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, 2013

or

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

For the transition period from                      to                     

Commission File Number 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, 17th 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.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

A total of 70,249,254 common shares of beneficial interest, par value $0.03 per share, of the registrant were outstanding as of August 5, 2013.

RAIT FINANCIAL TRUST

TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)		1
	Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012		1
	Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended June  30, 2013 and 2012		2
	Consolidated Statements of Comprehensive Income (Loss) for the Three-Month and Six-Month Periods Ended June 30, 2013 and 2012		3
	Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2013 and 2012		4
	Notes to Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		46
Item 4.	Controls and Procedures		46
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings		46
Item 1A.	Risk Factors		46
Item 2.	Unregistered Sales of Securities and Use of Proceeds		46
Item 5.	Other Information		46
Item 6.	Exhibits		46
	Signatures		47

1

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, 2013			As of December  31, 2012
Assets
Investments in mortgages and loans, at amortized cost:
Commercial mortgages, mezzanine loans, other loans and preferred equity interests	$	1,161,766		$	1,075,129
Allowance for losses		(24,222	)		(30,400	)
Total investments in mortgages and loans		1,137,544			1,044,729
Investments in real estate, net of accumulated depreciation of $112,325 and $97,392, respectively		949,649			918,189
Investments in securities and security-related receivables, at fair value		603,173			655,509
Cash and cash equivalents		60,401			100,041
Restricted cash		99,119			90,641
Accrued interest receivable		51,331			47,335
Other assets		54,171			45,459
Deferred financing costs, net of accumulated amortization of $17,080 and $15,811, respectively		17,863			19,734
Intangible assets, net of accumulated amortization of $3,277 and $2,976, respectively		2,324			2,343
Total assets	$	2,975,575		$	2,923,980
Liabilities and Equity
Indebtedness ($316,620 and $216,703 at fair value, respectively)	$	1,919,620		$	1,799,595
Accrued interest payable		25,867			24,129
Accounts payable and accrued expenses		26,252			22,990
Derivative liabilities		123,458			151,438
Deferred taxes, borrowers’ escrows and other liabilities		52,951			35,704
Total liabilities		2,148,148			2,033,856
Series D cumulative redeemable preferred shares, $0.01 par value per share, 4,000,000 shares authorized, 2,600,000 shares issued and outstanding		51,282			52,278
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, 4,760,000 shares authorized, 3,749,288 and 3,124,288 shares issued and outstanding		37			31
8.375% Series B cumulative redeemable preferred shares, liquidation preference $25.00 per share, 4,300,000 shares authorized, 2,288,465 shares issued and outstanding		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		0			0
Common shares, $0.03 par value per share, 200,000,000 shares authorized, 69,960,454 and 58,913,142 issued and outstanding, including 391,268 unvested restricted common share awards at June 30, 2013		2,100			1,760
Additional paid in capital		1,929,797			1,837,389
Accumulated other comprehensive income (loss)		(77,527	)		(95,173	)
Retained earnings (deficit)		(1,083,924	)		(910,086	)
Total shareholders’ equity		770,523			833,961
Noncontrolling interests		5,622			3,885
Total equity		776,145			837,846
Total liabilities and equity	$	2,975,575		$	2,923,980

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

1

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
	2013			2012			2013			2012
Revenue:
Investment interest income	$	31,256		$	28,745		$	62,536		$	56,701
Investment interest expense		(7,278	)		(8,474	)		(14,761	)		(16,923	)
Net interest margin		23,978			20,271			47,775			39,778
Rental income		27,858			25,540			55,027			50,371
Fee and other income		6,786			2,062			14,071			3,520
Total revenue		58,622			47,873			116,873			93,669
Expenses:
Interest expense		9,978			10,764			19,644			21,663
Real estate operating expense		14,911			13,487			29,321			27,284
Compensation expense		6,337			5,246			13,284			10,984
General and administrative expense		3,562			3,783			7,338			7,608
Provision for losses		500			500			1,000			1,000
Depreciation and amortization expense		8,618			7,631			17,188			15,294
Total expenses		43,906			41,411			87,775			83,833
Operating Income		14,716			6,462			29,098			9,836
Other income (expense)		69			(1,471	)		145			(1,438	)
Gains (losses) on assets		224			2,518			221			2,529
Gains (losses) on extinguishment of debt		0			0			0			1,574
Change in fair value of financial instruments		(76,020	)		(11,169	)		(175,777	)		(120,092	)
Income (loss) before taxes and discontinued operations		(61,011	)		(3,660	)		(146,313	)		(107,591	)
Income tax benefit (provision)		673			90			634			357
Income (loss) from continuing operations		(60,338	)		(3,570	)		(145,679	)		(107,234	)
Income (loss) from discontinued operations		0			0			0			0
Net income (loss)		(60,338	)		(3,570	)		(145,679	)		(107,234	)
(Income) loss allocated to preferred shares		(5,589	)		(3,419	)		(10,807	)		(6,829	)
(Income) loss allocated to noncontrolling interests		50			38			77			93
Net income (loss) allocable to common shares	$	(65,877	)	$	(6,951	)	$	(156,409	)	$	(113,970	)
Earnings (loss) per share—Basic:
Continuing operations	$	(0.94	)	$	(0.14	)	$	(2.40	)	$	(2.42	)
Discontinued operations		0.00			0.00			0.00			0.00
Total earnings (loss) per share—Basic	$	(0.94	)	$	(0.14	)	$	(2.40	)	$	(2.42	)
Weighted-average shares outstanding—Basic		69,757,807			49,902,247			65,086,432			47,026,586
Earnings (loss) per share—Diluted:
Continuing operations	$	(0.94	)	$	(0.14	)	$	(2.40	)	$	(2.42	)
Discontinued operations		0.00			0.00			0.00			0.00
Total earnings (loss) per share—Diluted	$	(0.94	)	$	(0.14	)	$	(2.40	)	$	(2.42	)
Weighted-average shares outstanding—Diluted		69,757,807			49,902,247			65,086,432			47,026,586
Distributions declared per common share	$	0.13		$	0.08		$	0.25		$	0.16

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

2

RAIT Financial Trust

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited and dollars in thousands)

	For the Three-Month Periods Ended June 30						For the Six-Month Periods Ended June 30
	2013			2012			2013			2012
Net income (loss)	$	(60,338	)	$	(3,570	)	$	(145,679	)	$	(107,234	)
Other comprehensive income (loss):
Change in fair value of interest rate hedges		1,794			(5,230	)		1,262			(8,180	)
Realized (gains) losses on interest rate hedges reclassified to earnings		8,098			8,940			16,384			17,850
Change in fair value of available-for-sale securities		0			(147	)		0			(97	)
Total other comprehensive income (loss)		9,892			3,563			17,646			9,573
Comprehensive income (loss) before allocation to noncontrolling interests		(50,446	)		(7	)		(128,033	)		(97,661	)
Allocation to noncontrolling interests		50			38			77			93
Comprehensive income (loss)	$	(50,396	)	$	31		$	(127,956	)	$	(97,568	)

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

3

RAIT Financial Trust

Consolidated Statements of Cash Flows

(Unaudited and dollars in thousands)

	For the Six-Month Periods Ended June 30
	2013			2012
Operating activities:
Net income (loss)	$	(145,679	)	$	(107,234	)
Adjustments to reconcile net income (loss) to cash flow from operating activities:
Provision for losses		1,000			1,000
Share-based compensation expense		1,466			1,106
Depreciation and amortization		17,188			15,294
Amortization of deferred financing costs and debt discounts		3,499			3,321
Accretion of discounts on investments		(5,086	)		289
(Gains) losses on assets		(221	)		(2,529	)
(Gains) losses on extinguishment of debt		0			(1,574	)
Change in fair value of financial instruments		175,777			120,092
Changes in assets and liabilities:
Accrued interest receivable		(4,618	)		(3,854	)
Other assets		(9,322	)		(5,372	)
Accrued interest payable		(12,710	)		(19,684	)
Accounts payable and accrued expenses		387			2,907
Deferred taxes, borrowers’ escrows and other liabilities		(571	)		3,583
Cash flow from operating activities		21,110			7,345
Investing activities:
Proceeds from sales of other securities		70,501			7,520
Purchase and origination of loans for investment		(251,085	)		(242,474	)
Principal repayments on loans		9,354			115,847
Sales of conduit loans		120,195			0
Investments in real estate		(11,511	)		(7,029	)
(Increase) Decrease in restricted cash		(3,777	)		186,345
Cash flow from investing activities		(66,323	)		60,209
Financing activities:
Repayments on secured credit facility and loans payable on real estate		(8,368	)		(1,605	)
Repayments and repurchase of CDO notes payable		(72,910	)		(95,741	)
Repayments and repurchase of 6.875% convertible senior notes		0			(3,582	)
Proceeds from repurchase agreements		23,049			22,291
Repayments of repurchase agreements		(8,331	)		(3,471	)
Issuance (acquisition) of noncontrolling interests		196			0
Payments for deferred costs		(126	)		(256	)
Preferred share issuance, net of costs incurred		14,506			1,147
Common share issuance, net of costs incurred		76,749			41,535
Distributions paid to preferred shareholders		(4,840	)		(6,836	)
Distributions paid to common shareholders		(14,352	)		(6,491	)
Cash flow from financing activities		5,573			(53,009	)
Net change in cash and cash equivalents		(39,640	)		14,545
Cash and cash equivalents at the beginning of the period		100,041			29,720
Cash and cash equivalents at the end of the period	$	60,401		$	44,265
Supplemental cash flow information:
Cash paid for interest	$	15,962		$	13,735
Cash paid (refunds received) for taxes		265			(435	)
Non-cash increase in investments in real estate from conversion of loans		36,950			27,400
Non-cash decrease in indebtedness from conversion to shares or debt extinguishments		0			(1,574	)
Non-cash increase in non-controlling interests from property acquisition		1,618			0

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

4

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of June 30, 2013

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

NOTE 1: THE COMPANY

RAIT Financial Trust is a multi-strategy commercial real estate company. Our vertically integrated platform originates commercial real estate loans, acquires commercial real estate properties and invests in, manages, services and advises on commercial real estate-related assets. We offer a comprehensive set of debt financing options to the commercial real estate industry along with asset and property management services. We also own and manage a portfolio of commercial real estate properties and manage real estate-related assets for third parties. We are positioning RAIT for future growth in the area of its historical core competency, commercial real estate lending and direct ownership of real estate, while diversifying the revenue generated from our commercial real estate loans and properties and reducing or removing other non-core assets and activities. 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, 2012 included in our Annual Report on Form 10-K. 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. Previously, investment interest expense was included as part of interest expense within total expenses. We have now classified the portion of interest expense that finances our interest bearing assets as a component of net interest margin within total revenue.

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 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 consolidated the VIEs when we are the primary beneficiary. See Note 9 for additional disclosures pertaining to VIEs.

5

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. Actual results could differ from those estimates.

d. Investments in Loans

We invest in commercial mortgages, mezzanine loans, debt securities and other loans. 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 other loans. 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 and reasonably estimable 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.

We acquire real estate assets either directly or through the conversion of our investments in loans into owned real estate. 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. All expenses incurred to acquire a real estate asset are expensed as incurred.

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. Investments in Securities

We account for our investments in securities under FASB ASC Topic 320, “Investments—Debt and Equity Securities”, and designate each investment security as a trading security, an available-for-sale security, or a held-to-maturity security based on our intent at the time of acquisition. Trading securities are recorded at their fair value each reporting period with fluctuations in fair value reported as a component of earnings. Available-for-sale securities are recorded at fair value with changes in fair value reported as a component of other comprehensive income (loss). We classify certain available-for-sale securities as trading securities when we elect to record them under the fair value option in accordance with FASB ASC Topic 825, “Financial Instruments.” See “i. Fair Value of Financial Instruments.” Upon the sale of an available-for-sale security, the realized gain or loss on the sale will be recorded as a component of earnings in the respective period. Held-to-maturity investments are carried at amortized cost at each reporting period.

6

We account for investments in securities where the transfer meets the criteria as a financing under FASB ASC Topic 860, “Transfers and Servicing”, at fair value. Our investments in security-related receivables represent securities that were transferred to issuers of collateralized debt obligations, or CDOs, in which the transferors maintained some level of continuing involvement. We use our judgment to determine whether an investment in securities has sustained an other-than-temporary decline in value. If management determines that an investment in securities has sustained an other-than-temporary decline in its value, the investment is written down to its fair value by a charge to earnings, and we establish a new cost basis for the investment. Our evaluation of an other-than-temporary decline is dependent on the specific facts and circumstances. Factors that we consider in determining whether an other-than-temporary decline in value has occurred include: the estimated fair value of the investment in relation to our cost basis; the financial condition of the related entity; and the intent and ability to retain the investment for a sufficient period of time to allow for recovery of the fair value of the investment.

h. Revenue Recognition

1) Interest income—We recognize interest income from investments in commercial mortgages, mezzanine loans, and other securities on a yield to maturity basis. Upon the acquisition of a loan at a discount, we assess the portions of the discount that constitute accretable yields and non-accretable differences. The accretable yield represents the excess of our expected cash flows from the loan over the amount we paid for the loan. That amount, the accretable yield, is accreted to interest income over the remaining life of the loan. 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.

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.

2) 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 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.

3) Fee and other income—We generate fee and other income through our various subsidiaries by (a) providing ongoing asset management services to investment portfolios under cancelable management agreements, (b) providing or arranging to provide financing to our borrowers, (c) providing property management services to third parties, (d) funding conduit loans for sale into unaffiliated commercial mortgage-backed securities, or CMBS, securitizations. 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.

During the three-month periods ended June 30, 2013 and 2012, we received $1,223 and $1,228, respectively, of earned asset management fees, of which we eliminated $863 and $906, respectively, of management fee income associated with consolidated securitizations.

During the six-month periods ended June 30, 2013 and 2012, we received $2,439 and $2,513, respectively, of earned asset management fees, of which we eliminated $1,746 and $1,876, respectively, of management fee income associated with consolidated CDOs.

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i. 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, CMBS receivables and certain financial instruments classified as derivatives where the fair value is based 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 are trust preferred securities, or TruPS, and subordinated debentures, trust preferred obligations and CDO notes payable where 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 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.

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 j. Income Taxes

RAIT, Taberna Realty Finance Trust, or Taberna, and Independence Realty Trust, Inc., or IRT, have each elected to be taxed as a REIT and to comply with the related provisions of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. Accordingly, we generally will not be subject to U.S. federal income tax to the extent of our dividends to shareholders and as long as certain asset, income and share ownership tests are met. If we were to fail to meet these requirements, we would be subject to U.S. federal income tax, which could have a material adverse impact on our results of operations and amounts available for dividends to our shareholders. Management believes that all of the criteria to maintain RAIT’s, Taberna’s, and IRT’s REIT qualification have been met for the applicable periods, but there can be no assurance that these criteria will continue to be met in subsequent periods.

