10-Q 1 ras-10q_20190331.htm 10-Q1 ras-10q_20190331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

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.

 

 

 

Two Logan Square, 100 N. 18th Street, 23rd Floor, Philadelphia, PA

 

19103

Address of Principal Executive Offices

 

Zip Code

(215) 207-2100

Registrant’s Telephone Number, Including Area Code

N/A

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Securities registered pursuant to Section 12(b) of the Act: None

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Not applicable

Not applicable

Not applicable

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes     No 

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

Large accelerated filer 

Accelerated filer 

Non-accelerated filer  

Smaller reporting company  

 

Emerging growth company   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

 

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

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes     No  

 

A total of 1,849,252 common shares of beneficial interest, par value $1.50 per share, of the registrant were outstanding as of November 1, 2019.

 

 

 

 

 

 


RAIT FINANCIAL TRUST

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

 

 

PART I—FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

1

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

 

1

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018

 

2

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2018

 

3

 

 

 

 

 

 

 

Consolidated Statement of Changes in Equity for the Three Months Ended March 31, 2019 and 2018

 

4

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

 

5

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

6

 

 

 

 

 

Item 2.

 

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

 

37

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

48

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

49

 

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

50

 

 

 

 

 

Item 1A.

 

Risk Factors

 

51

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

53

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

53

 

 

 

 

 

Item 6.

 

Exhibits

 

54

 

 

 

 

 

 

 

SIGNATURES

 

58

 

 

 


PART I—FINANCIAL INFORMATION

Item  1.

Financial Statements

RAIT Financial Trust

Consolidated Balance Sheets

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

 

 

 

As of March 31, 2019

 

 

As of December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Investment in mortgage loans, held for investment:

 

 

 

 

 

 

 

 

Commercial mortgage loans, mezzanine loans, and preferred equity interests

 

$

438,244

 

 

$

502,397

 

Allowance for loan losses

 

 

(20,727

)

 

 

(22,336

)

Total investment in mortgage loans, held for investment, net (including $409,041 and $467,656 held by consolidated VIEs, respectively)

 

 

417,517

 

 

 

480,061

 

Investment in mortgage loans, held for sale

 

 

5,131

 

 

 

4,873

 

Investments in real estate, net of accumulated depreciation of $9,742 and $8,768, respectively (including $25,264 and $18,020 held by consolidated VIEs, respectively)

 

 

106,996

 

 

 

107,824

 

Investments in real estate, held for sale

 

 

7,448

 

 

 

4,918

 

Cash and cash equivalents

 

 

39,139

 

 

 

42,453

 

Restricted cash

 

 

65,000

 

 

 

63,067

 

Accrued interest receivable

 

 

17,399

 

 

 

18,044

 

Other assets

 

 

13,608

 

 

 

10,807

 

Intangible assets, net of accumulated amortization of $5,876 and $5,703, respectively

 

 

1,544

 

 

 

1,717

 

Total assets

 

$

673,782

 

 

$

733,764

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Indebtedness, net of unamortized discounts, premiums and deferred financing costs of $16,033 and $16,643 respectively (including $390,675 and $440,776 held by consolidated VIEs, respectively)

 

$

575,263

 

 

$

625,916

 

Accrued interest payable

 

 

2,352

 

 

 

2,401

 

Accounts payable and accrued expenses

 

 

2,671

 

 

 

3,330

 

Borrowers' escrows

 

 

26,074

 

 

 

31,343

 

Other liabilities

 

 

4,479

 

 

 

2,268

 

Total liabilities

 

 

610,839

 

 

 

665,258

 

Preferred shares, $0.01 par value per share, 25,000,000 shares authorized;

 

 

 

 

 

 

 

 

7.75% Series A cumulative redeemable preferred shares, liquidation preference $25.00 per share, 8,069,288 shares authorized, 5,727,500 and 5,727,500 shares issued and outstanding, respectively

 

 

57

 

 

 

57

 

8.375% Series B cumulative redeemable preferred shares, liquidation preference $25.00 per share, 4,300,000 shares authorized, 2,508,797 and 2,508,797 shares issued and outstanding, respectively

 

 

25

 

 

 

25

 

8.875% Series C cumulative redeemable preferred shares, liquidation preference $25.00 per share, 3,600,000 shares authorized, 1,758,030 and 1,758,030 shares issued and outstanding, respectively

 

 

18

 

 

 

18

 

Common shares, $1.50 par value per share, 200,000,000 shares authorized 1,849,530 and 1,850,451 issued and outstanding, respectively, including 4,997 and 6,844 unvested restricted common share awards, respectively

 

 

2,774

 

 

 

2,776

 

Additional paid in capital

 

 

2,102,363

 

 

 

2,102,274

 

Accumulated other comprehensive income (loss)

 

 

12,053

 

 

 

11,473

 

Retained earnings (deficit)

 

 

(2,054,347

)

 

 

(2,048,117

)

Total shareholders' equity

 

 

62,943

 

 

 

68,506

 

Total liabilities and shareholders' equity

 

$

673,782

 

 

$

733,764

 

 

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 Months Ended March 31,

 

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

Investment interest income

 

$

6,921

 

 

$

18,865

 

Investment interest expense

 

 

(4,163

)

 

 

(10,549

)

Net interest margin

 

 

2,758

 

 

 

8,316

 

Property income

 

 

3,307

 

 

 

8,816

 

Fee and other income

 

 

88

 

 

 

1,209

 

Total revenue

 

 

6,153

 

 

 

18,341

 

Expenses:

 

 

 

 

 

 

 

 

Interest expense

 

 

3,996

 

 

 

6,771

 

Real estate operating expense

 

 

2,003

 

 

 

5,790

 

Property management expenses

 

 

-

 

 

 

1,931

 

General and administrative expenses:

 

 

 

 

 

 

 

 

Compensation expense

 

 

2,229

 

 

 

2,925

 

Other general and administrative expense

 

 

3,451

 

 

 

6,338

 

