4 million as a result of our exit from the Taberna business in December 2014 and $4.3 million as a result of non-routine items including our acquisition of Urban, the conversion of certain loans to real estate owned property and the removal of certain loans from non-accrual status. Investment interest expense increased $2.1 million related to the RAIT FL3 securitization issued in October 2014 and the RAIT FL4 securitization issued in May 2015. This was partially offset by $0.9 million of reduced interest rate hedging costs from the expiration of interest rate swap agreements associated with our consolidated RAIT I and RAIT II securitizations and $0.1 million of reduced interest expense from repurchases and repayments of our CDO notes payable.

Rental income. Rental income increased $16.3 million to $55.5 million for the three-month period ended June 30, 2015 from $39.2 million for the three-month period ended June 30, 2014. The increase is attributable to $14.0 million of rental income from 16 new properties acquired or consolidated since June 30, 2014 and three properties acquired during the second quarter of 2014 as well as $2.3 million of rental income from improved occupancy and rental rates in 2015 as compared to 2014 at our other properties.

Fee and other income. Fee and other income increased $0.5 million to $7.4 million for the three-month period ended June 30, 2015 from $6.9 million for the three-month period ended June 30, 2014. The increase is primarily attributable to $0.3 million of increased conduit fee income generated during the three-month period ended June 30, 2015 as compared to the same period in 2014 as our conduit lending operations continue to grow and disposition fee earned by our property management operations. This was partially offset by a $0.5 million decrease in property management fees as leasing commissions earned during the three-month period ended June 30, 2015 declined as compared to the same period in 2014.

Expenses

Interest expense. Interest expense increased $6.5 million to $19.7 million for the three-month period ended June 30, 2015 from $13.2 million for the three-month period ended June 30, 2014. The increase is primarily attributable to $3.6 million of additional interest expense on our loans payable on real estate resulting from the financing of properties we acquired since June 30, 2014, $0.2 million from the 7.625% senior notes issued April 2014, $1.3 million from the 7.125% senior notes issued in August 2014 and $1.3 million related to our senior secured notes.

Real estate operating expense. Real estate operating expense increased $6.7 million to $26.4 million for the three-month period ended June 30, 2015 from $19.7 million for the three-month period ended June 30, 2014. The increase is attributable to $6.7 million of real estate operating expense from 16 new properties acquired or consolidated since June 30, 2014 and three properties acquired during the second quarter of 2014.

Compensation expense. Compensation expense decreased $0.8 million to $6.6 million for the three-month period ended June 30, 2015 from $7.4 million for the three-month period ended June 30, 2014. This decrease was primarily attributable to lower bonus accruals and salary costs for the three-month period ended June 30, 2015 as compared to the three-month period ended June 30, 2014, which was partially offset by a decrease in the capitalization of salaries.

General and administrative expense. General and administrative expense increased $0.4 million to $5.1 million for the three-month period ended June 30, 2015 from $4.7 million for the three-month period ended June 30, 2014. This increase was primarily attributable to an increase in professional service fees for the three-month period June 30, 2015 as compared to the same period in 2014.

Depreciation and amortization expense. Depreciation and amortization expense increased $3.6 million to $17.0 million for the three-month period ended June 30, 2015 from $13.4 million for the three-month period ended June 30, 2014. The increase is attributable to $5.0 million of depreciation expense from 16 new properties acquired or consolidated since June 30, 2014 and three properties acquired during the second quarter of 2014 that were present for the full six-month period ended June 30, 2015. The increase was offset by a decrease of $0.6 million related to three properties that were disposed of after June 30, 2014, a decrease of $0.7 million from our other properties and a decrease in corporate depreciation of $0.1 million.

Other income (expense)

Gains (losses) on assets. During the three-month period ended June 30, 2015, gains (losses) on assets was due to a gain on the disposition of one property. During the three-month period ended June 30, 2014, gains (losses) on assets was substantially due to a loss on sale of asset that resulted from the illiquid nature of the investment.