We maintain various taxable REIT subsidiaries, or TRSs, which may be subject to U.S. federal, state and local income taxes and foreign taxes. Current and deferred taxes are provided on the portion of earnings (losses) recognized by us with respect to our interest in domestic TRSs. Deferred income tax assets and liabilities are computed based on temporary differences between our GAAP consolidated financial statements and the federal and state income tax basis of assets and liabilities as of the consolidated balance sheet date. We evaluate the realizability of our deferred tax assets (e.g., net operating loss and capital loss carryforwards) and recognize a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of our deferred tax assets will not be realized. When evaluating the realizability of our deferred tax assets, we consider estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available, and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires management to forecast our business and general economic environment in future periods. Changes in estimate of deferred tax asset realizability, if any, are included in income tax expense on the consolidated statements of operations.

From time to time, our TRSs generate taxable income from intercompany transactions. The TRS entities generate taxable revenue from fees for services provided to securitizations. Some of these fees paid to the TRS entities are capitalized as deferred financing costs by the securitizations. Certain securitizations may be consolidated in our financial statements pursuant to FASB ASC Topic 810, “Consolidation.” In consolidation, these fees are eliminated when the securitization is included in the consolidated group. Nonetheless, all income taxes are accrued by the TRSs in the year in which the taxable revenue is received. These income taxes are not eliminated when the related revenue is eliminated in consolidation.

Certain TRS entities are domiciled in the Cayman Islands and taxable income generated by these entities may not be subject to local income taxation, but generally will be included in our taxable income on a current basis, whether or not distributed. Upon distribution to us of any previously included income, no incremental U.S. federal, state, or local income taxes would be payable by us.

The TRS entities may be subject to tax laws that are complex and potentially subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. We review the tax balances of our TRS entities quarterly and, as new information becomes available, the balances are adjusted as appropriate.

k. Recent Accounting Pronouncements

In June 2011, the FASB issued an accounting standard classified under FASB ASC Topic 222, “Comprehensive Income”. This accounting standard amends existing guidance to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by requiring entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued an accounting standard that deferred the new presentation requirements about reclassification adjustments. Both of these accounting standards are effective for fiscal years, and interim periods with those years, beginning after December 15, 2011. The adoption of these standards did not have a material effect on our consolidated financial statements. In February 2013, the FASB issued an accounting standard that requires an entity to present the amounts reclassified out of accumulated other comprehensive income by component either on the face of the statement of operations or in the notes to the financial statements. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. This standard is effective for reporting periods beginning after December 31, 2012. The adoption of this standard did not have a material effect on our consolidated financial statements.

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NOTE 3: INVESTMENTS IN LOANS

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

The following table summarizes our investments in commercial mortgages, mezzanine loans, other loans and preferred equity interests as of June 30, 2013:

	Unpaid Principal Balance			Unamortized (Discounts) Premiums			Carrying Amount			Number of Loans		Weighted- Average Coupon (1)			Range of Maturity Dates
Commercial Real Estate (CRE) Loans
Commercial mortgages	$	813,289		$	(22,428	)	$	790,861			60		6.3	%	Aug. 2013 to Jul. 2023
Mezzanine loans		276,264			(3,933	)		272,331			80		9.4	%	Aug. 2013 to Apr. 2024
Preferred equity interests		64,753			(986	)		63,767			15		9.8	%	Mar. 2014 to Aug. 2025
Total CRE Loans		1,154,306			(27,347	)		1,126,959			155		7.2	%
Other loans		35,019			(97	)		34,922			2		4.6	%	Aug. 2013 to Oct. 2016
Total Loans	$	1,189,325		$	(27,444	)	$	1,161,881			157		7.1	%
Deferred fees		(115	)		0			(115	)
Total investments in loans	$	1,189,210		$	(27,444	)	$	1,161,766

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

The following table summarizes our investments in commercial mortgages, mezzanine loans, other loans and preferred equity interests as of December 31, 2012:

	Unpaid Principal Balance			Unamortized (Discounts) Premiums			Carrying Amount			Number of Loans		Weighted- Average Coupon (1)			Range of Maturity Dates
Commercial Real Estate (CRE) Loans
Commercial mortgages	$	728,774		$	(25,807	)	$	702,967			50		6.4	%	Mar. 2013 to Jan. 2023
Mezzanine loans		275,457			(4,355	)		271,102			83		9.3	%	Mar. 2013 to Nov. 2038
Preferred equity interests		64,752			(1,031	)		63,721			15		9.7	%	Mar. 2014 to Aug. 2025
Total CRE Loans		1,068,983			(31,193	)		1,037,790			148		7.4	%
Other loans		38,600			(30	)		38,570			2		4.9	%	Mar. 2013 to Oct. 2016
Total Loans		1,107,583			(31,223	)		1,076,360			150		7.3	%
Deferred fees		(1,231	)		0			(1,231	)
Total investments in loans	$	1,106,352		$	(31,223	)	$	1,075,129

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

During the six-month period ended June 30, 2013, we acquired one multi-family property with a purchase price of $35,400, which consisted of the assumption of two commercial real estate loans and the issuance of limited liability company membership units. These units are redeemable for our common shares in defined circumstances. See Note 5.

During the six-month period ended June 30, 2012, we completed the conversion of two commercial real estate loans with a carrying value of $24,871 to real estate owned properties. We recorded a gain on asset of $2,529 as the value of the real estate exceeded the carrying amount of the converted loans.

The following table summarizes the delinquency statistics of our commercial real estate loans as of June 30, 2013 and December 31, 2012:

Delinquency Status	As of June 30, 2013		As of December  31, 2012
30 to 59 days	$	963	$	1,974
60 to 89 days		5,211		5,211
90 days or more		24,556		37,130
In foreclosure or bankruptcy proceedings		16,697		9,420
Total	$	47,427	$	53,735

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As of June 30, 2013 and December 31, 2012, approximately $65,597 and $69,080, respectively, of our commercial real estate loans were on non-accrual status and had a weighted-average interest rate of 8.2% and 8.4%. As of June 30, 2013 and December 31, 2012, 1 Other loan with a carrying amount of approximately $14,882 and $18,462, respectively, was on non-accrual status and had a weighted-average interest rate of 7.2%.

Allowance For Losses And Impaired Loans

The following table provides a roll-forward of our allowance for losses for our commercial mortgages, mezzanine loans, and other loans for the three-month periods ended June 30, 2013 and 2012:

	For the Three-Month Period Ended June 30, 2013			For the Three-Month Period Ended June 30, 2012
Beginning balance	$	26,206		$	39,715
Provision		500			500
Charge-offs, net of recoveries		(2,484	)		(338	)
Ending balance	$	24,222		$	39,877

The following table provides a roll-forward of our allowance for losses for our commercial mortgages, mezzanine loans, and other loans for the six-month periods ended June 30, 2013 and 2012:

	For the Six-Month Period Ended June 30, 2013			For the Six-Month Period Ended June 30, 2012
Beginning balance	$	30,400		$	46,082
Provision		1,000			1,000
Charge-offs, net of recoveries		(7,178	)		(7,205	)
Ending balance	$	24,222		$	39,877

As of June 30, 2013 and December 31, 2012, we identified 15 and 14, respectively, commercial mortgages, mezzanine loans and other loans with unpaid principal balances of $45,280 and $47,394, respectively, as impaired.

The average unpaid principal balance of total impaired loans was $45,979 and $75,728 during the three-month periods ended June 30, 2013 and 2012 and $46,450 and $79,811 during the six-month periods ended June 30, 2013 and 2012. We recorded interest income from impaired loans of $2 and $0 for the three-month periods ended June 30, 2013 and 2012. We recorded interest income from impaired loans of $21 and $62 for the six-month periods ended June 30, 2013 and 2012.

We have evaluated modifications to our commercial real estate loans to determine if the modification constitutes a troubled debt restructuring (TDR) under FASB ASC Topic 310, “Receivables”. During the six-month period ended June 30, 2013, we have determined that a modification to one commercial real estate loan constituted a TDR as the borrower was experiencing financial difficulties and we, as the lender granted a concession to the borrower by extending the maturity date from March 2014 to February 2016. The outstanding recorded investment was $18,995 both before and after the modification. As of June 30, 2013, there were no TDRs that subsequently defaulted.

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NOTE 4: INVESTMENTS IN SECURITIES

Our investments in securities and security-related receivables are accounted for at fair value. The following table summarizes our investments in securities as of June 30, 2013:

Investment Description	Amortized Cost		Net Fair Value Adjustments			Estimated Fair  Value		Weighted Average Coupon (1)			Weighted Average Years to Maturity
Trading securities
TruPS	$	620,376	$	(133,387	)	$	486,989		3.8	%		20.9
Other securities		12,015		(12,015	)		0		4.8	%		39.4
Total trading securities		632,391		(145,402	)		486,989		3.8	%		21.3
Available-for-sale securities		3,600		(3,598	)		2		2.1	%		29.4
Security-related receivables
TruPS receivables		57,900		(21,318	)		36,582		5.4	%		13.0
Unsecured REIT note receivables		30,000		2,564			32,564		6.7	%		3.6
CMBS receivables (2)		76,741		(32,192	)		44,549		5.6	%		31.3
Other securities		36,801		(34,314	)		2,487		2.6	%		37.0
Total security-related receivables		201,442		(85,260	)		116,182		5.2	%		23.0
Total investments in securities	$	837,433	$	(234,260	)	$	603,173		4.1	%		21.8

(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) CMBS receivables include securities with a fair value totaling $8,176 that are rated between “AAA” and “A-” by Standard & Poor’s, securities with a fair value totaling $25,992 that are rated “BBB+” and “B-” by Standard & Poor’s, securities with a fair value totaling $9,667 that are rated “CCC” by Standard & Poor’s and securities with a fair value totaling $714 that are rated “D” by Standard & Poor’s.

All of our gross unrealized losses are greater than 12 months.

The following table summarizes our investments in securities as of December 31, 2012:

Investment Description	Amortized Cost		Net Fair Value Adjustments			Estimated Fair  Value		Weighted Average Coupon (1)			Weighted Average Years to Maturity
Trading securities
TruPS and subordinated debentures	$	637,376	$	(152,173	)	$	485,203		4.2	%		20.9
Other securities		11,584		(11,584	)		0		4.8	%		39.9
Total trading securities		648,960		(163,757	)		485,203		4.2	%		21.2
Available-for-sale securities		3,600		(3,598	)		2		2.1	%		29.9
Security-related receivables
TruPS and subordinated debenture receivables		111,025		(19,877	)		91,148		6.5	%		9.1
Unsecured REIT note receivables		30,000		2,769			32,769		6.7	%		4.1
CMBS receivables (2)		83,342		(39,532	)		43,810		5.6	%		32.2
Other securities		38,508		(35,931	)		2,577		2.8	%		37.4
Total security-related receivables		262,875		(92,571	)		170,304		5.7	%		20.0
Total investments in securities	$	915,435	$	(259,926	)	$	655,509		4.6	%		21.0

(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) CMBS receivables include securities with a fair value totaling $8,398 that are rated between “AAA” and “A-” by Standard & Poor’s, securities with a fair value totaling $26,013 that are rated between “BBB+” and “B-” by Standard & Poor’s, securities with a fair value totaling $8,782 that are rated “CCC” by Standard & Poor’s, and securities with a fair value totaling $617 that are rated “D” by Standard & Poor’s.

All of our gross unrealized losses are greater than 12 months.

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TruPS included above as trading securities include (a) investments in TruPS issued by VIEs of which we are not the primary beneficiary and which we do not consolidate and (b) transfers of investments in TruPS securities to us that were accounted for as a sale pursuant to FASB ASC Topic 860, “Transfers and Servicing.”

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

	As of June 30, 2013							As of December 31, 2012
	Principal /Par Amount  on Non-accrual		Weighted Average  Coupon			Fair Value		Principal /Par Amount  on Non-accrual		Weighted Average  Coupon			Fair Value
TruPS and TruPS receivables	$	83,557		1.9	%	$	5,678	$	83,557		1.9	%	$	5,678
Other securities		40,448		3.0	%		2		35,159		3.2	%		2
CMBS receivables		28,608		5.9	%		746		35,208		5.9	%		642

The assets of our consolidated CDOs collateralize the debt of such entities and are not available to our creditors. As of June 30, 2013 and December 31, 2012, investment in securities of $678,276 in principal amount of TruPS and subordinated debentures, and $98,219 and $101,021, respectively, in principal amount of unsecured REIT note receivables and CMBS receivables, collateralized the consolidated CDO notes payable of such entities.

NOTE 5: INVESTMENTS IN REAL ESTATE

The table below summarizes our investments in real estate:

	As of June 30, 2013					As of December 31, 2012
	Book Value			Number  of Properties		Book Value			Number  of Properties
Multi-family real estate properties	$	654,149			35	$	613,888			34
Office real estate properties		276,119			11		271,847			11
Retail real estate properties		83,197			4		82,081			4
Parcels of land		48,509			10		47,765			10
Subtotal		1,061,974			60		1,015,581			59
Less: Accumulated depreciation and amortization		(112,325	)				(97,392	)
Investments in real estate	$	949,649				$	918,189

As of June 30, 2013, our investments in real estate of $949,649 are financed through $143,957 of mortgages held by third parties and $870,472 of mortgages held by our consolidated commercial real estate securitizations: RAIT CRE CDO I, Ltd., or RAIT I, and RAIT Preferred Funding II, Ltd., or RAIT II. As of December 31, 2012, our investments in real estate of $918,189 are financed through $144,645 of mortgages held by third parties and $830,077 of mortgages held by RAIT I and RAIT II. 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 RAIT I and RAIT II. All intercompany balances and interest charges are eliminated in consolidation.

 Acquisitions:

During the six-month period ended June 30, 2013, we acquired one multi-family property with a purchase price of $35,400, which consisted of the assumption of two commercial real estate loans and the issuance of limited liability company membership units. These units are redeemable for our common shares in defined circumstances. Upon acquisition, we recorded the investment in real estate, including any related working capital, at fair value of $36,950 and recorded a gain on asset of $1,550.

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, 2013, on the respective date of the acquisition, for the real estate accounted for under FASB ASC Topic 805.

Description	Estimated Fair  Value
Assets acquired:
Investments in real estate	$	36,950
Cash and cash equivalents		35
Restricted cash		350
Other assets		172
Total assets acquired		37,507

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Description	Estimated Fair  Value
Liabilities assumed:
Accounts payable and accrued expenses		335
Other liabilities		99
Total liabilities assumed		434
Estimated fair value of net assets acquired	$	37,073

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

Description	Estimated Fair  Value
Fair value of consideration transferred:
Commercial real estate loans	$	36,950
Other considerations		123
Total fair value of consideration transferred	$	37,073

During the six-month period ended June 30, 2013, this investment did not contribute any revenue and any net income allocable to common shares. During the six-month period ended June 30, 2013, we did not incur any third-party acquisition-related costs.