Total general and administrative expenses

 

 

5,680

 

 

 

9,263

 

Acquisition and integration expenses

 

 

-

 

 

 

133

 

Provision (benefit) for loan losses

 

 

(583

)

 

 

8,032

 

Depreciation and amortization expense

 

 

1,384

 

 

 

3,443

 

Total expenses

 

 

12,480

 

 

 

35,363

 

Operating (Loss) Income

 

 

(6,327

)

 

 

(17,022

)

Interest and other income (expense), net

 

 

104

 

 

 

349

 

Gains (losses) on assets

 

 

303

 

 

 

(937

)

Gains (losses) on extinguishments of debt

 

 

(285

)

 

 

(991

)

Asset impairment

 

 

(26

)

 

 

(9,191

)

Change in fair value of financial instruments

 

 

30

 

 

 

87

 

Income (loss) before taxes

 

 

(6,201

)

 

 

(27,705

)

Income tax benefit (provision)

 

 

-

 

 

 

-

 

Net income (loss)

 

 

(6,201

)

 

 

(27,705

)

(Income) loss allocated to preferred shares

 

 

(5,063

)

 

 

(6,389

)

Net income (loss) allocable to common shares

 

$

(11,264

)

 

$

(34,094

)

Earnings (loss) per share-Basic:

 

 

 

 

 

 

 

 

Earnings (loss) per share-Basic

 

$

(6.11

)

 

$

(18.55

)

Weighted-average shares outstanding-Basic

 

 

1,844,037

 

 

 

1,837,493

 

Earnings (loss) per share-Diluted:

 

 

 

 

 

 

 

 

Earnings (loss) per share-Diluted

 

$

(6.11

)

 

$

(18.55

)

Weighted average shares outstanding-Diluted

 

 

1,844,037

 

 

 

1,837,493

 

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 Months Ended March 31,

 

 

 

2019

 

 

2018

 

Net income (loss)

 

$

(6,201

)

 

$

(27,705

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Unrealized gains (losses) from change in fair value based on instrument specific credit risk

 

 

580

 

 

 

1,266

 

Total other comprehensive income (loss)

 

 

580

 

 

 

1,266

 

Comprehensive income (loss)

 

$

(5,621

)

 

$

(26,439

)

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

 

 

 

3


RAIT Financial Trust

Consolidated Statement of Changes in Equity

(Unaudited and dollars in thousands, except share information)

 

For the Three Months Ended March 31, 2019

 

 

Preferred

Shares—

Series A

 

Par Value

Preferred

Shares—

Series A

 

Preferred

Shares—

Series B

 

Par Value

Preferred

Shares—

Series B

 

Preferred

Shares—

Series C

 

Par Value

Preferred

Shares—

Series C

 

Common

Shares

 

Par

Value

Common

Shares

 

Additional

Paid In

Capital

 

AOCI

 

Retained

Earnings

(Deficit)

 

Total

Shareholders’

Equity

 

Total

Equity

 

Balance, December 31, 2018

 

5,727,500

 

$

57

 

 

2,508,797

 

$

25

 

 

1,758,030

 

$

18

 

 

1,850,451

 

$

2,776

 

$

2,102,274

 

$

11,473

 

$

(2,048,117

)

$

68,506

 

$

68,506

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,201

)

 

(6,201

)

 

(6,201

)

Common dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(29

)

 

(29

)

 

(29

)

Other comprehensive income (loss), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

580

 

 

 

 

 

580

 

 

580

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

89

 

 

 

 

 

 

 

 

89

 

 

89

 

Common shares activity related to equity compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(921

)

 

(2

)

 

 

 

 

 

 

 

 

 

 

(2

)

 

(2

)

Balance, March 31, 2019

 

5,727,500

 

$

57

 

 

2,508,797

 

$

25

 

 

1,758,030

 

$

18

 

 

1,849,530

 

$

2,774

 

$

2,102,363

 

$

12,053

 

$

(2,054,347

)

$

62,943

 

$

62,943

 

 

 

 

For the Three Months Ended March 31, 2018

 

 

 

 

 

Preferred

Shares—

Series A

 

Par Value

Preferred

Shares—

Series A

 

Preferred

Shares—

Series B

 

Par Value

Preferred

Shares—

Series B

 

Preferred

Shares—

Series C

 

Par Value

Preferred

Shares—

Series C

 

Common

Shares

 

Par

Value

Common

Shares

 

Additional

Paid In

Capital

 

AOCI

 

Retained

Earnings

(Deficit)

 

Total

Shareholders’

Equity

 

Noncontrolling

Interests

 

Total

Equity

 

Balance, December 31, 2017

 

5,344,353

 

$

53

 

 

2,340,969

 

$

23

 

 

1,640,425

 

$

17

 

 

1,860,903

 

$

2,791

 

$

2,094,804

 

$

0

 

$

(1,921,533

)

$

176,155

 

$

3,632

 

$

179,787

 

Cumulative effect adjustments from adoption of recently issued accounting pronouncements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,257

 

 

(8,496

)

 

761

 

 

 

 

 

761

 

Adjusted Balance, January 1, 2018

 

5,344,353

 

$

53

 

 

2,340,969

 

$

23

 

 

1,640,425

 

$

17

 

 

1,860,903

 

$

2,791

 

$

2,094,804

 

$

9,257

 

$

(1,930,029

)

$

176,916

 

$

3,632

 

$

180,548

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27,705

)

 

(27,705

)

 

 

 

 

(27,705

)

Preferred dividends paid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,389

)

 

(6,389

)

 

 

 

 

(6,389

)

Common dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(105

)

 

(105

)

 

 

 

 

(105

)

Other comprehensive income (loss), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,266

 

 

 

 

 

1,266

 

 

 

 

 

1,266

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(539

)

 

 

 

 

 

 

 

(539

)

 

 

 

 

(539

)

Issuance of noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

76

 

 

76

 

Acquisition of noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,239

 

 

 

 

 

 

 