Change in fair value of financial instruments. During the three-month period ended June 30, 2015, the change in fair value of financial instruments increased our net income by $8.4 million. The fair value adjustments related to the following (dollars in thousands):


Description	For the Three-Month Period Ended June 30, 2015		For the Three-Month Period Ended June 30, 2014
Change in fair value of trading securities and security-related receivables	$	—	$	2,132
Change in fair value of CDO notes payable and trust preferred obligations		316		(18,937	)
Change in fair value of derivatives		1,627		(7,484	)
Change in fair value of warrants and investor SARs		6,413		(782	)

Change in fair value of financial instruments	$	8,356	$	(25,071	)

The changes in the fair value for the trading securities and security-related receivables, CDO notes payable, and other liabilities for which the fair value option was elected for the three-month periods ended June 30, 2015 and 2014 was primarily attributable to changes in instrument specific credit risks. The changes in the fair value of the CDO notes payable for which the fair value option was elected was also due to required repayments at par of senior CDO notes due to OC failures when the CDO notes being repaid have a fair value of less than par. The changes in the fair value of derivatives for which the fair value option was elected for the three-month periods ended June 30, 2015 and 2014 was mainly due to changes in interest rates. The change in fair value of the warrants and investor SARs was due to changes in the reference stock price.

Six-Month Period Ended June 30, 2015 Compared to the Six-Month Period Ended June 30, 2014

Revenue

Net interest margin. Net interest margin decreased $22.0 million to $32.9 million for the six-month period ended June 30, 2015 from $54.9 million for the six-month period ended June 30, 2014. Investment interest income has decreased $10.5 million as a result of our exit from the Taberna business in December 2014 and $10.4 million of non-routine items including our acquisition of Urban and the removal of certain loans from non-accrual status. The remaining decrease in net interest

margin for the six-month period ended June 30, 2015 as compared to the six-month period ended June 30, 2014 is primarily attributable to increased investment interest expense from the RAIT FL3 securitization issued in October 2014 and the RAIT FL4 securitization issued in May 2015.

Rental income. Rental income increased $35.0 million to $109.4 million for the six-month period ended June 30, 2015 from $74.4 million for the six-month period ended June 30, 2014. The increase is attributable to $31.8 million of rental income from 16 new properties acquired or consolidated since June 30, 2014 and 13 properties acquired during the six-month period ended June 30, 2014 and $3.4 million from improved occupancy and rental rates in 2015 as compared to 2014 at our other properties.

Fee and other income. Fee and other income increased $1.7 million to $13.0 million for the six-month period ended June 30, 2015 from $11.3 million for the six-month period ended June 30, 2014. The increase is attributable to $2.1 million of conduit fee income generated during the six-month period ended June 30, 2015 as compared to the same period in 2014 as our conduit lending operations continue to grow. This was partially offset by a $0.4 million decrease in property reimbursement income as there was a reduction in our property management agreements during the six-month period ended June 30, 2015 as compared to the same period in 2014.

Expenses

Interest expense. Interest expense increased $14.6 million to $39.4 million for the six-month period ended June 30, 2015 from $24.8 million for the six-month period ended June 30, 2014. The increase is primarily attributable to $7.9 million of interest expense on our loans payable on real estate resulting from the financing of properties we acquired since June 30, 2014, $1.3 million from the 7.625% senior notes issued April 2014, $2.6 million from the 7.125% senior notes issued in August 2014 and a $2.7 million increase in interest expense related to our senior secured notes.

Real estate operating expense. Real estate operating expense increased $14.5 million to $52.3 million for the six-month period ended June 30, 2015 from $37.8 million for the six-month period ended June 30, 2014. Operating expenses increased $15.0 million primarily due to 16 properties acquired or consolidated since June 30, 2014 and 13 properties acquired during the six-month period ended June 30, 2014. The increase was partially offset by $0.3 million of real estate operating expenses related to three properties that were disposed of after June 30, 2014.

Compensation expense. Compensation expense decreased $3.2 million to $12.7 million for the six-month period ended June 30, 2015 from $15.9 million for the six-month period ended June 30, 2014. This decrease was primarily attributable to lower bonus accruals and salary costs and an increase in the capitalization of salaries for the six-month period ended June 30, 2015 as compared to the six-month period ended June 30, 2014.

General and administrative expense. General and administrative expense increased $2.0 million to $10.5 million for the six-month period ended June 30, 2015 from $8.5 million for the six-month period ended June 30, 2014. This increase was attributable to a $1.6 million increase in professional service fees for the six-month period June 30, 2015 as compared to the same period in 2014, and a $0.4 million increase in insurance expense as our policy premiums have increased.