Our consolidated unaudited pro forma information, after including the acquisition of real estate properties, is presented below as if the acquisition occurred on January 1, 2012. 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, 2013			For the Six-Month Period Ended June 30, 2012
Total revenue, as reported	$	116,873		$	93,669
Pro forma revenue		118,606			95,396
Net income (loss) allocable to common shares, as reported		(156,409	)		(113,970	)
Pro forma net income (loss) allocable to common shares		(155,889	)		(113,518	)

We have not yet completed the process of estimating the fair value of assets acquired and liabilities assumed. Accordingly, our preliminary estimates and the allocation of the purchase price to the assets acquired and liabilities assumed may change as we complete the process. In accordance with FASB ASC Topic 805, changes, if any, to the preliminary estimates and allocation will be reported in our financial statements retrospectively.

Subsequent to June 30, 2013, we completed the conversion of one commercial real estate loan with a carrying value of $15,000, relating to one multi-family real estate property, to owned real estate. We are completing the process of estimating the fair value of the assets acquired.

Dispositions:

During the six-month period ended June 30, 2013, we did not dispose of any real estate properties. Subsequent to June 30, 2013, we sold one multi-family real estate property for a total purchase price of $3,300. We recorded losses on the sale of this asset of $1,326, which is included in the accompanying consolidated statement of operations.

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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, 2013:

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
7.0% convertible senior notes (1)	$	115,000	$	110,437		7.0	%	Apr. 2031
Secured credit facility		7,121		7,121		3.0	%	Dec. 2016
Junior subordinated notes, at fair value (2)		18,671		11,933		0.5	%	Mar. 2035
Junior subordinated notes, at amortized cost		25,100		25,100		2.8	%	Apr. 2037
CMBS facilities		12,569		12,569		2.7	%	Oct. 2013 to Nov. 2013
Commercial mortgage facility		14,825		14,825		2.2	%	Dec. 2013
Total recourse indebtedness (3)		193,286		181,985		5.0	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (4)(5)		1,290,484		1,288,968		0.6	%	2045 to 2046
CDO notes payable, at fair value (2)(4)(6)		918,055		304,687		1.0	%	2037 to 2038
Loans payable on real estate		143,980		143,980		5.4	%	Sep. 2015 to Nov. 2022
Total non-recourse indebtedness		2,352,519		1,737,635		1.0	%
Total indebtedness	$	2,545,805	$	1,919,620		1.3	%

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

(3) Excludes senior secured notes issued by us with an aggregate principal amount equal to $90,000 with a weighted average coupon of 7.0%, which are eliminated in consolidation.

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

(5) Collateralized by $1,760,167 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) Collateralized by $1,035,821 principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of June 30, 2013 was $791,642. 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.

The following table summarizes our total recourse and non-recourse indebtedness as of December 31, 2012:

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
7.0% convertible senior notes (1)	$	115,000	$	109,631		7.0	%	Apr. 2031
Secured credit facility		8,090		8,090		3.0	%	Dec. 2016
Junior subordinated notes, at fair value (2)		38,052		29,655		5.2	%	Oct. 2015 to Mar. 2035
Junior subordinated notes, at amortized cost		25,100		25,100		2.8	%	Apr. 2037
Total recourse indebtedness (3)		186,242		172,476		5.9	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (4)(5)		1,297,069		1,295,400		0.6	%	2045 to 2046
CDO notes payable, at fair value (2)(4)(6)		984,380		187,048		1.0	%	2037 to 2038
Loans payable on real estate		144,671		144,671		5.4	%	Sept. 2015 to May 2021
Total non-recourse indebtedness		2,426,120		1,627,119		1.1	%
Total indebtedness	$	2,612,362	$	1,799,595		1.4	%

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

(3) Excludes senior secured notes issued by us with an aggregate principal amount equal to $94,000 with a weighted average coupon of 7.0%, which are eliminated in consolidation.

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

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(5) Collateralized by $1,757,789 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) Collateralized by $1,118,346 principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of December 31, 2012 was $849,919. 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.

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.

The current status or activity in our financing arrangements occurring as of or during the six-month period ended June 30, 2013 is as follows:

Recourse Indebtedness

7.0% convertible senior notes. The 7.0% Convertible Senior Notes due 2031, or the 7.0% convertible senior notes, are convertible at the option of the holder at a current conversion rate of 142.6266 common shares per $1 principal amount of 7.0% convertible senior notes (equivalent to a current conversion price of $7.01 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 earnings per share using the treasury stock method if the conversion value in excess of the par amount is considered in the money during the respective periods.

Secured credit facility. As of June 30, 2013, we have $7,121 outstanding under our secured credit facility, which is payable in December 2016 under the current terms of this facility. Our secured credit facility is secured by designated commercial mortgages and mezzanine loans.

Junior subordinated notes, at fair value. During the six-month period ended June 30, 2013, we prepaid the $19,381 junior subordinated note. After reflecting the prepayment, only the second $18,671 junior subordinated note remains outstanding.

CMBS facilities. We maintain CMBS facilities with two investment banks with total borrowing capacity of $250,000. The CMBS facilities are repurchase agreements that provide for margin calls in the event the conduit loans financed by the facilities change in value. As of June 30, 2013 we had $12,569 of outstanding borrowings under the CMBS facilities. As of June 30, 2013, $237,431 in aggregate principal amount remained available under the CMBS facilities.

Commercial mortgage facility. We maintain a commercial mortgage facility with an investment bank with total borrowing capacity of $150,000. The commercial mortgage facility is a repurchase agreement that provides for margin calls in the event the commercial mortgages financed by the facility change in value. As of June 30, 2013 we had $14,825 of outstanding borrowings under the commercial mortgage facility. As of June 30, 2013, $135,175 in aggregate principal amount remained available under the commercial mortgage facility.

Non-Recourse Indebtedness

CDO notes payable, at amortized cost. CDO notes payable at amortized cost represent notes issued by consolidated CDO entities 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 portfolio. Generally, CDO notes payable are comprised of various classes of notes payable, with each class bearing interest at variable or fixed rates. Both of our CRE CDOs are meeting all of their over collateralization, or OC, and interest coverage, or IC, trigger tests as of June 30, 2013.

CDO notes payable, at fair value. Both of our Taberna consolidated CDOs are failing OC trigger tests which cause a change to the priority of payments to the debt and equity holders of the respective securitizations. Upon the failure of an OC test, the indenture of each CDO requires cash flows that would otherwise have been distributed to us as equity distributions, or in some cases interest payments on our retained CDO notes payable, be used to pay down sequentially the outstanding principal balance of the most senior note holders. The OC tests failures are due to defaulted collateral assets and credit risk securities. During the six-month period ended June 30, 2013, $66,325 of restricted cash, including cash flow that was re-directed from our retained interests in these CDOs, was used to repay the most senior holders of our CDO notes payable.

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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.

Cash Flow Hedges

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, 2013, 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.

The following table summarizes the aggregate notional amount and estimated net fair value of our derivative instruments as of June 30, 2013 and December 31, 2012:

	As of June 30, 2013					As of December 31, 2012
	Notional		Fair Value			Notional		Fair Value
Cash flow hedges:
Interest rate swaps	$	1,087,770	$	(122,936	)	$	1,110,720	$	(151,358	)
Interest rate caps		36,000		1,006			36,000		1,053
Net fair value	$	1,123,770	$	(121,930	)	$	1,146,720	$	(150,305	)

During the period July 1, 2013 through December 31, 2013, interest rate swap agreements relating to RAIT I and RAIT II with a notional amount of $28,100 and a weighted average strike rate of 5.25% as of June 30, 2013, will terminate in accordance with their terms.

For interest rate swaps that are considered effective hedges, we reclassified realized losses of $8,098 and $8,940 to earnings for the three-month periods ended June 30, 2013 and 2012 and $16,384 and $17,850 for the six-month periods ended June 30, 2013 and 2012.

On January 1, 2008, we adopted the fair value option, which has been classified under FASB ASC Topic 825, “Financial Instruments”, for certain of our CDO notes payable. Upon the adoption of this standard, hedge accounting for any previously designated cash flow hedges associated with these CDO notes payable was discontinued and all changes in fair value of these cash flow hedges are recorded in earnings. As of June 30, 2013, the notional value associated with these cash flow hedges where hedge accounting was discontinued was $561,151 and had a liability balance with a fair value of $67,078. See Note 8: “Fair Value of Financial Instruments” for the changes in value of these hedges during the three-month and six-month periods ended June 30, 2013 and 2012. The change in value of these hedges was recorded as a component of the change in fair value of financial instruments in our consolidated statement of operations.

Amounts reclassified to earnings associated with effective cash flow hedges are reported in interest expense 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 facility, CMBS facilities, commercial mortgage facility and loans payable on real estate approximates cost due to the nature of these instruments.

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The following table summarizes the carrying amount and the fair value of our financial instruments as of June 30, 2013:

Financial Instrument	Carrying Amount		Estimated Fair  Value
Assets
Commercial mortgages, mezzanine loans and other loans	$	1,161,766	$	1,120,809
Investments in securities and security-related receivables		603,173		603,173
Cash and cash equivalents		60,401		60,401
Restricted cash		99,119		99,119
Derivative assets		1,528		1,528
Liabilities
Recourse indebtedness:
7.0% convertible senior notes		110,437		141,738
Secured credit facility		7,121		7,121
Junior subordinated notes, at fair value		11,933		11,933
Junior subordinated notes, at amortized cost		25,100		13,696
CMBS facilities		12,569		12,569
Commercial mortgage facility		14,825		14,825
Non-recourse indebtedness:
CDO notes payable, at amortized cost		1,288,968		781,554
CDO notes payable, at fair value		304,687		304,687
Loans payable on real estate		143,980		152,305
Derivative liabilities		123,458		123,458

The following table summarizes the carrying amount and the fair value of our financial instruments as of December 31, 2012:

Financial Instrument	Carrying Amount		Estimated Fair  Value
Assets
Commercial mortgages, mezzanine loans and other loans	$	1,075,129	$	1,063,716
Investments in securities and security-related receivables		655,509		655,509
Cash and cash equivalents		100,041		100,041
Restricted cash		90,641		90,641
Derivative assets		1,132		1,132
Liabilities
Recourse indebtedness:
7.0% convertible senior notes		109,631		115,230
Secured credit facility		8,090		8,090
Junior subordinated notes, at fair value		29,655		29,655
Junior subordinated notes, at amortized cost		25,100		12,700
Non-recourse indebtedness:
CDO notes payable, at amortized cost		1,295,400		722,371
CDO notes payable, at fair value		187,048		187,048
Loans payable on real estate		144,671		156,510
Derivative liabilities		151,438		151,438

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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, 2013, 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 as of June 30, 2013
Trading securities
TruPS	$	0	$	0	$	486,989	$	486,989
Other securities		0		0		0		0
Available-for-sale securities		0		2		0		2
Security-related receivables
TruPS receivables		0		0		36,582		36,582
Unsecured REIT note receivables		0		32,564		0		32,564
CMBS receivables		0		44,549		0		44,549
Other securities		0		2,487		0		2,487
Derivative assets		0		1,528		0		1,528
Total assets	$	0	$	81,130	$	523,571	$	604,701

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 as of June 30, 2013
Junior subordinated notes, at fair value	$	0	$	0	$	11,933	$	11,933
CDO notes payable, at fair value		0		0		304,687		304,687
Derivative liabilities		0		56,380		67,078		123,458
Total liabilities	$	0	$	56,380	$	383,698	$	440,078

(a) During the six-month period ended June 30, 2013, there were no transfers between Level 1 and Level 2, as well as, there were no 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, 2012, 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 as  of December 31, 2012
Trading securities
TruPS	$	0	$	0	$	485,203	$	485,203
Other securities		0		0		0		0
Available-for-sale securities		0		2		0		2
Security-related receivables
TruPS receivables		0		0		91,148		91,148
Unsecured REIT note receivables		0		32,769		0		32,769
CMBS receivables		0		43,810		0		43,810
Other securities		0		2,577		0		2,577
Derivative assets		0		1,132		0		1,132
Total assets	$	0	$	80,290	$	576,351	$	656,641

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 as  of December 31, 2012
Junior subordinated notes, at fair value	$	0	$	0	$	29,655	$	29,655
CDO notes payable, at fair value		0		0		187,048		187,048
Derivative liabilities		0		71,976		79,462		151,438
Total liabilities	$	0	$	71,976	$	296,165	$	368,141

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

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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. The weighted average effective dollar price of our TruPS and TruPS receivables as of June 30, 2013 and December 31, 2012 is 77 and 77.

The following tables summarize additional information about assets and 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 six-month period ended June 30, 2013:

Assets	Trading Securities—TruPS and Subordinated Debentures			Security-Related Receivables—TruPS and Subordinated Debenture Receivables			Total Level 3 Assets
Balance, as of December 31, 2012	$	485,203		$	91,148		$	576,351
Change in fair value of financial instruments		18,786			(1,441	)		17,345
Purchases		0			0			0
Principal Repayments		(17,000	)		(53,125	)		(70,125	)
Balance, as of June 30, 2013	$	486,989		$	36,582		$	523,571

Liabilities	Derivative Liabilities			CDO Notes Payable,  at Fair Value			Junior Subordinated Notes, at Fair Value			Total Level 3 Liabilities
Balance, as of December 31, 2012	$	79,462		$	187,048		$	29,655		$	296,165
Change in fair value of financial instruments		(12,384	)		183,964			1,659			173,239
Purchases		0			0			0			0
Sales		0			0			0			0
Principal repayments		0			(66,325	)		(19,381	)		(85,706	)
Balance, as of June 30, 2013	$	67,078		$	304,687		$	11,933		$	383,698

Our non-recurring 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 facility, 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, 2013		Estimated Fair Value as  of June 30, 2013		Valuation Technique	Quoted Prices  in Active Markets for Identical  Assets (Level 1)		Significant Other Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Commercial mortgages, mezzanine loans and other loans	$	1,161,766	$	1,120,809	Discounted cash flows	$	0	$	0	$	1,120,809
7.0% convertible senior notes		110,437		141,738	Trading price		141,738		0		0
Junior subordinated notes, at amortized cost		25,100		13,696	Discounted cash flows		0		0		13,696
CDO notes payable, at amortized cost		1,288,968		781,554	Discounted cash flows		0		0		781,554
Loans payable on real estate		143,980		152,305	Discounted cash flows		0		0		152,305

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						Fair Value Measurement
	Carrying Amount as of December 31, 2012		Estimated Fair Value as  of December 31, 2012		Valuation Technique	Quoted Prices  in Active Markets for Identical  Assets (Level 1)		Significant Other Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Commercial mortgages, mezzanine loans and other loans	$	1,075,129	$	1,063,716	Discounted cash flows	$	0	$	0	$	1,063,716
7.0% convertible senior notes		109,631		115,230	Trading price		115,230		0		0
Junior subordinated notes, at amortized cost		25,100		12,700	Discounted cash flows		0		0		12,700
CDO notes payable, at amortized cost		1,295,400		722,371	Discounted cash flows		0		0		722,371
Loans payable on real estate		144,671		156,510	Discounted cash flows		0		0		156,510

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” 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	2013			2012			2013			2012
Change in fair value of trading securities and security-related receivables	$	3,053		$	11,712		$	18,166		$	17,844
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		(80,393	)		(11,524	)		(190,267	)		(119,828	)
Change in fair value of derivatives		1,320			(11,357	)		(3,676	)		(18,108	)
Change in fair value of financial instruments	$	(76,020	)	$	(11,169	)	$	(175,777	)	$	(120,092	)

The changes in the fair value for the investment in securities, 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, 2013 and 2012 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 repayments at par because of OC failures when the CDO notes 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, 2013 and 2012 was mainly due to changes in interest rates.