 

3,239

 

 

(3,582

)

 

(343

)

Common shares activity related to equity compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,369

)

 

(14

)

 

(57

)

 

 

 

 

 

 

 

(71

)

 

 

 

 

(71

)

Balance, March 31, 2018

 

5,344,353

 

$

53

 

 

2,340,969

 

$

23

 

 

1,640,425

 

$

17

 

 

1,851,535

 

$

2,777

 

$

2,097,447

 

$

10,523

 

$

(1,964,228

)

$

146,612

 

$

126

 

$

146,738

 

 

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

 

 

 

4


 

RAIT Financial Trust

Consolidated Statements of Cash Flows

(Unaudited and dollars in thousands) 

 

 

 

For the Three Months Ended March 31,

 

 

 

 

2019

 

 

2018

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(6,201

)

 

$

(27,705

)

 

Adjustments to reconcile net income (loss) to cash flow from operating activities:

 

 

 

 

 

 

 

 

 

Provision (benefit) for loan losses

 

 

(583

)

 

 

8,032

 

 

Share-based compensation expense

 

 

89

 

 

 

(539

)

 

Depreciation and amortization expense

 

 

1,384

 

 

 

3,443

 

 

Amortization of deferred financing costs and debt discounts

 

 

933

 

 

 

3,046

 

 

(Amortization) of loan origination fees and costs, net

 

 

(280

)

 

 

(383

)

 

(Amortization) of above/below market leases

 

 

(16

)

 

 

(146

)

 

(Gains) Losses on assets

 

 

(303

)

 

 

937

 

 

(Gains) Losses on extinguishments of debt

 

 

285

 

 

 

991

 

 

Asset impairment

 

 

26

 

 

 

9,191

 

 

Change in fair value of financial instruments

 

 

(30

)

 

 

(87

)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

Decrease in accrued interest receivable

 

 

645

 

 

 

317

 

 

(Increase) decrease in other assets

 

 

(774

)

 

 

1,054

 

 

(Decrease) increase in accrued interest payable

 

 

(49

)

 

 

984

 

 

(Decrease) in accounts payable and accrued expenses

 

 

(695

)

 

 

(1,427

)

 

(Decrease) increase in other liabilities

 

 

(130

)

 

 

(22

)

 

Cash flows provided by (used in) operating activities

 

 

(5,699

)

 

 

(2,314

)

 

Investing activities:

 

 

 

 

 

 

 

 

 

Origination of loans for investment

 

 

(4,442

)

 

 

(50,492

)

 

Principal repayments on loans

 

 

60,027

 

 

 

136,664

 

 

Investments in real estate

 

 

(147

)

 

 

(828

)

 

Proceeds from sale of loans originated for investment

 

 

 

 

 

89,583

 

 

Proceeds from the disposition of real estate

 

 

4,918

 

 

 

16,607

 

 

(Decrease) in borrowers' escrows

 

 

(4,745

)

 

 

(25,487

)

 

Cash flows provided by (used in) investing activities

 

 

55,611

 

 

 

166,047

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

Repayments on secured credit facilities and loans payable on real estate

 

 

(189

)

 

 

(332

)

 

Repayments and repurchase of CDO notes payable and floating rate securitizations

 

 

(51,073

)

 

 

(90,796

)

 

Repurchase of convertible notes and senior notes

 

 

 

 

 

(5,722

)

 

Repayments of senior secured notes

 

 

 

 

 

(2,000

)

 

Net proceeds (repayments) related to floating rate loan repurchase agreements

 

 

 

 

 

(22,313

)

 

Acquisition of noncontrolling interests

 

 

 

 

 

(343

)

 

Issuance of noncontrolling interests

 

 

 

 

 

76

 

 

Common share issuance, net of costs incurred

 

 

(2

)

 

 

(71

)

 

Repurchase of Series D preferred shares

 

 

 

 

 

(4,863

)

 

Distributions paid to preferred shareholders

 

 

 

 

 

(11,113

)

 

Distributions paid to common shareholders

 

 

(29

)

 

 

(105

)

 

Cash flows (used in) provided by financing activities

 

 

(51,293

)

 

 

(137,582

)

 

Net change in cash, cash equivalents, and restricted cash

 

 

(1,381

)

 

 

26,151

 

 

Cash, cash equivalents, and restricted cash at the beginning of the period

 

 

105,520

 

 

 

211,294

 

 

Cash, cash equivalents, and restricted cash at the end of the period

 

$

104,139

 

 

$

237,445

 

 

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

 

 

5


 

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2019

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

 

 

NOTE 1: THE COMPANY

 

RAIT Financial Trust is a self-managed and self-advised Maryland real estate investment trust, or REIT, focused on managing a portfolio of commercial real estate, or CRE, loans and properties.  References to “RAIT”, “we”, “us”, and “our” refer to RAIT Financial Trust and its subsidiaries, unless the context otherwise requires.  

 

On August 30, 2019, RAIT and its affiliates RAIT Funding LLC (“RAIT Funding”), RAIT General, Inc. (“RAIT General”), RAIT Limited, Inc. (“RAIT Limited”), Taberna Realty Finance Trust (“TRFT”), RAIT JV TRS, LLC, and RAIT JV TRS Sub, LLC (each, a “Debtor”, and together, the “Debtors”) filed voluntary bankruptcy cases (the “Chapter 11 Cases”) under chapter 11, Title 11 of the U.S. Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). No other subsidiaries of RAIT filed for bankruptcy protection. The Chapter 11 Cases are jointly administered under the caption In re: RAIT Funding, LLC, a Delaware limited liability company, et. al. Each of the Debtors will continue to operate its business as a “debtor in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. The Bankruptcy Court entered orders approving a variety of first-day relief designed primarily to minimize the impact of the Chapter 11 Cases on our operations and employees. We expect to continue our operations during the pendency of the Chapter 11 Cases.