Depreciation and amortization expense. Depreciation and amortization expense increased $10.5 million to $36.0 million for the six-month period ended June 30, 2015 from $25.5 million for the six-month period ended June 30, 2014. The increase is attributable to $10.3 million of depreciation expense from 16 new properties acquired or consolidated since June 30, 2014.

Other income (expense)

Gains (losses) on assets. During the three-month period ended June 30, 2015, gains (losses) on assets was due to a gain on the disposition of one property. During the six-month period ended June 30, 2014, gains (losses) on assets included a $7.7 million loss on sale of an illiquid asset held by The Taberna VIII and Taberna IX securitizations, a $3.0 million charge off for certain assets that were disposed of and a $0.3 million loss related to the disposition of a real estate property. This was partially offset by a $5.7 million gain on property acquisitions as the fair value of the properties acquired exceeded the purchase price.

Gains (losses) on extinguishment of debt. During the six-month period ended June 30, 2015, we did not extinguish any debt. During the six-month period ended June 30, 2014, gains (losses) on extinguishment of debt is due to the repurchase of $5.8 million principal amount of RAIT I CDO notes from the market for $3.4 million.

Change in fair value of financial instruments. During the six-month period ended June 30, 2015, the change in fair value of financial instruments increased our net income by $12.8 million. The fair value adjustments we recorded were as follows (dollars in thousands):


	For the Six-Month Period Ended June 30,			For the Six-Month Period Ended June 30,
Description	2015			2014
Change in fair value of trading securities and security-related receivables	$	(173	)	$	8,574
Change in fair value of CDO notes payable and trust preferred obligations		236			(49,333	)
Change in fair value of derivatives		(420	)		(11,711	)
Change in fair value of warrants and investor SARs		13,203			3,260

Change in fair value of financial instruments	$	12,846		$	(49,210	)

The changes in the fair value for the trading securities and security-related receivables, CDO notes payable, and other liabilities for which the fair value option was elected for the six-month periods ended June 30, 2015 and 2014 was primarily attributable to changes in instrument specific credit risks. The changes in the fair value of the CDO notes payable for which the fair value option was elected was also due to required repayments at par of senior CDO notes due to OC failures when the CDO notes being repaid have a fair value of less than par. The changes in the fair value of derivatives for which the fair value option was elected for the six-month periods ended June 30, 2015 and 2014 was mainly due to changes in interest rates. The change in fair value of the warrants and investor SARs was due to changes in the reference stock price.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, pay dividends and other general business needs. We are seeking to expand sales of our securities, our ability to finance conduit loans and bridge loans through CMBS facilities, sales of conduit loans we originate to CMBS securitizations, our ability to sponsor additional securitizations similar to our FL securitizations and our use of other sources of short term financing and secured lines of credit. We are also seeking to develop other financing resources that will permit us to originate or acquire new investments to generate attractive returns while preserving our capital, such as joint venture financing arrangements and loan participations.

We believe our available cash and restricted cash balances, other financing arrangements, and cash flows from operations will be sufficient to fund our liquidity requirements for the next 12 months.

Our primary cash requirements are as follows:

•

to make investments and fund the associated costs;

•

to repay our indebtedness, including repurchasing, redeeming or retiring our debt before it becomes due;

•

to pay our expenses, including compensation to our employees;

•

to pay U.S. federal, state, and local taxes of our taxable REIT subsidiaries; and

•

to distribute a minimum of 90% of our REIT taxable income and to make investments in a manner that enables us to maintain our qualification as a REIT.

We intend to meet these liquidity requirements primarily through the following:

•

the use of our cash and cash equivalent balances of $104.8 million as of June 30, 2015;

•

cash generated from operating activities, including net investment income from our investment portfolio, and fee income generated by our commercial real estate platform;

•

proceeds from the sales of assets;

•

proceeds from future borrowings, including our CMBS facilities and loan participations; and

•

proceeds from our July 31, 2015 offering of our common shares and future offerings of our securities, including DRSPP and ATM.