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NOTE 9: VARIABLE INTEREST ENTITIES

The following table presents the assets and liabilities of our consolidated VIEs as of each respective date. As of June 30, 2013 and December 31, 2012, our consolidated VIEs were: Taberna Preferred Funding VIII, Ltd., or Taberna VIII, Taberna Preferred Funding IX, Ltd, or Taberna IX, RAIT I, RAIT II, Willow Grove and Cherry Hill.

	As of June 30, 2013			As of December 31, 2012
Assets
Investments in mortgages and loans, at amortized cost:
Commercial mortgages, mezzanine loans, other loans and preferred equity interests	$	1,918,215		$	1,917,925
Allowance for losses		(17,125	)		(17,125	)
Total investments in mortgages and loans		1,901,090			1,900,800
Investments in real estate, net of accumulated depreciation of $2,341 and $1,941, respectively		20,317			20,609
Investments in securities and security-related receivables, at fair value		602,555			654,795
Cash and cash equivalents		273			276
Restricted cash		57,270			50,203
Accrued interest receivable		71,082			67,271
Deferred financing costs, net of accumulated amortization of $15,010 and $13,633, respectively		11,364			12,741
Total assets	$	2,663,951		$	2,706,695
Liabilities and Equity
Indebtedness (including $304,687 and $187,048 at fair value, respectively)	$	1,837,445		$	1,724,356
Accrued interest payable		66,500			59,914
Accounts payable and accrued expenses		3,254			3,335
Derivative liabilities		123,458			151,438
Deferred taxes, borrowers’ escrows and other liabilities		5,702			4,877
Total liabilities		2,036,359			1,943,920
Equity:
Shareholders’ equity:
Accumulated other comprehensive income (loss)		(73,309	)		(90,954	)
RAIT Investment		292,237			295,641
Retained earnings		408,664			558,088
Total shareholders’ equity		627,592			762,775
Total liabilities and equity	$	2,663,951		$	2,706,695

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 other our 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.

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. Under the purchase agreement, we are required to issue and sell to the investor on a private placement basis from time to time in a period up to two years, and the investor will be obligated to purchase from us, 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, and (iii) common share appreciation rights, or the investor SARs with respect to up to 6,735,667 common shares. These securities will be issued on a pro rata basis based on the percentage of the total commitment drawn down at the relevant closing under the purchase agreement.

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 $5.90.

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The warrants and investor SARs were both determined to be classified as liabilities and had a combined fair value of $16,095, as of June 30, 2013. 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.

During the period from the effective date of the purchase agreement through June 30, 2013, we sold the following securities to the investor for an aggregate purchase price of $65,000: (i) 2,600,000 Series D Preferred Shares, (ii) warrants exercisable for 6,455,150 common shares (which have subsequently adjusted to 6,560,331 shares as of the date of filing this report); and (iii) investor SARs exercisable with respect to 4,378,183.55 common shares (which have subsequently adjusted to 4,449,521.89 shares as of the date of filing this report). As of June 30, 2013, the following securities remain issuable to the investor for an aggregate purchase price of $35,000: (i) 1,400,000 Series D Preferred Shares, (ii) warrants exercisable for 3,475,850 common shares (which have subsequently adjusted to 3,532,486 shares as of the date of filing this report), and (iii) investor SARs exercisable for 2,357,483.45 common shares (which have subsequently adjusted to 2,395,896.40 shares as of the date of filing this report). The following table summarizes the sales activity of the Series D Preferred Shares from the effective date of the agreement through June 30, 2013:

Aggregate purchase price			$	65,000
Initial value of warrants and investor SARs issued to-date	(9,751	)
Costs incurred	(4,952	)
Total discount				(14,703	)
Discount amortization to-date				985
Carrying amount of Series D Preferred Shares			$	51,282

NOTE 11: EQUITY

Preferred Shares

Dividends:

On January 29, 2013, our board of trustees declared a first quarter 2013 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 April 1, 2013 to holders of record on March 1, 2013 and totaled $4,840.

On May 14, 2013, our board of trustees declared a second quarter 2013 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 July 1, 2013 to holders of record on June 3, 2013 and totaled $5,142.

On July 30, 2013, our board of trustees declared a third quarter 2013 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, 2013 to holders of record on September 3, 2013.

At Market Issuance Sales Agreement (ATM):

On May 21, 2012, we entered into an At Market Issuance Sales Agreement, or Preferred ATM agreement, with MLV & Co. LLC, or MLV, providing that, from time to time during the term of the Preferred ATM agreement, on the terms and subject to the conditions set forth therein, we may issue and sell through MLV, up to 2,000,000 Series A Preferred Shares, up to 2,000,000 Series B Preferred Shares, and up to 2,000,000 Series C Preferred Shares. Unless the Preferred ATM agreement is earlier terminated by MLV or us, the 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 subject to the Preferred ATM agreement. During the six-month period ended June 30, 2013, pursuant to the Preferred ATM agreement we issued a total of 625,000 Series A Preferred Shares at a weighted-average price of $24.00 per share and we received $14,550 of net proceeds. We did not issue any Series B Preferred Shares or Series C Preferred Shares during the six-month period ended June 30, 2013. From July 1, 2013 through August 5, 2013 we issued a total of 320,000 Series A Preferred Shares pursuant to the ATM at a weighted-average price of $23.75 per share and we received $7,372 of net proceeds. After reflecting the preferred shares issued through August 5, 2013, 690,712, 1,969,835, and 1,959,900 of Series A Preferred Shares, Series B Preferred Shares, and Series C Preferred Shares, respectively, remain available for issuance under the Preferred ATM agreement.

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Common Shares

Dividends:

On March 15, 2013, the board of trustees declared a $0.12 dividend on our common shares to holders of record as of April 3, 2013. The dividend was paid on April 30, 2013 and totaled $8,334.

On June 20, 2013, the board of trustees declared a $0.13 dividend on our common shares to holders of record as of July 12, 2013. The dividend was paid on July 31, 2013 and totaled $9,032.

Equity Compensation:

During the six-month period ended June 30, 2013, 54,728 phantom unit awards were redeemed for common shares, a portion of which was withheld in order to satisfy the applicable withholding taxes. These phantom units were fully vested at the time of redemption.

On July 30, 2013, the compensation committee awarded 6,578 restricted common share awards, valued at $50 using our closing stock price of $7.60, to one of the board’s non-management trustees. Three quarters of this award vested immediately and the remainder vests three months after the award date.

On January 29, 2013, the compensation committee awarded 43,536 restricted common share awards, valued at $300 using our closing stock price of $6.89, to six of the board’s non-management trustees. One quarter of these awards vested immediately and the remainder vest over a nine-month period. On January 29, 2013, the compensation committee awarded 369,500 restricted common share awards, valued at $2,577 using our closing stock price of $6.89, to our executive officers and non-executive officer employees. These awards generally vest over three-year periods.

On January 29, 2013, the compensation committee awarded 1,127,500 stock appreciation rights, or SARs, valued at $1,332 based on a 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, 2018, the expiration date of the SARs.

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, 2013, we issued a total of 2,343 common shares pursuant to the DRSPP at a weighted-average price of $7.81 per share and we received $18 of net proceeds. As of June 30, 2013, 7,781,137 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, 2013, there were no common shares issued pursuant to this agreement. From July 1, 2013 through August 5, 2013 we issued a total of 287,277 common shares pursuant to this agreement at a weighted-average price of $7.59 per share and we received $2,126 of net proceeds. After reflecting the common shares issued through August 5, 2013, 9,712,723 common shares, in the aggregate, remain available for issuance under the COD sales agreement.

Common Share Public Offering:

In January 2013 in connection with an underwritten public offering in the fourth quarter of 2012, the underwriters exercised their overallotment option to purchase 1,350,000 additional common shares and we received $7,358 of proceeds.

In April 2013, we issued 9,200,000 common shares in an underwritten public offering. The public offering price was $7.87 per share and we received $70,196 of proceeds.

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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, 2013 and 2012:

	For the Three-Month Periods Ended June 30						For the  Six-Month Periods Ended June 30
	2013			2012			2013			2012
Income (loss) from continuing operations	$	(60,338	)	$	(3,570	)	$	(145,679	)	$	(107,234	)
(Income) loss allocated to preferred shares		(5,589	)		(3,419	)		(10,807	)		(6,829	)
(Income) loss allocated to noncontrolling interests		50			38			77			93
Income (loss) from continuing operations allocable to common shares		(65,877	)		(6,951	)		(156,409	)		(113,970	)
Income (loss) from discontinued operations		0			0			0			0
Net income (loss) allocable to common shares	$	(65,877	)	$	(6,951	)	$	(156,409	)	$	(113,970	)
Weighted-average shares outstanding—Basic		69,757,807			49,902,247			65,086,432			47,026,586
Dilutive securities under the treasury stock method		0			0			0			0
Weighted-average shares outstanding—Diluted		69,757,807			49,902,247			65,086,432			47,026,586
Earnings (loss) per share—Basic:
Continuing operations	$	(0.94	)	$	(0.14	)	$	(2.40	)	$	(2.42	)
Discontinued operations		0.00			0.00			0.00			0.00
Total earnings (loss) per share—Basic	$	(0.94	)	$	(0.14	)	$	(2.40	)	$	(2.42	)
Earnings (loss) per share—Diluted:
Continuing operations	$	(0.94	)	$	(0.14	)	$	(2.40	)	$	(2.42	)
Discontinued operations		0.00			0.00			0.00			0.00
Total earnings (loss) per share—Diluted	$	(0.94	)	$	(0.14	)	$	(2.40	)	$	(2.42	)

For the three-month and six-month periods ended June 30, 2013, securities convertible into 32,265 and 16,082,812 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, 2012, securities convertible into 15,328,251 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.

Scott F. Schaeffer is our Chairman, Chief Executive Officer and President, and is a Trustee. Mr. Schaeffer’s spouse was a director of The Bancorp, Inc., or Bancorp, until her resignation from that position on July 24, 2013. She and Mr. Schaeffer own, in the aggregate, less than 1% of Bancorp’s outstanding common shares. For transactions subsequent to July 24, 2013, we do not expect to treat Bancorp as a related party. Each transaction with Bancorp through June 30, 2013 is described below:

a). Cash and Restricted Cash—We maintain checking and demand deposit accounts at Bancorp. As of June 30, 2013 and December 31, 2012, we had $763 and $239, respectively, of cash and cash equivalents and $433 and $289, respectively, of restricted cash on deposit at Bancorp. We did not receive any interest income from the Bancorp during the three-month and six-month periods ended June 30, 2013 and 2012. Restricted cash held at Bancorp relates to borrowers’ escrows for taxes, insurance and capital reserves. Any interest earned on these deposits enures to the benefit of the specific borrower and not to us.

b). Office Leases—We sublease a portion of our downtown Philadelphia office space from Bancorp under a lease agreement extending through August 2014 at an annual rental expense based upon the amount of square footage occupied. We have a sublease agreement with a third party for the remaining term of our sublease. Rent paid to Bancorp was $74 and $53 for the three-month periods ended June 30, 2013 and 2012, respectively, and was $164 and $132 for the six-month periods ended June 30, 2013 and 2012. Rent received for our sublease was $43 and $44 for the three-month periods ended June 30, 2013 and 2012, respectively, and was $87 for the six-month periods ended June 30, 2013 and 2012.

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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. Also, Almanac receives fees in connection with its investments made pursuant to the purchase agreement. In addition, our subsidiary receives fees for managing a securitization collateralized, in part, by $25.0 million of trust preferred securities issued by Advance Realty Group. An affiliate of Almanac owns an interest in Advance Realty Group and Almanac receives fees in connection with this interest.

NOTE 14: 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 one of our investment adviser subsidiaries, Taberna Capital Management, LLC, or TCM. Based on the notice and other communications with SEC staff, we believe this matter concerns TCM’s compliance with securities laws in connection with transactions since January 1, 2009 involving various Taberna securitizations for which TCM served as collateral manager. The SEC staff has subpoenaed testimony and information and we are cooperating fully. Because this matter is ongoing, we cannot predict the outcome at this time and, as a result, no conclusion can be reached as to what impact, if any, this matter may have on TCM or us.

NOTE 15: SUBSEQUENT EVENTS

On July 31, 2013, or the closing date, we closed a CMBS securitization transaction structured to be collateralized by $135,000 of floating rate commercial mortgage loans and participation interests, or the FL1 collateral, that we originated. The CMBS securitization transaction is intended to finance the FL1 collateral on a non-recourse basis. In connection with the CMBS securitization transaction, our subsidiaries made certain customary representations, warranties and covenants.

On the closing date, our subsidiary, RAIT 2013-FL1 Trust, or the FL1 issuer, issued classes of investment grade senior notes, or the FL1 senior notes, with an aggregate principal balance of approximately $101,250 to investors, representing an advance rate of approximately 75%. A RAIT subsidiary received the unrated classes of junior notes, or the FL1 junior notes, including a class with an aggregate principal balance of $33,750, and the equity, or the retained interests, of the FL1 issuer. The FL1 senior notes bear interest at a weighted average rate equal to LIBOR plus 1.85%. The stated maturity of the FL1 notes is January 2029, unless redeemed or repaid prior thereto. Subject to certain conditions, beginning in August 2015 or upon defined tax events, the FL1 issuer may redeem the FL1 senior notes, in whole but not in part, at the direction of defined holders of FL1 junior notes that we hold.

On the closing date, the FL1 issuer purchased FL1 collateral with an aggregate principal balance of approximately $70,762 and approximately $64,238 was reserved for the expected acquisition by the FL1 issuer of additional collateral meeting defined eligibility criteria during a ramp-up period ending by February 28, 2014, which FL1 Collateral will be originated, selected and serviced by our subsidiary.