 

Immediately prior to the filing of the Chapter 11 Cases, on August 30, 2019, RAIT, RAIT General, RAIT Limited and TRFT (together, the “Sellers”), entered into an Equity and Asset Purchase Agreement (the “Purchase Agreement”) with CF RFP Holdings LLC, a Delaware limited liability company and an entity owned by funds managed by affiliates of Fortress Investment Group LLC (“Buyer”), pursuant to which, among other things, Buyer agreed to purchase certain subsidiaries and assets of the Sellers (together, the “Purchased Assets”) for a purchase price of $174,424, as adjusted pursuant to a cash adjustment (the “Purchase Price”), including the assumption of certain liabilities. Buyer deposited $8,721 as an earnest money deposit. The transactions contemplated by the Purchase Agreement (the “Transactions”) will be effected pursuant to a sale process under Section 363 of the Bankruptcy Code.   On October 4, 2019, RAIT and the Sellers and the Buyer entered into Amendment No. 1 (the “Amendment”) to the Purchase Agreement which, among other things, (i) provided for an additional deposit by the Buyer in the amount of $8,721 if Buyer is the winning bidder or back-up bidder in the auction contemplated by the Purchase Agreement or if there is no such auction and (ii) added a mechanism to adjust the Purchase Price for approved expenses associated with certain new, renewed, modified or amended leases that with the consent of Buyer are entered into by a Seller or an affiliate of Seller after the date of the Amendment and prior to the closing of the transactions contemplated by the Purchase Agreement. The Amendment further provided that if Buyer does not approve a proposed new, renewed, modified or amended lease or, if Buyer approves a proposed new, renewed, modified or amended lease, but does not approve all expenses associated therewith, the Sellers will not be in breach of the Purchase Agreement for the consequences of the determination not to enter into such new, renewed, modified or amended lease or make such unapproved payments, as applicable.

On August 29, 2019, RAIT entered into a Restructuring and Plan Support Agreement with TRFT and TP Management LLC, an affiliate of Buyer, in its capacity as delegate collateral manager (“TPM”) (the “Taberna RSA”). On August 31, 2019, RAIT entered into a Restructuring and Plan Support Agreement with RAIT Funding and Kodiak CDO I., Ltd., as holder of certain preferred securities (“Kodiak”, and together with TPM, the “RSA Counterparties”) (the “Kodiak RSA”, and together with the Taberna RSA, the “RSAs”). TPM is the collateral manager and Kodiak is the holder of certain securities that are collateralized by the 2035 Note (defined below, and also referred to as the junior subordinated note, at fair value) and the 2037 Note (defined below, and also referred to as the junior subordinated note, at amortized cost), respectively. Pursuant to the RSAs, each of the RSA Counterparties agreed, among other things, to support, and take reasonable necessary actions in furtherance of, the Transactions, including, among other things, the consummation of the sale of the Purchased Assets under Section 363 of the Bankruptcy Code and support the confirmation of a plan of reorganization of the Debtors. Pursuant to the RSAs, each of the RSA Counterparties has agreed, subject to certain conditions, to accept less than the total unpaid amounts due under the 2035 Note and the 2037 Note. The RSAs contain customary representations and warranties by RAIT, the applicable RAIT subsidiary and the applicable RSA Counterparty. RAIT, the applicable RAIT subsidiary and the applicable RSA Counterparty may terminate their respective RSA under certain circumstances, including, among other things, (a) the failure to satisfy certain bankruptcy-related milestones, (b) the entry of certain orders by, or upon certain actions taken by, the Bankruptcy Court, (c) breaches of representations and obligations under the applicable RSA, and (d) upon the occurrence of a material adverse change.    

Subject to certain specific exceptions under the Bankruptcy Code, the Chapter 11 Cases automatically stayed most judicial or administrative actions against the Debtors as well as efforts by creditors to collect on or otherwise exercise rights or remedies with

6


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2019

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

 

respect to pre-petition claims. As a result, for example, most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the Debtors, or to collect on or otherwise exercise rights or remedies with respect to a pre-petition claim are stayed.

On October 2, 2019, the Bankruptcy Court entered an order (the “Bidding Procedures Order”) approving the bidding procedures (the “Bidding Procedures”) by which the Debtors expect to solicit and select the highest and otherwise best offer for the sale (the “Sale”) of the Purchased Assets, establishing related dates and deadlines, approving the Debtor’s selection of the Buyer as the “stalking horse bidder,” the break-up fee and expense reimbursement contemplated by the Purchase Agreement, approving the process of any auction that might be required under the Bidding Procedures, and granting related relief.  Pursuant to the Bidding Procedures Order, the Debtors intend to sell all of their right, title and interest in and to the Purchased Assets free and clear of any pledges, liens, security interests, encumbrances, claims, charges, options, and interests thereon to the maximum extent permitted by Section 363 of the Bankruptcy Code. The deadline for the submission of bids that satisfies the requirements of the Bidding Procedures Order is November 27, 2019 at 12:00 p.m. (prevailing Eastern Time).

 

On September 27, 2019, the Debtors filed with the Bankruptcy Court its schedules of assets and liabilities and statements of financial affairs setting forth, among other things, the assets and liabilities of each of the Debtors, subject to the assumptions filed in connection therewith. These schedules and statements of financial affairs may be subject to further amendment or modification after filing. On October 14, 2019, the Debtors filed with the Bankruptcy Court its disclosure statement for Debtors’ Joint Chapter 11 Plan (the “Disclosure Statement”) and the Debtors’ Joint Chapter 11 Plan (the “Plan”). 