Cash Flows

As of June 30, 2015 and 2014, we maintained cash and cash equivalents of approximately $104.8 million and $75.1 million, respectively. Our cash and cash equivalents were generated from the following activities (dollars in thousands):


	For the Six-Month Periods Ended June 30
Description	2015			2014
Cash flow from operating activities	$	82,354		$	(8,992	)
Cash flow from investing activities		(137,641	)		(302,158	)
Cash flow from financing activities		38,333			297,382

Net change in cash and cash equivalents		(16,954	)		(13,768	)
Cash and cash equivalents at beginning of period		121,726			88,847

Cash and cash equivalents at end of period	$	104,772		$	75,079

The cash outflow for investing activities for the six-month period ended June 30, 2015 is substantially due to new investments in loans of $191.9 million which exceeded loan repayments of $130.5 million. We also had cash outflows of $37.5 million due to the acquisition of real estate assets and capital expenditures in our other owned real estate assets, which was partially offset by $20.6 million dollars of sales proceeds on the disposition of real estate assets. These cash outflows were partially offset by the sale proceeds we received from our sale of investment securities totaling $31.2 million for the six-month period ended June 30, 2015. The cash outflow for investing activities for the six-month period ended June 30, 2014 is substantially due to new investments in loans of $297.4 million which exceeded loan repayments of $88.3 million. We also had cash outflows of $133.6 million due to the acquisition of real estate properties and capital expenditures in our owned real estate assets.

Cash flow from operating activities for the six-month period ended June 30, 2015, as compared to the same period in 2014, has increased due to the timing of payments for various accounts payable and accrued liabilities, the timing of conduit loan originations and sales, and an increase in other assets as the size of our portfolio of real estate properties has grown.

The cash inflow from our financing activities during the six-month period ended June 30, 2015 is primarily due to the net proceeds from the proceeds from the RAIT FL4 securitization and borrowings associated with our real estate acquisitions. These cash inflows were partially offset by the outflows from the repayments and repurchases of our CDO notes payable and distributions on preferred shares and common shares during the six-month period ended June 30, 2015.

As a REIT, we evaluate our dividend coverage based on our cash flow from operating activities, excluding the origination and sale of conduit loans and before changes in assets and liabilities. During the six-month period ended June 30, 2015, we paid distributions to our preferred and common shareholders of $42.4 million and generated cash flows from operating activities, before origination and sale of conduit loans and changes in assets and liabilities, of $45.6 million.

Capitalization

Refer to Note 6: Indebtedness and Note 11: Shareholders’ Equity in the Notes to Consolidated Financial Statements for information regarding our capitalization.

Off-Balance Sheet Arrangements and Commitments

There have been no material changes in off-balance sheet arrangements or commitments during the six-month period ended June 30, 2015 from the disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2014. Reference is made to Item 7 included in our Annual Report on Form 10-K for the year ended December 31, 2014.

Critical Accounting Estimates and Policies

Our Annual Report on Form 10-K for the year ended December 31, 2014 contains a discussion of our critical accounting policies. On January 1, 2015 we adopted a new accounting pronouncement and revised our accounting policies as described below. See Note 2 in the Notes to Consolidated Financial Statements. Management discusses our critical accounting policies and management’s judgments and estimates with the audit committee of our board of trustees.

Recent Accounting Pronouncements

In May 2014, the FASB issued an accounting standard classified under FASB ASC Topic 606, “Revenue from Contracts with Customers”. This accounting standard generally replaces existing guidance by requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This standard is currently effective for annual reporting periods beginning after December 15, 2016. Management is currently evaluating the impact that this standard may have on our consolidated financial statements.

In February 2015, the FASB issued an accounting standard classified under FASB ASC Topic 810, “Consolidation”. This accounting standard amends the consolidation analysis required under GAAP and requires management to reevaluate all previous consolidation conclusions. This standard considers limited partnerships as VIEs, unless the limited partners have either substantive kick-out or participating rights. The presumption that a general partner should consolidate a limited partnership has also been eliminated. The standard amends the effect that fees paid to a decision maker or service provider have on the consolidation analysis, as well as amends how variable interests held by a reporting entity’s related parties affect the consolidation conclusion. This standard also clarifies how to determine whether equity holders as a group have power over an entity. This standard is effective for interim and annual reporting periods beginning on or after December 15, 2015, with an early adoption permitted. Management is currently evaluating the impact that this standard may have on our consolidated financial statements.