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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, 2012, 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. Our vertically integrated platform originates commercial real estate loans, acquires commercial real estate properties and invests in, manages, services and advises on commercial real estate-related assets. We offer a comprehensive set of debt financing options to the commercial real estate industry along with asset and property management services. We also own and manage a portfolio of commercial real estate properties and manage real estate-related assets for third parties. We are positioning RAIT for future growth in the area of its historical core competency, commercial real estate lending and direct ownership of real estate, while diversifying the revenue generated from our commercial real estate loans and properties and reducing or removing other non-core assets and activities.

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 originating commercial real estate loans, 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;

• maintaining and expanding our sources of liquidity;

• sponsoring REITs and other sponsored companies and generating fee income by advising the sponsored companies and through broker-dealer activities;

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

• managing our investment portfolios to reposition our assets, increase our cash flows and maximize the value of our assets over time.

We continue to have success in implementing these strategies as demonstrated by our loan originations and growth in our adjusted funds from operations and operating income. During the six-month period ended June 30, 2013, we originated $265.7 million of commercial real estate loans, had conduit loan sales of $120.2 million and loan repayments of $9.4 million, resulting in net loan growth of $136.1 million. Our business originating conduit loans continues to grow. With regards to our owned commercial real estate portfolios, we continue to see improvements in the key measures of their performance: occupancy and rental rates. As a result, the rental income at our owned properties increased to $55.0 million during the six-month period ended June 30, 2013. Our asset growth and asset performance resulted in growth in our adjusted funds from operations to $40.6 million and growth in our operating income to $29.1 million during the six-month period ended June 30, 2013.

While we generated a GAAP net loss allocable to common shares of $156.4 million, or $2.40 per common share-diluted, during the six-month period ended June 30, 2013, we attribute this loss primarily to continued non-cash negative changes in the fair value of various financial instruments. For the six-month period ended June 30, 2013, the net change in fair value of financial instruments decreased net income by $175.8 million. This is comprised of the change in fair value of financial instruments of $189.3 million associated with an increase in the fair value of non-recourse debt, CDO Notes payable issued by Taberna VIII and Taberna IX and the associated interest rate hedges. This non-cash mark-to-market reduction to earnings was partially offset by $18.2 million of non-cash mark-to-market increases in the fair value of trading securities and security related receivables.

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Key Statistics

Set forth below are key statistics relating to our business through June 30, 2013 (dollars in thousands, except per share data):

	As of or For the Three-Month Periods Ended
	June 30, 2013			March 31, 2013			December 31, 2012			September 30, 2012			June 30, 2012
Financial Statistics:
Assets under management	$	3,692,349		$	3,669,564		$	3,630,959		$	3,598,503		$	3,642,189
Debt to equity		2.8 x			2.8 x			2.4 x			2.4 x			2.4 x
Total revenue	$	58,622		$	58,251		$	54,922		$	52,193		$	47,873
Earnings per share, diluted	$	(0.94	)	$	(1.50	)	$	(0.99	)	$	(0.37	)	$	(0.14	)
Funds from operations per share, diluted	$	(0.81	)	$	(1.37	)	$	(0.83	)	$	(0.21	)	$	0.01
Adjusted funds from operations per share, diluted	$	0.32		$	0.31		$	0.33		$	0.30		$	0.25
Common dividend declared	$	0.13		$	0.12		$	0.10		$	0.09		$	0.08
Commercial Real Estate (“CRE”) Loan Portfolio (a):
Reported CRE Loans—unpaid principal	$	1,154,306		$	1,118,519		$	1,068,984		$	1,042,047		$	1,072,655
Non-accrual loans—unpaid principal	$	65,597		$	68,257		$	69,080		$	70,419		$	73,592
Non-accrual loans as a % of reported loans		5.7	%		6.1	%		6.5	%		6.8	%		6.9	%
Reserve for losses	$	24,222		$	26,206		$	30,400		$	32,738		$	35,426
Reserves as a % of non-accrual loans		36.9	%		38.4	%		44.0	%		46.5	%		48.1	%
Provision for losses	$	500		$	500		$	500		$	500		$	500
CRE Property Portfolio:
Reported investments in real estate, net	$	949,649		$	914,919		$	918,189		$	906,487		$	911,128
Net operating income	$	12,947		$	12,759		$	12,184		$	12,158		$	12,053
Number of properties owned		60			59			59			58			58
Multifamily units owned		8,535			8,206			8,206			8,014			8,014
Office square feet owned		2,015,576			2,015,524			2,015,524			2,015,524			2,015,524
Retail square feet owned		1,421,059			1,422,572			1,422,572			1,422,481			1,422,298
Acres of land owned		21.92			21.92			21.92			21.92			21.92
Average physical occupancy data:
Multifamily properties		92.6	%		92.6	%		90.0	%		90.2	%		91.2	%
Office properties		74.3	%		70.3	%		72.8	%		71.9	%		71.0	%
Retail properties		68.7	%		68.9	%		73.2	%		73.2	%		70.0	%
Total		87.1	%		85.9	%		85.1	%		84.6	%		85.2	%
Average effective rent per unit/square foot (b)
Multifamily (c)	$	727		$	720		$	718		$	699		$	695
Office (d)	$	18.77		$	18.91		$	18.82		$	19.08		$	19.07
Retail (d)	$	11.78		$	11.95		$	12.53		$	11.74		$	12.44

(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 RAIT.

(b) Based on properties owned as of June 30, 2013.

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

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

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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, 2012, or the Annual Report, for a detailed discussion of the following items:

• Credit, capital markets and liquidity risk.

• Interest rate environment.

• Prepayment rates.

• Commercial real estate improved performance.

Our Investment Portfolio

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

Commercial mortgages, mezzanine loans, other loans and preferred equity interests. We originate and own senior long-term mortgage loans, including conduit 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, other loans and preferred equity interests as of June 30, 2013 (dollars in thousands):

	Book Value		Weighted- Average Coupon			Range of Maturities	Number of Loans
Commercial Real Estate (CRE) Loans
Commercial mortgages	$	790,861		6.3	%	Aug. 2013 to Jul. 2023		60
Mezzanine loans		272,331		9.4	%	Aug. 2013 to Apr. 2024		80
Preferred equity interests		63,767		9.8	%	Mar. 2014 to Aug. 2025		15
Total CRE Loans		1,126,959		7.2	%			155
Other loans		34,922		4.6	%	Aug. 2013 to Oct. 2016		2
Total investments in loans	$	1,161,881		7.1	%			157

During the six-month period ended June 30, 2013, we originated $265.7 million of new loans and had CMBS loan sales of $120.2 million and loan repayments of $9.4 million, resulting in net loan growth of $136.1 million.

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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, 2013:

(a) Based on book value.

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, 2013 (dollars in thousands, except average effective rent):

	Investments in Real Estate (a)		Average Physical Occupancy			Units/ Square Feet/ Acres		Number of Properties		Average Effective Rent (a)
Multi-family real estate properties (b)	$	654,149		92.6	%		8,535		35	$	727
Office real estate properties (c)		276,119		74.3	%		2,015,576		11		18.77
Retail real estate properties (c)		83,197		68.7	%		1,421,059		4		11.78
Parcels of land		48,509		N/A			21.9		10		N/A
Total	$	1,061,974		87.1	%				60

(a) Based on properties owned as of June 30, 2013.

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

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

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The charts below describe the property types and the geographic breakdown of our investments in real estate as of June 30, 2013:

(a) Based on book value.

Investment in debt securities—TruPS and Subordinated Debentures. Historically, we provided REITs and real estate operating companies the ability to raise subordinated debt capital through TruPS and subordinated debentures. TruPS are long-term instruments, with maturities ranging from 5 to 30 years, which are priced based on short-term variable rates, such as the three-month London Inter-Bank Offered Rate, or LIBOR. TruPS are unsecured and generally contain minimal financial and operating covenants. We financed most of our debt securities portfolio in a series of non-recourse securitizations which provided long-dated, interest-only, match funded financing to the TruPS and subordinated debenture investments. As of June 30, 2013, we retained a controlling interest in two such securitizations—Taberna VIII and Taberna IX, which are consolidated entities. We present all of the collateral assets for the debt securities and the related non-recourse securitization financing obligations at fair value in our consolidated financial statements. During the six-month period ended June 30, 2013, due to the credit performance of the underlying collateral, we received only our senior collateral management fees from these two securitizations. We do not expect to add investments in this asset category for the foreseeable future due to market conditions.

The table below describes our investment in TruPS and subordinated debentures as included in our consolidated financial statements as of June 30, 2013 (dollars in thousands):

						Issuer Statistics
Industry Sector	Estimated Fair Value		Weighted- Average Coupon			Weighted Average Ratio of Debt to Total Capitalization			Weighted Average Interest Coverage Ratio
Commercial Mortgage	$	110,091		1.5	%		53.9	%		2.9x
Office		134,190		6.7	%		60.7	%		1.7x
Residential Mortgage		51,563		2.5	%		74.8	%		4.8x
Specialty Finance		79,681		4.3	%		80.2	%		1.6x
Homebuilders		18,750		8.0	%		86.6	%		1.1x
Retail		76,790		2.4	%		60.2	%		2.4x
Hospitality		26,608		8.7	%		141.6	%		0.4x
Storage		25,898		8.0	%		76.8	%		3.2x
Total	$	523,571		3.9	%		69.4	%		2.3x

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The chart below describes the equity capitalization of our investment in TruPS and subordinated debentures as included in our consolidated financial statements as of June 30, 2013:

(a) Based on the most recent information available to management as provided by our TruPS issuers or through public filings.

(b) Based on estimated fair value.

Investment in debt securities—Other Real Estate Related Debt Securities. We have invested, and expect to continue to invest, in CMBS, unsecured REIT notes and other real estate-related debt securities.

Unsecured REIT notes are publicly traded debentures issued by large public reporting REITs and other real estate companies. These debentures generally pay interest semi-annually.

CMBS generally are multi-class debt or pass-through certificates issued by CMBS securitizations secured or backed by single loans or pools of mortgage loans on commercial real estate properties. Our CMBS investments may include loans and securities that are rated investment grade by one or more nationally-recognized rating agencies, as well as both unrated and non-investment grade loans and securities.

The table and the chart below describe certain characteristics of our real estate-related debt securities as of June 30, 2013 (dollars in thousands):

Investment Description	Estimated Fair Value		Weighted- Average Coupon			Weighted- Average Years to Maturity		Book Value
Unsecured REIT note receivables	$	32,564		6.7	%		3.6	$	30,000
CMBS receivables		44,549		5.6	%		31.3		76,741
Other securities		2,489		2.8	%		35.3		52,416
Total	$	79,602		4.7	%		28.1	$	159,157

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(a) S&P Ratings as of June 30, 2013.

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 portfolios for the long-term. 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 securities backing 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.

Performance. Our securitizations contain interest coverage triggers, or IC triggers, and overcollateralization triggers, or OC triggers, that 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, the Taberna I, Taberna VIII and Taberna IX securitizations that we manage were not passing all of their required IC triggers or OC triggers and we received only senior asset management fees. All applicable IC triggers and OC triggers continue to be met for our two commercial real estate securitizations, RAIT I and RAIT II, and we continue to receive all of our management fees, interest and residual returns from these securitizations.

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

• RAIT I—RAIT I has $977.1 million of total collateral at par value, of which $17.9 million is defaulted. The current overcollateralization, or OC, test is passing at 126.9% with an OC trigger of 116.2%. We currently own $43.7 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 $43.7 million of the securities we own issued by RAIT I as collateral for a senior secured note we issued.

• RAIT II—RAIT II has $827.8 million of total collateral at par value, of which $18.9 million is defaulted. The current OC test is passing at 117.7% 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 $104.0 million of the securities we own issued by RAIT II as collateral for a senior secured note we issued.

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• Taberna VIII—Taberna VIII has $515.1 million of total collateral at par value, of which $52.0 million is defaulted. The current OC test is failing at 80.9% with an OC trigger of 103.5%. We currently own $40.0 million of the securities that were originally rated investment grade and $93.0 million of the non-investment grade securities issued by this securitization. We do not expect to receive any distributions from this securitization other than our senior management fees for the foreseeable future.

• Taberna IX—Taberna IX has $520.8 million of total collateral at par value, of which $121.8 million is defaulted. The current OC test is failing at 68.5% with an OC trigger of 105.4%. We currently own $89.0 million of the securities that were originally rated investment grade and $97.5 million of the non-investment grade securities issued by this securitization. We do not expect to receive any distributions from this securitization other than our senior management fees for the foreseeable future.

RAIT 2013-FL1 Securitization

On July 31, 2013, or the closing date, we closed a CMBS securitization transaction structured to be collateralized by $135.0 million of floating rate commercial mortgage loans and participation interests, or the FL1 collateral, that we originated. The CMBS securitization transaction is intended to finance the FL1 collateral on a non-recourse basis. In connection with the CMBS securitization transaction, our subsidiaries made certain customary representations, warranties and covenants.

On the closing date, our subsidiary, RAIT 2013-FL1 Trust, or the FL1 issuer, issued classes of investment grade senior notes, or the FL1 senior notes, with an aggregate principal balance of approximately $101.2 million to investors, representing an advance rate of approximately 75%. A RAIT subsidiary received the unrated classes of junior notes, or the FL1 junior notes, including a class with an aggregate principal balance of $33.8 million, and the equity, or the retained interests, of the FL1 issuer. The FL1 senior notes bear interest at a weighted average rate equal to LIBOR plus 1.85%. The stated maturity of the FL1 notes is January 2029, unless redeemed or repaid prior thereto. Subject to certain conditions, beginning in August 2015 or upon defined tax events, the FL1 issuer may redeem the FL1 senior notes, in whole but not in part, at the direction of defined holders of FL1 junior notes that we hold.

On the closing date, the FL1 issuer purchased FL1 collateral with an aggregate principal balance of approximately $71.8 million and approximately $64.2 million was reserved for the expected acquisition by the FL1 issuer of additional collateral meeting defined eligibility criteria during a ramp-up period ending by February 28, 2014, which FL1 Collateral will be originated, selected and serviced by our subsidiary.

Sponsored Companies

Through April 8, 2013, IRT had sold shares of its common stock, or the IRT common stock, pursuant to a registered continuous offering carried out in a manner consistent with offerings of non-listed REITs. Subsequently, IRT decided to sell shares of IRT common stock in an underwritten public offering and terminate its continuous offering. Accordingly, IRT amended its registration statement on April 26, 2013 to terminate IRT’s continuous offering and describe the anticipated underwritten public offering. There can be no assurance that IRT will be able to complete the underwritten public offering described in IRT’s amended registration statement. While IRT’s amended registration statement has been filed with the SEC, it has not yet been declared effective by the SEC. The IRT common stock to be registered pursuant to IRT’s amended registration statement may not be sold nor may offers to buy be accepted prior to the time the amended registration statement becomes effective. Any disclosure concerning IRT is neither an offer nor a solicitation to purchase IRT’s securities.