 

Under the priority requirements established by the Bankruptcy Code, pre-petition and post-petition liabilities to creditors must be satisfied in full before the holders of our outstanding preferred shares and common shares are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery for creditors, if any, will not be determined until confirmation and implementation of a plan of reorganization. The outcome of the Chapter 11 Cases remains uncertain at this time and, as a result, we cannot accurately estimate the amounts or value of distributions that creditors may receive. The Plan contemplates that our senior notes, which are publicly traded, RAIT’s 7.125% Senior Notes due 2019 (the “7.125% Senior Notes”) and 7.625% Senior Notes due 2024 (the “7.625% Senior Notes,” and, together with the 7.125% Senior Notes, the “Senior Notes”), will be paid all outstanding principal and all accrued and unpaid interest as of (but excluding) the petition date in accordance with the Bankruptcy Code. The Plan contemplates that our junior subordinated notes will receive less than the total unpaid amounts due under each note consistent with the RSAs. The Plan contemplates that our outstanding preferred shares and common shares will be cancelled upon the effective date of the Plan and that the holders of our outstanding preferred shares and common shares will be entitled to no recovery. Article III of the Disclosure Statement sets forth a summary of the Plan, including a Plan Summary Table summarizing the classification and treatment of claims, along with projected recoveries for each class, all of which is subject to all the qualifications and disclaimers set forth in the Plan.

The filing of the Chapter 11 Cases with the Bankruptcy Court constituted an “Event of Default” under each of: (a) that certain Indenture, dated as of December 10, 2013, by and between RAIT and Wells Fargo Bank, National Association, as trustee, as subsequently modified by supplemental indentures setting forth the terms of the 7.125% Senior Notes (such indenture, the “Supplemental Indenture”) and 7.625% Senior Notes, (b) that certain Junior Subordinated Indenture, dated February 12, 2007, by and between RAIT Funding and The Bank of New York Trust Company, National Association, as Trustee, relating to the 2037 Note, and (c) that certain Junior Subordinated Indenture, dated October 25, 2010, by and between TRFT and Wells Fargo Bank, National Association, as Trustee, relating to the 2035 Note (collectively, the “Debt Instruments”). We refer to the Events of Default described in this paragraph as the “Bankruptcy Events of Default.” Each of the Debt Instruments provides that upon the occurrence of such an Event of Default, all obligations of RAIT or its applicable affiliate thereunder are accelerated and the principal and accrued interest due thereunder shall be automatically and immediately due and payable. Any efforts to enforce such payment obligations under the Debt Instruments were automatically stayed as a result of the filing of the Chapter 11 Cases with the Bankruptcy Court, and the respective creditors’ rights of enforcement in respect of the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. As of the date hereof, RAIT or its applicable affiliates had (i) $65,356 of principal amount of 7.125% Senior Notes outstanding, (ii) $56,324 of principal amount of 7.625% Senior Notes outstanding, (iii) $25,100 of principal amount of the 2037 Note, or the junior subordinated note, at amortized cost, outstanding and (iv) $18,671 of principal amount of the 2035 Note, or the junior subordinated note, at fair value, outstanding.

Furthermore, RAIT’s failure to pay the principal amount of 7.125% Senior Notes by their maturity date on August 30, 2019 constituted an “Event of Default” under the Supplemental Indenture.

7


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2019

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

 

 

The Plan contemplates the appointment of a Plan Administrator (the “Plan Administrator”) to implement the Plan and to distribute any proceeds of the Plan upon confirmation of the Plan by the Bankruptcy Court. We expect that, for the duration of the of the Chapter 11 Cases, our operations will be subject to significant risks and uncertainties associated with Chapter 11 Cases. As a result of these significant risks and uncertainties, our assets, liabilities, shareholders’ equity (deficit), officers and/or trustees could be significantly different following the outcome of the Chapter 11 Cases, and the description of our operations, equity, assets and liabilities included in this report may not accurately reflect our operations, assets and liabilities following the conclusion of the Chapter 11 Cases.

 

Any fair values utilized or disclosed in our consolidated financial statements to determine the amounts of our assets, liabilities, shareholders’ equity or otherwise were developed for the purpose of complying with the accounting principles established for fair value measurements, as described below. The fair values of our assets, liabilities, shareholders’ equity or otherwise for enterprise value in our Chapter 11 Cases or as a component of the Plan may reflect differing assumptions and methodologies. These estimates of fair value will be subject to a number of approvals and reviews and therefore may be materially different than any fair values utilized in our consolidated financial statements.

 

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, 2018 included in our Annual Report on Form 10-K, or the Annual Report. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position and consolidated results of operations, equity 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.

 

The consolidated statement of cash flows for the three-month period ended March 31, 2018 includes the impact of correcting the reporting of certain activity that occurred in the three-month period ended March 31, 2018. Specifically, the correction re-classified cash proceeds from certain loan sales that were previously reported within cash flows from operating activities and should have been reported within cash flows from investing activities. The impact of this was a decrease to cash flows from operating activities and an increase to cash flows from investing activities of $89,583 for the three-month period ended March 31, 2018. This correction had no impact to cash and cash equivalents as of March 31, 2018, nor did it impact any other consolidated financial statement amounts as of March 31, 2018 or for the three-month period ended March 31, 2018.

 

b. Going Concern Considerations

 

Under the accounting guidance related to the presentation of financial statements, an entity is required to evaluate on a quarterly basis whether the entity’s current financial condition, including its liquidity sources at the date that the financial statements are issued, will enable the entity to meet its obligations arising within one year of the date the entity’s financial statements are issued and to make a determination as to whether it is probable, under the application of this accounting guidance, that the entity will be able to continue as a going concern over the applicable period. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments that might be necessary should RAIT be unable to continue as a going concern. As a result of the considerations articulated below, there is substantial doubt about RAIT’s ability to continue as a going concern within one year after the date that the financial statements are issued.

 

Analysis.  In applying the accounting guidance, management considered RAIT’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows and RAIT’s conditional and unconditional obligations due over the next twelve months.  Management considered the following: (i) the impacts of the Chapter 11 Cases including the Events of Default as described in Note 1: The Company, and (ii) RAIT’s recurring costs of operating its business.