In April 2015, the FASB issued an accounting standard classified under FASB ASC Topic 835, “Interest”. This accounting standard amends existing guidance to change reporting requirements for debt issuance costs by requiring debt issuance costs to be presented on the balance sheet as a direct deduction from the debt liability. This standard is effective for interim and annual reporting periods beginning on or after December 15, 2015, with an early adoption permitted. Retrospective application to prior periods is required. Management is currently evaluating the impact that this standard may have on our consolidated financial statements.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in quantitative and qualitative market risks during the six-month period ended June 30, 2015 from the disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2014. Reference is made to Item 7A included in our Annual Report on Form 10-K for the year ended December 31, 2014.

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our chief executive officer and chief financial officer and with the participation of our disclosure committee, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon a previously identified material weakness in our internal control over financial reporting, as of December 31, 2014, related to the lack of sufficient qualified resources to ensure appropriate design and operating effectiveness of our internal controls over financial reporting, specifically our reconciliation controls, management review controls and controls over complex transaction and accounting estimates, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective at June 30, 2015.

Management is in the process of developing and implementing new controls to remediate the material weakness described above. Management is enhancing its reconciliation controls, management review controls, and controls over complex transactions and

accounting estimates by (i) supplementing its resources, (ii) upgrading its outsourced internal audit function, (iii) designing and documenting additional management review controls, and (iv) providing additional training to effectively perform reconciliation controls, management review controls and controls related to complex transactions and accounting estimates.

As we add resources, we also plan to make organizational changes and further develop skills in our employees in order to strengthen and improve our internal control over financial reporting.

Management believes that these measures will remediate the previously identified material weakness. We currently are targeting to complete the implementation of the control enhancements during 2015. We will test the ongoing effectiveness of the new controls subsequent to implementation, and will consider the material weakness remediated after the applicable remedial controls operate effectively for a sufficient period of time.

Changes in Internal Control Over Financial Reporting

Except as otherwise stated above, there were no changes in our internal control over financial reporting or in other factors during the quarter ended June 30, 2015, that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1.

Legal Proceedings

On March 13, 2012, the staff of the SEC notified us that they had initiated a non-public investigation concerning our subsidiary, TCM. The investigation relates to TCM’s receipt of approximately $15 million of restructuring fees from issuers of securities collateralizing securitizations for which TCM served as collateral manager in connection with certain exchange transactions involving these securities and securitizations. TCM participated in these exchange transactions between March 2, 2009 and November 28, 2012 and has not subsequently participated in any exchange transactions in which it has collected a fee. The SEC staff has issued administrative subpoenas seeking testimony and information from us in connection with this matter, and we are cooperating fully in providing such information.

Item 1A.

Risk Factors

There have not been any material changes from the risk factors previously disclosed in Item 1A—“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Item 6.

Exhibits

(a)

Exhibits

The exhibits filed as part of this quarterly report on Form 10-Q are identified in the exhibit index immediately following the signature page of this Report. Such Exhibit Index is incorporated herein by reference.

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.


	RAIT FINANCIAL TRUST (Registrant)

Date: August 7, 2015	By:	/s/ Scott F. Schaeffer
		Scott F. Schaeffer, Chairman of the Board and Chief Executive Officer
		(On behalf of the registrant and as its Principal Executive Officer)

Date: August 7, 2015	By:	/s/ James J. Sebra
		James J. Sebra, Chief Financial Officer and Treasurer (On behalf of the registrant and as its Principal Financial Officer and Principal Accounting Officer)

EXHIBIT INDEX


Exhibit Number		Description of Documents

3.1.1		Amended and Restated Declaration of Trust of RAIT Financial Trust (“RAIT”). Incorporated by reference to RAIT’s Registration Statement on Form S-11 (Registration No. 333-35077).

3.1.2		Articles of Amendment to Amended and Restated Declaration of Trust of RAIT. Incorporated by reference to RAIT’s Registration Statement on Form S-11 (Registration No. 333-53067).

3.1.3		Articles of Amendment to Amended and Restated Declaration of Trust of RAIT. Incorporated by reference to RAIT’s Registration Statement on Form S-2 (Registration No. 333-55518).