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, 2013 and December 31, 2012 (dollars in thousands):

	AUM as of June 30, 2013		AUM as of December 31, 2012
Commercial real estate portfolio (1)	$	2,144,471	$	1,993,655
U.S. TruPS portfolio (2)		1,547,878		1,637,304
Total	$	3,692,349	$	3,630,959

(1) As of June 30, 2013 and December 31, 2012, our commercial real estate portfolio was comprised of $979.3 million and $1.0 billion of assets collateralizing RAIT I and RAIT II, $949.6 million and $918.2 million, respectively, of investments in real estate and $215.5 million and $85.9 million, respectively, of commercial mortgages, mezzanine loans and preferred equity interests that were not securitized.

(2) Our U.S. TruPS portfolio is comprised of assets collateralizing Taberna I, Taberna VIII, and Taberna IX, and includes TruPS and subordinated debentures, unsecured REIT note receivables, CMBS receivables, other securities, commercial mortgages and mezzanine loans.

Non-GAAP Financial Measures

Funds from Operations and Adjusted Funds from Operations

We believe that funds from operations, or FFO, and adjusted funds from operations, or AFFO, each of which are non-GAAP measures, are additional appropriate measures of the operating performance of a REIT and us in particular. 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.

AFFO is a computation made by analysts and investors to measure a real estate company’s cash flow generated by operations. We calculate AFFO by adding to or subtracting from FFO: change in fair value of financial instruments; gains or losses on debt extinguishment; capital expenditures, net of any direct financing associated with those capital expenditures; straight-line rental effects; amortization of various deferred items and intangible assets; and share-based compensation.

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Our calculation of AFFO differs from the methodology used for calculating AFFO by certain other REITs and, accordingly, our AFFO may not be comparable to AFFO reported by other REITs. Our management utilizes FFO and AFFO as measures of our operating performance, and believes they are also useful to investors, because they facilitate an understanding of our operating performance after adjustment for certain non-cash items, such as changes in fair value of financial instruments, real estate depreciation, share-based compensation and various other items required by GAAP that may not necessarily be indicative of current operating performance and that may not accurately compare our operating performance between periods. Furthermore, although FFO, AFFO and other supplemental performance measures are defined in various ways throughout the REIT industry, we also believe that FFO and AFFO may provide us and our investors with an additional useful measure to compare our financial performance to certain other REITs.

Neither FFO nor AFFO is equivalent to net income or cash generated from operating activities determined in accordance with U.S. GAAP. Furthermore, FFO and AFFO do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Neither FFO nor AFFO should 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 and AFFO to net income (loss) allocable to common shares for the three-month periods ended June 30, 2013 and 2012 (dollars in thousands, except share information):

	For the Three-Month Period Ended June 30, 2013						For the Three-Month Period Ended June 30, 2012
	Amount			Per Share (1)			Amount			Per Share (2)
Funds From Operations:
Net income (loss) allocable to common shares	$	(65,877	)	$	(0.94	)	$	(6,951	)	$	(0.14	)
Adjustments:
Real estate depreciation and amortization		8,050			0.11			7,449			0.15
(Gains) losses on the sale of real estate		1,326			0.02			0			0.00
Funds From Operations	$	(56,501	)	$	(0.81	)	$	498		$	0.01
Adjusted Funds From Operations:
Funds From Operations	$	(56,501	)	$	(0.81	)	$	498		$	0.01
Adjustments:
Change in fair value of financial instruments		76,020			1.09			11,169			0.23
(Gains) losses on debt extinguishment		0			0.00			0			0.00
Capital expenditures, net of direct financing		(797	)		(0.01	)		(535	)		(0.01	)
Straight-line rental adjustments		(678	)		(0.01	)		(785	)		(0.02	)
Amortization of deferred items and intangible assets		3,267			0.05			1,516			0.03
Share-based compensation		743			0.01			549			0.01
Adjusted Funds From Operations	$	22,054		$	0.32		$	12,412		$	0.25

(1) Based on 69,757,807 weighted-average shares outstanding-diluted for the three-month period ended June 30, 2013.

(2) Based on 49,902,247 weighted-average shares outstanding-diluted for the three-month period ended June 30, 2012.

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Set forth below is a reconciliation of FFO and AFFO to net income (loss) allocable to common shares for the six-month periods ended June 30, 2013 and 2012 (dollars in thousands, except share information):

	For the Six-Month Period Ended June 30, 2013						For the Six-Month Period Ended June 30, 2012
	Amount			Per Share (1)			Amount			Per Share (2)
Funds From Operations:
Net income (loss) allocable to common shares	$	(156,409	)	$	(2.40	)	$	(113,970	)	$	(2.42	)
Adjustments:
Real estate depreciation and amortization		16,023			0.24			14,908			0.31
(Gains) losses on the sale of real estate		1,326			0.02			0			0.00
Funds From Operations	$	(139,060	)	$	(2.14	)	$	(99,062	)	$	(2.11	)
Adjusted Funds From Operations:
Funds From Operations	$	(139,060	)	$	(2.14	)	$	(99,062	)	$	(2.11	)
Adjustments:
Change in fair value of financial instruments		175,777			2.69			120,092			2.56
(Gains) losses on debt extinguishment		0			0.00			(1,574	)		(0.03	)
Capital expenditures, net of direct financing		(969	)		(0.01	)		(783	)		(0.02	)
Straight-line rental adjustments		(966	)		(0.01	)		(1,091	)		(0.02	)
Amortization of deferred items and intangible assets		4,400			0.07			3,042			0.06
Share-based compensation		1,466			0.02			1,106			0.02
Adjusted Funds From Operations	$	40,648		$	0.62		$	21,730		$	0.46

(1) Based on 65,086,432 weighted-average shares outstanding-diluted for the six-month period ended June 30, 2013.

(2) Based on 47,026,586 weighted-average shares outstanding-diluted for the six-month period ended June 30, 2012.

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, 2013 (dollars in thousands, except share information):

	As of June 30, 2013
	Amount			Per Share (1)
Total shareholders’ equity	$	770,523		$	11.01
Liquidation value of preferred shares (2)		(191,946	)		(2.74	)
Book value		578,577			8.27
Adjustments:
Taberna VIII and Taberna IX securitizations		(334,551	)		(4.79	)
RAIT I and RAIT II derivative liabilities		53,464			0.76
Change in fair value for warrants and investor SARs		6,342			0.09
Accumulated depreciation and amortization		138,264			1.98
Valuation of recurring collateral and property management fees		19,255			0.28
Total adjustments		(117,226	)		(1.68	)
Adjusted book value	$	461,351		$	6.59

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(1) Based on 69,960,454 common shares outstanding as of June 30, 2013.

(2) Based on 3,749,288 Series A preferred shares, 2,288,465 Series B preferred shares, and 1,640,100 Series C preferred shares outstanding as of June 30, 2013, all of which have a liquidation preference of $25.00 per share.

Results of Operations

Three-Month Period Ended June 30, 2013 Compared to the Three-Month Period Ended June 30, 2012

Revenue

Net interest margin. Net interest margin increased $3.8 million, or 18.8%, to $24.0 million for the three-month period ended June 30, 2013 from $20.2 million for the three-month period ended June 30, 2012. Investment interest income has increased, when compared to the three-month period ended June 30, 2012, as a result of an increase in our average investments in loans and securities. This increase was primarily caused by the origination of new loans since June 30, 2012. In addition, investment interest expense decreased for the three-month period ended June 30, 2013 as compared to the three-month period ended June 30, 2012 primarily attributable to $0.5 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 since June 30, 2012 and $0.6 million of reduced interest expense from repurchases and repayments of our CDO notes payable.

Rental income. Rental income increased $2.4 million to $27.9 million for the three-month period ended June 30, 2013 from $25.5 million for the three-month period ended June 30, 2012. The increase is attributable to $0.5 million of rental income from two new properties acquired or consolidated since June 30, 2012, $0.3 million of rental income from two properties acquired during the three-month period ended June 30, 2012 present for a full quarter of operations during the three-month period ended June 30, 2013, and $1.6 million from improved occupancy and rental rates in 2013 as compared to 2012.

Fee and other income. Fee and other income increased $4.7 million to $6.8 million for the three-month period ended June 30, 2013 from $2.1 million for the three-month period ended June 30, 2012. The increase is attributable to $4.1 million of conduit fee income and $0.7 million in other income associated with a legal settlement.

Expenses

Interest expense. Interest expense decreased $0.8 million, or 7.4%, to $10.0 million for the three-month period ended June 30, 2013 from $10.8 million for the three-month period ended June 30, 2012. The decrease is primarily attributable to the repayment of $19.4 million of Junior Subordinated Notes during the first quarter of 2013 as well as an interest rate reduction on the Junior Subordinated Notes as they had a fixed rate during the three-month period ended June 30, 2012 and had a floating rate for the three-month period ended June 30, 2013 which was, during the period, lower than the fixed rate. This was partially offset by an increase in interest expense from the commercial mortgage facility and loans payable on real estate.

Real estate operating expense. Real estate operating expense increased $1.4 million to $14.9 million for the three-month period ended June 30, 2013 from $13.5 million for the three-month period ended June 30, 2012. Operating expenses increased primarily due to the two properties acquired or consolidated since June 30, 2012 and from the two properties acquired during the three-month period ended June 30, 2012 present for a full quarter of operations during the three-month period ended June 30, 2013. In our existing portfolio, real estate tax expenses increased in the three-month period ended June 30, 2013 due real estate property tax refunds received in the three-month period ended June 30, 2012.

Compensation expense. Compensation expense increased $1.1 million, or 21.2%, to $6.3 million for the three-month period ended June 30, 2013 from $5.2 million for the three-month period ended June 30, 2012. This increase was primarily attributable to an increase in stock-based compensation and for new employees hired since June 30, 2012.

Depreciation and amortization expense. Depreciation and amortization expense increased $1.0 million to $8.6 million for the three-month period ended June 30, 2013 from $7.6 million for the three-month period ended June 30, 2012. The increase is attributable to $0.2 million of depreciation expense from two new properties acquired or consolidated since June 30, 2012, $0.4 million of operating expenses from two properties acquired during the three-month period ended June 30, 2012 present for a full quarter of operations during the three-month period ended June 30, 2013, and $0.4 million from our other consolidated properties.

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Other income (expense)

Other income (expense). During the three-month period ended June 30, 2012, other income (expense) included a one-time accrual of $1.5 million loss associated with a sublease on our New York office space. In January 2013, we executed a sub-lease on our New York office space at a monthly rate that is less than our remaining contractual obligation.

Gain on assets. During the three-month period ended June 30, 2013, gain on assets included a $1.6 million gain on the acquisition of one multi-family property with a fair value of $37.0 million for a purchase price of $35.4 million. This was partially offset with an accrual of a $1.3 million loss related to the disposition of a real estate property in July 2013. During the three-month period ended June 30, 2012, gain on assets included a $2.5 million gain on the conversion of two loans to real estate owned property as the fair value of the real estate acquired exceeded the carrying amount of our loans.

Change in fair value of financial instruments. During the three-month period ended June 30, 2013, the change in fair value of financial instruments reduced our net income by $76.0 million. The fair value adjustments we recorded were as follows (dollars in thousands):

Description	For the Three-Month Period Ended June 30, 2013			For the Three-Month Period Ended June 30, 2012
Change in fair value of trading securities and security-related receivables	$	3,053		$	11,712
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		(80,393	)		(11,524	)
Change in fair value of derivatives		1,320			(11,357	)
Change in fair value of financial instruments	$	(76,020	)	$	(11,169	)

Changes in the fair value of our financial instruments occur when market conditions change, including interest rates and/or the credit profile of the underlying issuers change. In addition, a change in fair value of a financial instrument will occur when principal repayments occur where the carrying amount of the financial instrument, prior to the principal repayment, did not equal the principal amount repaid. We have had and expect to continue to have changes in the fair value of our financial instruments as market conditions change and as principal repayments occur in either the securities or liabilities that are subject to fair value accounting under FASB ASC Topic 825, “Financial Instruments.”

Six-Month Period Ended June 30, 2013 Compared to the Six-Month Period Ended June 30, 2012

Revenue

Net interest margin. Net interest margin increased $8.0 million, or 20.1%, to $47.8 million for the six-month period ended June 30, 2013 from $39.8 million for the six-month period ended June 30, 2012. Investment interest income has increased, when compared to the six-month period ended June 30, 2012, as a result of an increase in our average investments in loans and securities. This increase was primarily caused by the origination of new loans since June 30, 2012. In addition, investment interest expense decreased for the six-month period ended June 30, 2013 as compared to the six-month period ended June 30, 2012 primarily attributable to $0.8 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 since June 30, 2012, $1.3 million of reduced interest expense from repurchases and repayments of our CDO notes payable.

Rental income. Rental income increased $4.6 million to $55.0 million for the six-month period ended June 30, 2013 from $50.4 million for the six-month period ended June 30, 2012. The increase is attributable to $1.1 million of rental income from two new properties acquired or consolidated since June 30, 2012, $1.4 million from two properties acquired during the six-months ended June 30, 2012 present for a full two quarters of operations in 2013, and $2.1 million from improved occupancy and rental rates in 2013 as compared to 2012.

Fee and other income. Fee and other income increased $10.6 million to $14.1 million for the six-month period ended June 30, 2013 from $3.5 million for the six-month period ended June 30, 2012. The increase is attributable to $7.9 million of conduit fee income and structuring fee income and $2.6 million in other income associated with legal settlements.

Expenses

Interest expense. Interest expense decreased $2.1 million, or 9.7%, to $19.6 million for the six-month period ended June 30, 2013 from $21.7 million for the six-month period ended June 30, 2012. The decrease is attributable to the repayment of $19.4 million of Junior Subordinated Notes during the first quarter of 2013, an interest rate reduction on the Junior Subordinated Notes as they had a fixed rate during the six-month period ended June 30, 2012 and had a floating rate for the six-month period ended June 30, 2013 which was, during the period, lower than the fixed rate,

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repurchases of our 6.875% convertible senior notes and repayments of our CDO notes payable. This was partially offset by an increase in interest expense from the outstanding borrowings on the commercial mortgage facility during the six-month period ended June 30, 2013 as compared to the same period in 2012 and an increase in loans payable on real estate relating to the acquisition of a real estate property in October 2012.

Real estate operating expense. Real estate operating expense increased $2.0 million to $29.3 million for the six-month period ended June 30, 2013 from $27.3 million for the six-month period ended June 30, 2012. Operating expenses increased primarily due to the two properties acquired or consolidated since June 30, 2012 and from the two properties acquired during the six-months ended June 30, 2012 present for a full two quarters of operations in 2013. In our existing portfolio, operating expenses increased due to increases in utilities, repairs and maintenance, real estate taxes and legal expenses, which were partially offset by lower bad debt expenses.