8


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2019

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

 

 

As described in Note 1: The Company, the filing of the Chapter 11 Cases with the Bankruptcy Court triggered the Bankruptcy Events of Default and RAIT’s failure to pay the principal amount of the 7.125% Senior Notes by their maturity date on August 30, 2019 also constituted an Event of Default. Each of the Debt Instruments provides that upon the occurrence of such an Event of Default, all obligations of RAIT and/or its applicable affiliates thereunder were accelerated and the principal and accrued interest due thereunder was automatically and immediately due and payable. Any efforts to enforce such payment obligations under the Debt Instruments are automatically stayed pursuant to Section 362 of the Bankruptcy Code, and the respective creditors’ rights of enforcement in respect of the Debt Instruments are limited. As of the date hereof, the Debt Instruments of RAIT and/or its applicable affiliates had (i) $65,356 of principal amount of 7.125% Senior Notes outstanding, (ii) $56,324 of principal amount of 7.625% Senior Notes outstanding, (iii) $25,100 of principal amount of the 2037 Note, or the junior subordinated note, at amortized cost, outstanding, and (iv) $18,671 of principal amount of the 2035 Note, or the junior subordinated note, at fair value, outstanding.

 

RAIT’s current sources of liquidity, including its current cash and cash equivalents balance, are not sufficient to satisfy RAIT’s obligations arising over the next twelve months. Subject to receiving a higher and otherwise better bid as a result of the Bidding Procedures, RAIT expects to sell substantially all of its assets pursuant to the Purchase Agreement under Section 363 of the Bankruptcy Code and the Bidding Procedures Order for a purchase price of $174,424, adjusted as provided in the Purchase Agreement, including the assumption of certain liabilities. RAIT’s proposed plan of reorganization under the Chapter 11 Cases provides for the ultimate wind down of RAIT’s affairs once the transactions contemplated by the Purchase Agreement and the Bidding Procedures are completed and the plan of reorganization is confirmed.

 

Due to the inherent risks and significant uncertainties associated with the completion of the transactions under the Purchase Agreement, the Plan, the Chapter 11 Cases, and RAIT’s recurring costs of operations, there is substantial doubt about RAIT’s ability to continue as a going concern within one year after the date that these financial statements are issued.

 

c. 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, or FASB, Accounting Standards Codification, or 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 entity. For our commercial mortgage loans, mezzanine loans, and preferred equity investments, certain rights we hold are protective in nature and would preclude us from having the power to direct the activities that most significantly impact the VIE’s economic performance. Assuming both criteria are met, we would be considered the primary beneficiary and would consolidate the VIE. We will continually assess our involvement with VIEs and consolidate the VIEs when we are the primary beneficiary. See Note 7: Variable Interest Entities for additional disclosures pertaining to VIEs.

 

d. Use of Estimates

 

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

 

9


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2019

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

 

e. Cash and Cash Equivalents

 

Cash and cash equivalents include cash held in banks and highly liquid investments with maturities of three months or less when purchased.  Cash, including amounts restricted, may at times exceed the Federal Deposit Insurance Corporation deposit insurance limit of $250 per institution.  We attempt to mitigate credit risk by placing cash and cash equivalents with major financial institutions.  To date, we have not experienced any losses on cash and cash equivalents.

 

f. Restricted Cash

 

Restricted cash consists primarily of tenant escrows and borrowers’ funds held by us to fund certain expenditures or to be released at our discretion upon the occurrence of certain pre-specified events, and to serve as additional collateral for borrowers’ loans. As of March 31, 2019 and December 31, 2018, we had $29,021 and $33,300, respectively, of tenant escrows and borrowers’ funds.

 

Restricted cash also includes cash received from the sale, repayment and/or other disposition of assets held by the issuers of our securitizations that are awaiting to be distributed to holders of our CDO notes payable and CMBS securitizations, as well as the proceeds from the issuance of CDO notes payable by securitizations that are restricted for the purpose of funding additional investments in securities subsequent to the balance sheet date.  As of March 31, 2019 and December 31, 2018, we had $35,979 and $29,767, respectively, of restricted cash held by securitizations.

 

g. Investments in Commercial Mortgage Loans, Mezzanine Loans and Preferred Equity Interests

 

We have invested in commercial mortgage loans, mezzanine loans and preferred equity interests. We account for our investments in commercial mortgage loans, mezzanine loans and preferred equity interests that we do not have the intention or ability to sell, 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.

 

Loans that we have the intention and ability to sell are classified as held for sale and are measured at the lower of amortized cost or fair value. If the amortized cost exceeds the loan’s fair value, we establish a valuation allowance equal to the difference between the amortized cost and fair value.

 

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

 

We maintain an allowance for loan losses on our investments in commercial mortgage loans, mezzanine loans and preferred equity interests. Management’s periodic evaluation of the adequacy of the allowance is based upon expected and inherent risks in the portfolio, the estimated value of underlying collateral, and current economic conditions. The credit quality of our loans is monitored via quantitative and qualitative metrics.  Quantitatively we evaluate items such as the current debt service coverage ratio and annual net operating income of the underlying property.  Qualitatively we evaluate items such as recent operating performance of the underlying property and history of the borrower’s ability to provide financial support.  These items together are considered in developing our view of each loan’s risk rating which are categorized as either impaired or satisfactory. Management reviews loans for impairment and establishes specific reserves when a loss is probable under the provisions of FASB ASC Topic 310, “Receivables.” A loan is impaired when it is probable that we may not collect all principal and interest payments according to the contractual terms. As part of the detailed loan review, we consider many factors about the specific loan, including payment history, asset performance, borrower’s financial capability and other characteristics. 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 unless it is well secured and in the process of collection, or if the collection of principal and interest in full is not probable. Payments received for non-accrual loans are applied to principal until the loan is removed from non-accrual status. Loans are generally removed from non-accrual status when they are making current interest payments. The allowance for loan losses is increased by the provision for loan losses and decreased by charge-offs (net of recoveries). We recognize recoveries when they are received, and we charge off a loan when we determine that all commercially reasonable means of recovering the loan balance have been exhausted. This may occur at a variety of times, including when we receive cash or other assets in a pre-foreclosure sale or take control of the underlying collateral in full satisfaction of the loan upon foreclosure. We consider circumstances such as these to indicate that the loan collection process has ceased and that a loan is uncollectible.