3.1.4		Certificate of Correction to the Amended and Restated Declaration of Trust of RAIT. Incorporated by reference to RAIT’s Form 10-Q for the Quarterly Period ended March 31, 2002 (File No. 1-14760).

3.1.5		Articles of Amendment to Amended and Restated Declaration of Trust of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the Securities and Exchange Commission (“SEC”) on December 15, 2006 (File No. 1-14760).

3.1.6		Articles of Amendment to Amended and Restated Declaration of Trust of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on July, 1 2011 (File No. 1-14760).

3.1.7		Articles Supplementary (the “Series A Articles Supplementary”) relating to the 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series A Preferred Shares”) of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 18, 2004 (File No. 1-14760).

3.1.8		Certificate of Correction to the Series A Articles Supplementary. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 18, 2004 (File No. 1-14760).

3.1.9		Articles Supplementary relating to the 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, (the “Series B Preferred Shares”) of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 1, 2004 (File No. 1-14760).

3.1.10		Articles Supplementary relating to the 8.875% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, (the “Series C Preferred Shares”) of RAIT. Incorporated by reference to RAIT’s Form 8-A as filed with the SEC on June 29, 2007 (File No. 1-14760).

3.1.11		Articles Supplementary relating to Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on May 25, 2012 (File No. 1-14760).

3.1.12		Certificate of Correction relating to Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares. Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended June 30, 2012 (File No. 1-14760).

3.1.13		Articles Supplementary (the “Series D Articles Supplementary”) relating to the Series D Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series D Preferred Shares”) of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 4, 2012 (File No. 1-14760).

3.1.14		Articles Supplementary relating to the Series E Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series E Preferred Shares”) of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 4, 2012 (File No.1-14760).

3.1.15		Amendment dated November 30, 2012 to the Series D Articles Supplementary. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 4, 2012 (File No.1-14760).

3.1.16		Articles Supplementary relating to the Series A Preferred Shares. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on June 13, 2014 (File No. 1-14760).

3.2.1		By-laws of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 19, 2009 (File No. 1-14760).

3.2.2		First Amendment to the Bylaws of RAIT. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on April 6, 2015 (File No. 1-14760).

4.1.1		Form of Certificate for Common Shares of Beneficial Interest. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on July 1, 2011 (File No. 1-14760).

4.1.2		Form of Certificate for the Series A Preferred Shares. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 22, 2004 (File No. 1-14760).


Exhibit Number		Description of Documents

4.1.3		Form of Certificate for the Series B Preferred Shares. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 1, 2004 (File No. 1-14760).

4.1.4		Form of Certificate for the Series C Preferred Shares. Incorporated by reference to RAIT’s Form 8-A as filed with the SEC on June 29, 2007 (File No. 1-14760).

4.1.5		Form of Certificate for the Series D Preferred Shares. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 23, 2012 (File No. 1-14760).

4.1.6		Form of Certificate for the Series E Preferred Shares. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 23, 2012 (File No. 1-14760).

4.2.1		Base Indenture dated as of December 10, 2013 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 13, 2013 (File No. 1-14760).

4.2.2		Supplemental Indenture dated as of December 10, 2013 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 13, 2013 (File No. 1-14760).

4.2.3		Form of RAIT 4.00% Convertible Senior Note due 2033 (included in Exhibit 4.2.2). Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 13, 2013 (File No. 1-14760).

4.3.1		Base Indenture dated as of March 21, 2011 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 22, 2011 (File No. 1-14760).

4.3.2		Supplemental Indenture dated as of March 21, 2011 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 22, 2011 (File No. 1-14760).

4.4		Indenture dated as of October 5, 2011 between RAIT and Wilmington Trust, National Association, as trustee. Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended September 30, 2011 (File No. 1-14760).

4.5.1		Registration Rights Agreement dated as of October 1, 2012 by and among RAIT and ARS VI Investor I, LLC (“ARS VI”). Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 4, 2012 (File No. 1-14760).

4.5.2		Amendment No. 1 to Registration Rights Agreement dated as of April 25, 2014 by and among RAIT and ARS VI. Incorporated by reference to RAIT’s Registration Statement on Form S-3 (Registration No. 333-195547).

4.5.3		Common Share Purchase Warrant No.1 dated October 17, 2012 issued by RAIT to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 23, 2012 (File No. 1-14760).