Compensation expense. Compensation expense increased $2.3 million, or 20.9%, to $13.3 million for the six-month period ended June 30, 2013 from $11.0 million for the six-month period ended June 30, 2012. This increase was due to $1.1 million of severance paid during the six-month period ended June 30, 2013, $0.4 million increase in stock-based compensation, and an increase in salary and benefits for new employees hired since June 30, 2012.

Depreciation and amortization expense. Depreciation and amortization expense increased $1.9 million to $17.2 million for the six-month period ended June 30, 2013 from $15.3 million for the six-month period ended June 30, 2012. The increase is attributable to $0.4 million of depreciation expense from two new properties acquired or consolidated since June 30, 2012, $0.6 million from two properties acquired during the six-months ended June 30, 2012 present for a full two quarters of operations in 2013, $0.8 million from our other consolidated properties, and corporate depreciation of $0.1 million.

Other income (expense)

Other income (expense). During the six-month period ended June 30, 2012, other income (expense) included a one-time accrual of $1.5 million loss associated with a sublease on our New York office space. In January 2013, we executed a sub-lease on our New York office space at a monthly rate that is less than our remaining contractual obligation.

Gain on assets. During the six-month period ended June 30, 2013, gain on assets included a $1.6 million gain on the acquisition of one multi-family property with a fair value of $37.0 million for a purchase price of $35.4 million. This was partially offset with an accrual of a $1.3 million loss related to the disposition of a real estate property in July 2013. During the six-month period ended June 30, 2012, gain on assets included a $2.5 million gain on the conversion of two loans to real estate owned property as the fair value of the real estate acquired exceeded the carrying amount of our loans.

Gains on extinguishment of debt. Gains on extinguishment of debt during the six-month period ended June 30, 2012 are attributable to the repurchase of $2.5 million principal amount of RAIT I debt notes from the market for $0.9 million of cash, resulting in gains on extinguishment of debt of $1.6 million.

Change in fair value of financial instruments. During the six-months ended June 30, 2013, the change in fair value of financial instruments reduced our net income by $175.8 million. The fair value adjustments we recorded were as follows (dollars in thousands):

Description	For the Six-Month Period Ended June 30, 2013			For the Six-Month Period Ended June 30, 2012
Change in fair value of trading securities and security-related receivables	$	18,166		$	17,844
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		(190,267	)		(119,828	)
Change in fair value of derivatives		(3,676	)		(18,108	)
Change in fair value of financial instruments	$	(175,777	)	$	(120,092	)

Changes in the fair value of our financial instruments occur when market conditions change, including interest rates and/or the credit profile of the underlying issuers change. In addition, a change in fair value of a financial instrument will occur when principal repayments occur where the carrying amount of the financial instrument, prior to the principal repayment, did not equal the principal amount repaid. We have had and expect to continue to have changes in the fair value of our financial instruments as market conditions change and as principal repayments occur in either the securities or liabilities that are subject to fair value accounting under FASB ASC Topic 825, “Financial Instruments.”

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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 our use of short term financing and secured lines of credit while developing other financing resources that will permit us to originate or acquire new investments to generate attractive returns while preserving our capital, such as loan participations and joint venture financing arrangements and opportunities to sell conduit loans to CMBS issuers.

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 TRSs; 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 $60.4 million as of June 30, 2013;

• 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 future offerings of our securities, including pursuant to the Series D preferred shares purchase agreement, DRSPP and ATM discussed below.

During the period July 1, 2013 through December 31, 2013, interest rate swap agreements relating to RAIT I and RAIT II with a notional amount of $28.1 million and a weighted average strike rate of 5.25% as of June 30, 2013, will terminate in accordance with their terms. We expect this will result in increased cash flow to us of $1.5 million during the remainder of 2013 as compared to the same period in 2012.

Cash Flows

As of June 30, 2013 and 2012, we maintained cash and cash equivalents of approximately $60.4 million and $44.3 million, respectively. Our cash and cash equivalents were generated from the following activities (dollars in thousands):

	For the Six-Month Periods Ended June 30
	2013			2012
Cash flow from operating activities	$	21,110		$	7,345
Cash flow from investing activities		(66,323	)		60,209
Cash flow from financing activities		5,573			(53,009	)
Net change in cash and cash equivalents		(39,640	)		14,545
Cash and cash equivalents at beginning of period		100,041			29,720
Cash and cash equivalents at end of period	$	60,401		$	44,265

The cash outflow for investing activities for the six-month period ended June 30, 2013 is substantially due to new investments in loans of $251.1 million exceeded loan repayments of $129.5 million. These cash outflows were partially offset by payoffs we received for our investment in securities totaling $70.5 million for the six-month period ended June 30, 2013. The cash inflows during the six-month period ended June 30, 2012 was substantially due to the decrease in our restricted cash to repay the most senior note holders of a consolidated securitization, which was offset by cash outflows as new investments in loans exceeded loan repayments for the six-month period ended June 30, 2012.

Cash flow from operating activities for the six-month period ended June 30, 2013, as compared to the same period in 2012, has increased due to reduced interest expense and the timing of payments for various accounts payable and accrued liabilities. This was partially offset by an increase in other assets, including prepaid expenses for insurance and real estate taxes, as the size of our portfolio of real estate properties has grown.

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The cash inflow from our financing activities during the six-month period ended June 30, 2013 is primarily due to the issuance of our preferred shares through our ATM program, the issuance of common shares from the underwritten public offering in April 2013 and from the underwriters’ exercise of their overallotment option related to the public offering from the fourth quarter of 2012. These cash inflows were partially offset by the outflows from the repayments and repurchases of our CDO notes payable and the repayment of a junior subordinated note during the six-month period ended June 30, 2013.

As a REIT, we evaluate our dividend coverage based on our cash flow from operating activities before changes in assets and liabilities. During the six-month period ended June 30, 2013, we paid distributions to our preferred and common shareholders of $19.2 million and generated cash flows from operating activities, before changes in assets and liabilities, of $47.9 million. The cash flow from operating activities of $21.1 million during six-month period ended June 30, 2013 exceeded these distributions paid to our shareholders by $1.9 million. The source of funds used to pay these distributions was cash flows from operations before changes in assets and liabilities, as mentioned above.

Capitalization

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, 2013 (dollars in thousands):

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
7.0% convertible senior notes (1)	$	115,000	$	110,437		7.0	%	Apr. 2031
Secured credit facility		7,121		7,121		3.0	%	Dec. 2016
Junior subordinated notes, at fair value (2)		18,671		11,933		0.5	%	Mar. 2035
Junior subordinated notes, at amortized cost		25,100		25,100		2.8	%	Apr. 2037
CMBS facilities		12,569		12,569		2.7	%	Oct. 2013 to Nov. 2013
Commercial mortgage facility		14,825		14,825		2.2	%	Dec. 2013
Total recourse indebtedness (3)		193,286		181,985		5.0	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (4)(5)		1,290,484		1,288,968		0.6	%	2045 to 2046
CDO notes payable, at fair value (2)(4)(6)		918,055		304,687		1.0	%	2037 to 2038
Loans payable on real estate		143,980		143,980		5.4	%	Sep. 2015 to Nov. 2022
Total non-recourse indebtedness		2,352,519		1,737,635		1.0	%
Total indebtedness	$	2,545,805	$	1,919,620		1.3	%

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

(3) Excludes senior secured notes issued by us with an aggregate principal amount equal to $90.0 million with a weighted average coupon of 7.0%, which are eliminated in consolidation.

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

(5) Collateralized by $1.8 billion 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) Collateralized by $1.0 billion principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of June 30, 2013 was $791.6 million. 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.

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.

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The current status or activity in our financing arrangements occurring as of or during the six-month period ended June 30, 2013 is as follows:

Recourse Indebtedness

7.0% convertible senior notes. The 7.0% Convertible Senior Notes due 2031, or the 7.0% convertible senior notes, are convertible at the option of the holder at a current conversion rate of 142.6266 common shares per $1,000 principal amount of 7.0% convertible senior notes (equivalent to a current conversion price of $7.01 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 earnings per share using the treasury stock method if the conversion value in excess of the par amount is considered in the money during the respective periods.

Secured credit facility. As of June 30, 2013, we have $7.1 million outstanding under our secured credit facility, which is payable in December 2016 under the current terms of this facility. Our secured credit facility is secured by designated commercial mortgages and mezzanine loans.

Junior subordinated notes, at fair value. During the six-month period ended June 30, 2013, we prepaid the $19.4 million junior subordinated note. After reflecting the prepayment, only the second $18.7 million junior subordinated note remains outstanding.

CMBS facilities. We maintain CMBS facilities with two investment banks with total borrowing capacity of $250.0 million. The CMBS facilities are repurchase agreements that provide for margin calls in the event the conduit loans financed by the facilities change in value. As of June 30, 2013 we had $12.6 million of outstanding borrowings under the CMBS facilities. As of June 30, 2013, $237.4 million in aggregate principal amount remained available under the CMBS facilities.

Commercial mortgage facility. We maintain a commercial mortgage facility with an investment bank with total borrowing capacity of $150.0 million. The commercial mortgage facility is a repurchase agreement that provides for margin calls in the event the commercial mortgages financed by the facility change in value. As of June 30, 2013 we had $14.8 million of outstanding borrowings under the commercial mortgage facility. As of June 30, 2013, $135.2 million in aggregate principal amount remained available under the commercial mortgage facility.

Non-Recourse Indebtedness

CDO notes payable, at amortized cost. CDO notes payable at amortized cost represent notes issued by consolidated CDO entities 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 portfolio. Generally, CDO notes payable are comprised of various classes of notes payable, with each class bearing interest at variable or fixed rates. Both of our CRE CDOs are meeting all of their over collateralization, or OC, and interest coverage, or IC, trigger tests as of June 30, 2013.

CDO notes payable, at fair value. Both of our Taberna consolidated CDOs are failing OC trigger tests which cause a change to the priority of payments to the debt and equity holders of the respective securitizations. Upon the failure of an OC test, the indenture of each CDO requires cash flows that would otherwise have been distributed to us as equity distributions, or in some cases interest payments on our retained CDO notes payable, be used to pay down sequentially the outstanding principal balance of the most senior note holders. The OC tests failures are due to defaulted collateral assets and credit risk securities. During the six-month period ended June 30, 2013, $66.3 million of restricted cash, including cash flow that was re-directed from our retained interests in these CDOs, was used to repay the most senior holders of our CDO notes payable.

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. Under the purchase agreement, we are required to issue and sell to the investor on a private placement basis from time to time in a period up to two years, and the investor will be obligated to purchase from us, for an aggregate purchase price of $100.0 million, 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, and (iii) common share appreciation rights, or the investor SARs with respect to up to 6,735,667 common shares. These securities will be issued on a pro rata basis based on the percentage of the total commitment drawn down at the relevant closing under the purchase agreement.

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 $5.90.

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The warrants and investor SARs were both determined to be classified as liabilities and had a combined fair value of $16.1 million, as of June 30, 2013. 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.

During the period from the effective date of the purchase agreement through June 30, 2013, we sold the following securities to the investor for an aggregate purchase price of $65.0 million: (i) 2,600,000 Series D Preferred Shares, (ii) warrants exercisable for 6,455,150 common shares (which have subsequently adjusted to 6,560,331 shares as of the date of filing this report); and (iii) investor SARs exercisable with respect to 4,378,183.55 common shares (which have subsequently adjusted to 4,449,521.89 shares as of the date of filing this report). As of June 30, 2013, the following securities remain issuable to the investor for an aggregate purchase price of $35.0 million: (i) 1,400,000 Series D Preferred Shares, (ii) warrants exercisable for 3,475,850 common shares (which have subsequently adjusted to 3,532,486 shares as of the date of filing this report), and (iii) investor SARs exercisable for 2,357,483.45 common shares (which have subsequently adjusted to 2,395,896.40 shares as of the date of filing this report). The following table summarizes the sales activity of the Series D Preferred Shares from the effective date of the agreement through June 30, 2013: (dollars in thousands)

Aggregate purchase price			$	65,000
Initial value of warrants and investor SARs issued to-date	(9,751	)
Costs incurred	(4,952	)
Total discount				(14,703	)
Discount amortization to-date				985
Carrying amount of Series D Preferred Shares			$	51,282

Preferred Shares

Dividends:

On January 29, 2013, our board of trustees declared a first quarter 2013 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 April 1, 2013 to holders of record on March 1, 2013 and totaled $4.8 million.

On May 14, 2013, our board of trustees declared a second quarter 2013 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 July 1, 2013 to holders of record on June 3, 2013 and totaled $5.1 million.

On July 30, 2013, our board of trustees declared a third quarter 2013 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, 2013 to holders of record on September 3, 2013.

At Market Issuance Sales Agreement (ATM):

On May 21, 2012, we entered into an At Market Issuance Sales Agreement, or Preferred ATM agreement, with MLV & Co. LLC, or MLV, providing that, from time to time during the term of the Preferred ATM agreement, on the terms and subject to the conditions set forth therein, we may issue and sell through MLV, up to 2,000,000 Series A Preferred Shares, up to 2,000,000 Series B Preferred Shares, and up to 2,000,000 Series C Preferred Shares. Unless the Preferred ATM agreement is earlier terminated by MLV or us, the 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 subject to the Preferred ATM agreement. During the six-month period ended June 30, 2013, pursuant to the Preferred ATM agreement we issued a total of 625,000 Series A Preferred Shares at a weighted-average price of $24.00 per share and we received $14.6 million of net proceeds. We did not issue any Series B Preferred Shares or Series C Preferred Shares during the six-month period ended June 30, 2013. From July 1, 2013 through August 5, 2013 we issued a total of 320,000 Series A Preferred Shares pursuant to the ATM at a weighted-average price of $23.75 per share and we received $7.4 million of net proceeds. After reflecting the preferred shares issued through August 5, 2013, 690,712, 1,969,835, and 1,959,900 of Series A Preferred Shares, Series B Preferred Shares, and Series C Preferred Shares, respectively, remain available for issuance under the Preferred ATM agreement.

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Common Shares

Dividends:

On March 15, 2013, the board of trustees declared a $0.12 dividend on our common shares to holders of record as of April 3, 2013. The dividend was paid on April 30, 2013 and totaled $8.3 million.

On June 20, 2013, the board of trustees declared a $0.13 dividend on our common shares to holders of record as of July 12, 2013. The dividend was paid on July 31, 2013 and totaled $9.0 million.

Equity Compensation:

During the six-month period ended June 30, 2013, 54,728 phantom unit awards were redeemed for common shares, a portion of which was withheld in order to satisfy the applicable withholding taxes. These phantom units were fully vested at the time of redemption.