 

10


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2019

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

 

Loans which experience a modification to their contractual terms which result in a concession being granted to a borrower experiencing financial difficulties are considered troubled debt restructurings, or TDRs. A concession is deemed granted when, as a result of the restructuring, we do not expect to collect all amounts due, including interest accrued, at the original contractual interest rate. As appropriate, we also consider other qualitative factors in determining whether a concession is deemed granted, including the value of the underlying collateral. We do not consider restructurings that result in a delay in payment, in timing or amount, which is insignificant, to be a concession.

  

i. Investments in Real Estate

 

Investments in real estate are shown net of accumulated depreciation. We capitalize those costs that have been determined 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.

Effective January 1, 2018, FASB ASC Topic 805, “Business Combinations” was amended to clarify the definition of a business by more clearly outlining the requirements for an integrated set of assets and activities to be considered a business and by establishing a practical framework to determine when the integrated set of assets and activities is a business. Prior to January 1, 2018, the properties we acquired were generally considered businesses and were accounted for as business combinations. Subsequent to January 1, 2018, we expect any properties that we acquire to generally not be considered businesses and, therefore, to be accounted for as asset acquisitions.  

Under business combination accounting, the fair value of the real estate acquired is allocated to the acquired tangible assets, generally consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based, in each case, on their fair values.  Transaction costs and fees incurred related to the acquisition are expensed as incurred.  Under asset acquisition accounting, the costs to acquire real estate, including transaction costs related to the acquisition, are accumulated and then allocated to the individual assets and liabilities acquired based upon their relative fair value.  

 

In determining the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the differences between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the lease. The capitalized above-market lease values and the capitalized below-market lease values are amortized as an adjustment to property income over the lease term.

 

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

 

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

 

j. Revenue Recognition

 

 

1)

Interest income—We recognize interest income from investments in commercial mortgage loans, mezzanine loans, and preferred equity interests, and other securities on a yield to maturity basis. Certain of our commercial mortgage loans, mezzanine loans and preferred equity interests permanently provide for the accrual of interest at specified rates which

11


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2019

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

 

 

differ from current payment terms (which may have minimum payment rates as low as zero percent). Interest income is recognized on such loans, the majority of which were originated prior to 2011, at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible. Management will cease accruing interest on these loans when it determines that the interest income is not collectible based on the value of the underlying collateral using discounted cash flow models and market-based assumptions. The accrued interest receivable associated with these loans as of March 31, 2019 and December 31, 2018 was $15,503 and $15,870, respectively.  These loans are considered to be impaired when the total amount owed exceeds the estimated value of the underlying collateral.  Seven of these loans, with an unpaid principal balance of $32,968 and $33,030, respectively, were considered to be impaired as of March 31, 2019 and December 31, 2018, respectively.

 

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

 

 

2)

Property income—We generate rental income from tenant rent and other tenant-related activities at our consolidated real estate properties. For multifamily real estate properties (which we owned none of as of March 31, 2019), property 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, property 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. For retail and office real estate properties, 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. Such reimbursements are generally recognized on a monthly basis as billed to tenants.

 

 

3)

Fee and other income—We have generated and/or generate, as applicable, fee and other income through our various subsidiaries by (a) providing ongoing asset management services to investment portfolios under cancelable management agreements, and (b) prior to the sale of our retail property manager subsidiary in August 2018, providing property management services to third parties. We recognize revenue for these activities when: (i) a contract has been mutually approved and each party is committed to perform; (ii) both parties can identify the rights of each party; (iii) both parties can identify the payment terms of the contract; (iv) the contract has commercial substance; and (v) it is probable that we will collect substantially all of the consideration to which we are entitled. 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 months ended March 31, 2019 and 2018, we received $59 and $162, respectively, of earned asset management fees, which were eliminated as they were associated with consolidated securitizations.

 

Certain components of property income and fee and other income fall within the scope of FASB ASC Topic 606, “Revenue from Contracts with Customers”. This topic requires entities to disaggregate revenue into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. In the following table, revenue from contracts with customers is disaggregated by type of revenue.

 

 

 

For the Three Months Ended March 31,

 

Revenue from Contracts with customers

 

2019

 

 

2018

 

Property Management Fee income

 

$

 

 

$

766

 

Parking

 

 

 

 

 

202

 

Leasing Commission income

 

 

 

 

 

320

 

Other miscellaneous

 

 

70

 

 

 

248

 

Total

 

$

70

 

 

$

1,536

 

There have been no changes in the measurement of revenue from contracts with customers resulting from the adoption of ASC 606.

12


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2019

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

 

 

k. Fair Value of Financial Instruments

 

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

 

 

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

 

 

Level 2: Valuations are based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Fair value assets and liabilities that are generally included in this category are unsecured REIT note receivables, commercial mortgage-backed securities, or CMBS, receivables and certain financial instruments classified as derivatives where the fair value is based 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 or liability. Generally, assets and liabilities carried at fair value and included in this category are subordinated debentures, and historically included 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.

 

13


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2019

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

 

Fair value for certain of our Level 3 financial instruments is derived using valuation models that include discounted cash flow analyses. These internal valuation models include discounted cash flow analyses 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. 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.

 

l. Transfers of Financial Assets

 

We account for transfers of financial assets under FASB ASC Topic 860, “Transfers and Servicing”, as either sales or financings.  Transfers of financial assets that result in sales accounting are those in which (1) the transfer legally isolates the transferred assets from the transferor, (2) the transferee has the right to pledge or exchange the transferred assets and no condition both constrains the transferee’s right to pledge or exchange the assets and provides more than a trivial benefit to the transferor, and (3) the transferor does not maintain effective control over the transferred assets.  If the transfer does not meet these criteria, the transfer is accounted for as a financing.  Financial assets that are treated as sales are removed from our accounts with any realized gain (loss) reflected in earnings during the period of sale.  Financial assets that are treated as financings are maintained on the balance sheet with proceeds received from the legal transfer reflected as securitized borrowings or security-related receivables.