4.5.4		Common Share Appreciation Right No.1 dated October 17, 2012 issued by RAIT to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 23, 2012 (File No. 1-14760).

4.5.5		Common Share Purchase Warrant No. 2 dated November 15, 2012 issued by RAIT to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on November 21, 2012 (File No.1-14760).

4.5.6		Common Share Appreciation Right No. 2 dated November 15, 2012 issued by RAIT to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on November 21, 2012 (File No.1-14760).

4.5.7		Common Share Purchase Warrant No. 3 dated December 18, 2012 issued by RAIT to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 18, 2012 (File No.1-14760).

4.5.8		Common Share Appreciation Right No. 3 dated December 18, 2012 issued by RAIT to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 18, 2012 (File No.1-14760).

4.5.9		Common Share Purchase Warrant No. 4 dated March 27, 2014 issued by RAIT Financial Trust to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 27, 2014 (File No. 1-14760).

4.5.10		Common Share Appreciation Right No. 4 dated March 27, 2014 issued by RAIT Financial Trust to ARS VI. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 27, 2014 (File No. 1-14760).

4.6.1		Base Indenture dated as of December 10, 2013 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 13, 2013 (File No. 1-14760).


Exhibit Number		Description of Documents

4.6.2		Supplemental Indenture dated as of December 10, 2013 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 13, 2013 (File No. 1-14760).

4.6.3		Form of RAIT 4.00% Convertible Senior Note due 2033 (included in Exhibit 4.6.2). Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 13, 2013 (File No. 1-14760).

4.6.4		Second Supplemental Indenture, dated as of April 14, 2014, between RAIT Financial Trust, as issuer, and Wells Fargo Bank, National Association, as trustee. Incorporated by reference to RAIT’s Form 8-A as filed with the SEC on April 14, 2014. (File No. 1-14760).

4.6.5		Form of 7.625% Senior Notes due 2024 (included as Exhibit A to Exhibit 4.6.4 hereto).

4.6.6		Third Supplemental Indenture, dated as of August 14, 2014, between RAIT, as Issuer, and Wells Fargo Bank, National Association, as trustee. Incorporated by reference to RAIT’s Form 8-A as filed with the SEC on August 14, 2014.

4.6.7		Form of 7.125% Senior Notes due 2019 (included as Exhibit A to Exhibit 4.6.6 hereto).

		Certain Instruments defining the rights of holders of long-term debt securities of the Registrant and its subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.

10.1		RAIT 2015 Annual Incentive Compensation Plan Form of Target Cash Bonus Award Grant Agreement adopted under the RAIT 2012 Incentive Award Plan (“IAP”). Incorporated by reference to RAIT’s Form 10-Q for the Quarterly Period ended March 31, 2015 (File No. 1-14760).

10.2		RAIT 2015 Long Term Incentive Plan Form of Performance Share Unit Award Grant Agreement adopted under the IAP. Incorporated by reference to RAIT’s Form 10-Q for the Quarterly Period ended March 31, 2015 (File No. 1-14760).

12.1		Statements regarding computation of ratios as of June 30, 2015, filed herewith.

31.1		Rule 13a-14(a) Certification by the Chief Executive Officer of RAIT, filed herewith.

31.2		Rule 13a-14(a) Certification by the Chief Financial Officer of RAIT, filed herewith.

32.1		Section 1350 Certification by the Chief Executive Officer of RAIT, filed herewith.

32.2		Section 1350 Certification by the Chief Financial Officer of RAIT, filed herewith.

101		Pursuant to Rule 405 of Regulation S-T, the following financial information from RAIT’s Quarterly Report on Form 10-Q for the period ended June 30, 2015 is formatted in XBRL interactive data files: (i) Consolidated Statements of Operations for the three month and six month periods ended June 30, 2015 and 2014; (ii) Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014; (iii) Consolidated Statements of Comprehensive Income (Loss) for the three month and six month periods ended June 30, 2015 and 2014; (iv) Consolidated Statement of Changes in Equity for the six month period ended June 30, 2015; (v) Consolidated Statements of Cash Flows for the six month periods ended June 30, 2015 and 2014; and (vi) Notes to Unaudited Consolidated Financial Statements, filed herewith.

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