On July 30, 2013, the compensation committee awarded 6,578 restricted common share awards, valued at $0.1 million using our closing stock price of $7.60, to one of the board’s non-management trustees. Three quarters of this award vested immediately and the remainder vests three months after the award date.

On January 29, 2013, the compensation committee awarded 43,536 restricted common share awards, valued at $0.3 million using our closing stock price of $6.89, to six of the board’s non-management trustees. One quarter of these awards vested immediately and the remainder vest over a nine-month period. On January 29, 2013, the compensation committee awarded 369,500 restricted common share awards, valued at $2.6 million using our closing stock price of $6.89, to our executive officers and non-executive officer employees. These awards generally vest over three-year periods.

On January 29, 2013, the compensation committee awarded 1,127,500 stock appreciation rights, or SARs, valued at $1.3 million based on a 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, 2018, the expiration date of the SARs.

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, 2013, we issued a total of 2,343 common shares pursuant to the DRSPP at a weighted-average price of $7.81 per share and we received $0.1 million of net proceeds. As of June 30, 2013, 7,781,137 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, 2013, there were no common shares issued pursuant to this agreement. From July 1, 2013 through August 5, 2013 we issued a total of 287,277 common shares pursuant to this agreement at a weighted-average price of $7.59 per share and we received $2.1 million of net proceeds. After reflecting the common shares issued through August 5, 2013, 9,712,723 common shares, in the aggregate, remain available for issuance under the COD sales agreement.

Common Share Public Offering:

In January 2013 in connection with an underwritten public offering in the fourth quarter of 2012, the underwriters exercised their overallotment option to purchase 1,350,000 additional common shares and we received $7.4 million of proceeds.

In April 2013, we issued 9,200,000 common shares in an underwritten public offering. The public offering price was $7.87 per share and we received $70.2 million of proceeds.

Off-Balance Sheet Arrangements and Commitments

Not applicable.

Critical Accounting Estimates and Policies

Our Annual Report on Form 10-K for the year ended December 31, 2012 contains a discussion of our critical accounting policies. On January 1, 2013 we adopted a new accounting pronouncement and revised our accounting policies as described below. See Note 2 in our unaudited consolidated financial statements as set forth herein. Management discusses our critical accounting policies and management’s judgments and estimates with the audit committee of our board of trustees.

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Recent Accounting Pronouncements

In June 2011, the FASB issued an accounting standard classified under FASB ASC Topic 222, “Comprehensive Income”. This accounting standard amends existing guidance to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by requiring entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued an accounting standard that deferred the new presentation requirements about reclassification adjustments. Both of these accounting standards are effective for fiscal years, and interim periods with those years, beginning after December 15, 2011. The adoption of these standards did not have a material effect on our consolidated financial statements. In February 2013, the FASB issued an accounting standard that requires an entity to present the amounts reclassified out of accumulated other comprehensive income by component either on the face of the statement of operations or in the notes to the financial statements. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. This standard is effective for reporting periods beginning after December 31, 2012. The adoption of this standard did not have a material effect on our consolidated financial statements.

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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, 2013 from the disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2012. Reference is made to Item 7A included in our Annual Report on Form 10-K for the year ended December 31, 2012.

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 that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the three-month period ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

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 one of our investment adviser subsidiaries, Taberna Capital Management, LLC, or TCM. Based on the notice and other communications with SEC staff, we believe this matter concerns TCM’s compliance with securities laws in connection with transactions since January 1, 2009 involving various Taberna securitizations for which TCM served as collateral manager. The SEC staff has subpoenaed testimony and information and we are cooperating fully. Because this matter is ongoing, we cannot predict the outcome at this time and, as a result, no conclusion can be reached as to what impact, if any, this matter may have on TCM or us.

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, 2012.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

As of June 30, 2013, or the effective date, we engaged in a “downREIT” transaction whereby we formed a limited liability company subsidiary, or holdco, and holdco issued its managing class A membership units to our subsidiary, or the class A member, and issued class B membership units, or the class B units, to specified individuals, or the class B members. Prior to this transaction, the class B members indirectly controlled a limited liability company, or the borrower, that was the borrower on mortgage loans and mezzanine loans made by our subsidiaries with respect to a property owned by the borrower. As of the effective date, the class B members caused the contribution of the equity of the borrower to holdco and received 213,958 class B units, in the aggregate, and were credited with capital contributions aggregating approximately $1.6 million.

Subsequent to two years after the effective date, the class B members have redemption rights with respect to their class B units. The class A member may elect in its discretion to acquire some or all of the tendered class B units in exchange for our common shares. One of our common shares would be issued for each class B unit in any redemption other than a redemption in connection with a sale of the underlying property. In the case of such a redemption, the number of common shares issued would be equal to the number of tendered class B units plus an additional number of shares with equivalent fair market value to a distribution to be made in defined circumstances in connection with a sale of the property. The class B members received registration rights with respect to any of our common shares issued in connection with a redemption. The class A units and class B units issued in this transaction were issued in private placement transactions exempt from registration under the Securities Act of 1933, as amended.

Item 5. Other Information.

The disclosure below is intended to be made pursuant to Item 8.01-“Other Events” of Form 8-K.

Arthur Makadon

On July 24, 2013, Arthur Makadon, who had served as a Trustee on the Board of Trustees of RAIT since July 2002, died. The Board of Trustees and management of RAIT extend their condolences to Mr. Makadon’s family.

RAIT 2013-FL1 Securitization

On July 31, 2013, or the closing date, we closed a CMBS securitization transaction structured to be collateralized by $135.0 million of floating rate commercial mortgage loans and participation interests, or the FL1 collateral, that we originated. The CMBS securitization transaction is intended to finance the FL1 collateral on a permanent, non-mark to market and non-recourse basis.

On the closing date, our subsidiary, RAIT 2013-FL1 Trust, or the FL1 issuer, issued classes of investment grade senior notes, or the FL1 senior notes, with an aggregate principal balance of approximately $101.0 million to investors, representing an advance rate of approximately 75%. A RAIT subsidiary received the unrated classes of junior notes, or the FL1 junior notes, including a class with an aggregate principal balance of $34.0 million, and the equity, or the retained interests, of the FL1 issuer. The FL1 senior notes bear interest at a weighted average rate equal to LIBOR plus 1.85%. The stated maturity of the FL1 notes is January 2029, unless redeemed or repaid prior thereto, though we expect the average life of the notes to be less. Subject to certain conditions, beginning in August 2015 or upon defined tax events, the FL1 issuer may redeem the FL1 senior notes, in whole but not in part, at the direction of defined holders of FL1 junior notes that we hold.

On the closing date, the FL1 issuer purchased FL1 collateral with an aggregate principal balance of approximately $71.0 million and approximately $65.0 million was reserved for the expected acquisition by the FL1 issuer of an additional $65.0 million of FL1 collateral meeting defined eligibility criteria during a ramp-up period ending by February 28, 2014, which FL1 Collateral will be originated, selected and serviced by our subsidiary. The FL1 issuer will not make any investments after the termination of the ramp-up period and, if any reserved amounts remain at that time, those amounts would be distributed by the FL1 issuer to pay down the FL1 senior notes. We expect that the FL1 issuer will fully invest the reserved amounts by the end of the ramp-up period resulting in the acquisition of $135.0 million of F1 collateral, in the aggregate, assuming no material market disruptions. The net proceeds we received from this CMBS securitization transaction were used to repay approximately $22.0 million of borrowings primarily under our commercial mortgage facility that had originally financed the FL1 collateral sold on the closing date.

In connection with the CMBS securitization transaction, our subsidiaries made certain customary representations, warranties and covenants. If there is a material breach of those representations and warranties or a material defect in the documentation of any of the FL1 collateral, then our subsidiary may be required to either cure the breach, repurchase the affected FL1 collateral from the FL1 issuer, replace the FL1 collateral with another assets meeting the eligibility criteria of the FL1 collateral or make a loss of value payment, as the case may be. Our retained interests will be subordinate to interests of holders of the FL1 senior notes. Upon the occurrence of defined events, our role as servicer may be terminated.

The notes issued in the CMBS securitization were sold in inside the United States to (1) qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended, or the Securities Act, and (2) to other institutional investors that are accredited investors within the meaning of rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act, and outside the United States to non-U.S. persons in reliance on Regulation S under the Securities Act. These notes were not registered under the Securities Act or applicable state or foreign securities laws and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state laws. An affiliate of the lender under our commercial mortgage facility served as the placement agent in the offering of the FL1 senior notes.

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.

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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, 2013	By:	/s/ Scott F. Schaeffer
		Scott F. Schaeffer, Chairman of the Board, Chief Executive Officer and President
		(On behalf of the registrant and as its Principal Executive Officer)
Date: August 7, 2013	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)

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EXHIBIT INDEX

Exhibit Number	Description of Documents
3.1.1	Amended and Restated Declaration of Trust of RAIT Financial Trust (“RAIT”). (1)
3.1.2	Articles of Amendment to Amended and Restated Declaration of Trust of RAIT. (2)
3.1.3	Articles of Amendment to Amended and Restated Declaration of Trust of RAIT. (3)
3.1.4	Certificate of Correction to the Amended and Restated Declaration of RAIT. (4)
3.1.5	Articles of Amendment to Amended and Restated Declaration of RAIT. (5)
3.1.6	Articles of Amendment to Amended and Restated Declaration of RAIT. (6)
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. (7)
3.1.8	Certificate of Correction to the Series A Articles Supplementary. (7)
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. (8)
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. (9)
3.1.11	Articles Supplementary relating to Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares. (10)
3.1.12	Certificate of Correction relating to Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares. (11)
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. (12)
3.1.14	Articles Supplementary relating to the Series E Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series E Preferred Shares”) of RAIT. (13)
3.1.15	Amendment dated November 30, 2012 to the Series D Articles Supplementary. (13)
3.2	By-laws of RAIT. (14).
4.1.1	Form of Certificate for Common Shares of Beneficial Interest. (6)
4.1.2	Form of Certificate for the Series A Preferred Shares. (15)
4.1.3	Form of Certificate for the Series B Preferred Shares. (8)
4.1.4	Form of Certificate for the Series C Preferred Shares. (9)
4.1.5	Form of Certificate for Series D Preferred Shares. (16)
4.1.6	Form of Certificate for Series E Preferred Shares. (16)
4.2.1	Indenture dated as of April 18, 2007 among RAIT Financial Trust (“RAIT”), as issuer, RAIT Partnership, L.P. (“RAIT Partnership”), and RAIT Asset Holdings, LLC, as guarantors, and Wells Fargo Bank, N.A., as trustee. (17)
4.2.2	Registration Rights Agreement dated as of April 18, 2007 between RAIT and Bear, Stearns & Co. Inc. (17)
4.3.1	Base Indenture dated as of March 21, 2011 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. (18)
4.3.2	Supplemental Indenture dated as of March 21, 2011 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. (18)
4.4	Indenture dated as of October 5, 2011 between RAIT and Wilmington Trust, National Association, as trustee. (19)
4.5.1	Registration Rights Agreement dated as of October 1, 2012 by and among RAIT and ARS VI Investor I, LLC (“ARS VI”). (12)

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Exhibit Number	Description of Documents
4.5.2	Common Share Purchase Warrant No. 1 dated October 17, 2012 issued by RAIT to ARS VI. (16)
4.5.3	Common Share Appreciation Right No. 1 dated October 17, 2012 issued by RAIT to ARS VI. (16)
4.5.4	Common Share Purchase Warrant No. 2 dated November 15, 2012 issued by RAIT to ARS VI. (20)
4.5.5	Common Share Appreciation Right No. 2 dated November 15, 2012 issued by RAIT to ARS VI. (20)
4.5.6	Common Share Purchase Warrant No. 3 dated December 18, 2012 issued by RAIT to ARS VI. (21)
4.5.7	Common Share Appreciation Right No. 3 dated December 18, 2012 issued by RAIT to ARS VI. (21)
	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	Separation Agreement between Jack E. Salmon and RAIT with an execution date of February 1, 2013. (22)
10.2.1	IAP Form of Share Appreciation Rights Award Agreement adopted January 29, 2013. (22)
10.2.2	IAP Form of Share Award Grant Agreement for participants other than non-management trustees adopted January 29, 2013. (22)
10.2.3	IAP Form of Share Award Grant Agreement for non- management trustees adopted January 29, 2013.(23)
12.1	Statements regarding computation of ratios as of June 30, 2013. *
31.1	Rule 13a-14(a) Certification by the Chief Executive Officer of RAIT. *
31.2	Rule 13a-14(a) Certification by the Chief Financial Officer of RAIT. *
32.1	Section 1350 Certification by the Chief Executive Officer of RAIT. *
32.2	Section 1350 Certification by the Chief Financial Officer of RAIT. *
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, 2013 is formatted in XBRL interactive data files: (i) Consolidated Statements of Operations for the three month and six month periods ended June 30, 2013 and 2012; (ii) Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012; (iii) Consolidated Statements of Comprehensive Income (Loss) for the three month and six month periods ended June 30, 2013 and 2012; (iv) Consolidated Statements of Cash Flows for the three month and six month periods ended June 30, 2013 and 2012; and (v) Notes to Unaudited Consolidated Financial Statements. The information in this exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document. *

* Filed herewith

(1) Incorporated by reference to RAIT’s Registration Statement on Form S-11 (Registration No. 333-35077).

(2) Incorporated by reference to RAIT’s Registration Statement on Form S-11 (Registration No. 333-53067).

(3) Incorporated by reference to RAIT’s Registration Statement on Form S-2 (Registration No. 333-55518).

(4) Incorporated by reference to RAIT’s Form 10-Q for the Quarterly Period ended March 31, 2002 (File No. 1-14760).

(5) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 15, 2006 (File No. 1-14760).

(6) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on July, 1 2011 (File No. 1-14760).

(7) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 18, 2004 (File No. 1-14760).

(8) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 1, 2004 (File No. 1-14760).

(9) Incorporated by reference to RAIT’s Form 8-A as filed with the SEC on June 29, 2007 (File No. 1-14760).

(10) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on May 25, 2012 (File No. 1-14760).

(11) Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended June 30, 2012 (File No. 1-14760).

(12) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 4, 2012 (File No. 1-14760).

(13) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 4, 2012 (File No.1-14760).

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

(15) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 22, 2004 (File No. 1-14760).

(16) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 23, 2012 (File No. 1-14760).

(17) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on April 18, 2007 (File No. 1-14760).

(18) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 22, 2011 (File No. 1-14760).

(19) Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended September 30, 2011 (File No. 1-14760).

(20) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on November 21, 2012 (File No. 1-14760).

(21) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on December 18, 2012 (File No. 1-14760).

(22) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on February 1, 2013. (File No. 1-14760).

(23) Incorporated by reference to RAIT’s Form 10-K for the fiscal year ended December 31, 2012 (File No. 1-14760).

49