 

m. Deferred Financing Costs

 

Costs incurred in connection with debt financing are deferred and classified within indebtedness and charged to interest expense over the terms of the related debt agreements, under the effective interest method.

 

n. Intangible Assets

 

Intangible assets on our consolidated balance sheets represent identifiable intangible assets acquired in business acquisitions. We amortize identified intangible assets to expense over their estimated lives using the straight-line method. We evaluate intangible assets for impairment as events and circumstances change, in accordance with FASB ASC Topic 360, “Property, Plant, and Equipment.” The gross carrying amount for our in-place leases and above-market leases was $7,420 as of March 31, 2019 and December 31, 2018. The accumulated amortization for our intangible assets was $5,876 and $5,703 as of March 31, 2019 and December 31, 2018, respectively. We recorded amortization expense of $193, and $427 for the three months ended March 31, 2019 and 2018, respectively. Based on the intangible assets identified above, we expect to record amortization expense of intangible assets of $513 for 2019, $434 for 2020, $249 for 2021, $145 for 2022, $72 for 2023 and $131 thereafter. As of March 31, 2019, we have determined that no triggering events occurred that would indicate an impairment to our intangible assets.

 

o. Derivative Instruments

 

We have historically entered into interest rate derivative contracts to hedge all or a portion of the interest rate risk associated with certain of our borrowings and/or our fixed rate assets. The principal objective of these arrangements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.  While these instruments may impact our periodic cash flows, they benefit us by minimizing the risks and/or costs previously described.

 

In accordance with FASB ASC Topic 815, “Derivatives and Hedging”, we measure each derivative instrument at fair value and record such amounts in our consolidated balance sheet as either an asset or liability. For derivatives designated in hedging relationships, we determine at inception whether the hedge agreement is highly effective in offsetting the related risk by using regression analysis.  For derivatives not designated as hedges, the changes in fair value of the derivative instrument are recorded in earnings. For derivatives cleared through the Chicago Mercantile Exchange, or CME, and the London Clearing House, or LCH, variation margin payments are considered settlements of the related derivatives.  

 

As of March 31, 2019, we had no derivative instruments outstanding.

 

14


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2019

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

 

p. Income Taxes

 

RAIT and Taberna Realty Finance Trust, or TRFT, 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 any 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. Management believes that all of the criteria to maintain RAIT’s and TRFT’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 estimates of deferred tax asset realizability, if any, are included in income tax expense on the consolidated statements of operations.

 

In the prior year, our TRS entities generated taxable revenue primarily from property management fees for services provided to RAIT properties and third-party properties.  In the current year, our TRS entities have not generated any significant taxable revenue. All income taxes are expensed and are paid by the TRSs in the year in which the revenue is received. These income taxes are not eliminated when the related revenue is eliminated in consolidation.

 

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.

 

q. Recent Accounting Pronouncements

 

Adopted within these Financial Statements

 

In February 2016, the FASB issued an accounting standard classified under FASB ASC Topic 842, “Leases”.  This accounting standard states that a lessee should recognize the assets and liabilities that arise from all leases with a term greater than 12 months. The core principle requires the lessee to recognize a liability to make lease payments and a right-of-use (“ROU”) asset. The accounting applied by the lessor is relatively unchanged. During 2017 and 2018, the FASB issued multiple amendments to this accounting standard that provide further clarification to this accounting standard.   The new standard is effective for us on January 1, 2019, with early adoption permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. We have adopted the new standard effective January 1, 2019 and have used the effective date as our date of initial application. The new standard provides a number of optional practical expedients in transition. We have elected the “package of practical expedients” for all our leases that exist at the date of initial application. This package permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We also have elected the practical expedient to not separate lease and non-lease components for all of our leases. The adoption of FASB ASC Topic 842 resulted in the recognition of a lease liability of $3,008 and a ROU asset of $2,416 as of the adoption date for one of our operating leases for which we are the lessee. The standard did not have an impact on any of our real estate leases for which we are the lessor.

 

15


RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2019

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

 

Not Yet Adopted Within These Financial Statements

 

In June 2016, the FASB issued an accounting standard classified under FASB ASC Topic 326, “Financial Instruments-Credit Losses”.  The amendments in this standard provide an approach based on expected losses to estimate credit losses on certain types of financial instruments.  The amendments also modify the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination.  The amendments in this standard expand the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses.  In addition, public business entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. During 2019, the FASB issued an amendment to this accounting standard which provides further clarification to this accounting standard. This standard and its amendment are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Management is currently evaluating the impact that this standard will have on our consolidated financial statements.

 

In August 2018, the FASB issued an accounting standard classified under FASB ASC Topic 820, “Fair Value Measurement”. The amendments in this standard eliminate, add and modify certain disclosure requirements for fair value measurements. For example, entities will no longer have to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The amendments in this accounting standard are effective for fiscal years beginning after December 15, 2019. Management is currently evaluating the impact that this standard will have on our consolidated financial statements.

 

 

NOTE 3: INVESTMENTS IN COMMERCIAL MORTGAGE LOANS, MEZZANINE LOANS AND PREFERRED EQUITY INTERESTS

 

Loans Held for Investment

 

The following table summarizes our investments in commercial mortgage loans, mezzanine loans and preferred equity interests held for investment as of March 31, 2019:

 

 

 

Unpaid

Principal

Balance

 

 

Unamortized

(Discounts)

Premiums

 

 

Carrying

Amount

 

 

Number of

Loans

 

 

Weighted-

Average

Coupon (1)

 

 

Range of Maturity Dates

Commercial Real Estate (CRE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage loans

 

$

388,913

 

 

$

(64

)

 

$

388,849

 

 

 

30

 

 

 

6.9

%

 

Apr. 2019 to Jun. 2025