FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
Commission File Number 001-13937
ANTHRACITE CAPITAL, INC.
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(Exact name of registrant as specified in its charter)
Maryland 13-3978906
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 East 52nd Street, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number including area code): (212) 409-3333
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345 Park Avenue, New York, New York 10154
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(Former name, former address and for new fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
(1) Yes X No
--- --
(2) Yes X No
-- --
As of May 14, 2002, 46,200,110 shares of voting common stock
($.001 par value) were outstanding.
ANTHRACITE CAPITAL, INC.,
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
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Item 1. Interim Financial Statements........................................................................3
Consolidated Statements of Financial Condition
At March 31, 2002 (Unaudited) and December 31, 2001.................................................3
Consolidated Statements of Operations
For the Three Months Ended March 31, 2002 and 2001 (Unaudited)......................................4
Consolidated Statement of Changes in Stockholders' Equity
For the Three Months Ended March 31, 2002 (Unaudited)...............................................5
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2002 and 2001 (Unaudited)......................................6
Notes to Consolidated Financial Statements (Unaudited)..............................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................................................17
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................................29
Part II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................34
Item 2. Changes in Securities and Use of Proceeds..........................................................34
Item 3. Defaults Upon Senior Securities....................................................................34
Item 4. Submission of Matters to a Vote of Security Holders................................................34
Item 5. Other Information..................................................................................34
Item 6. Exhibits and Reports on Form 8-K...................................................................34
SIGNATURES.......................................................................................................35
Part I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Anthracite Capital, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
(in thousands, except per share data)
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March 31, 2002 December 31, 2001
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(Unaudited)
ASSETS
Cash and cash equivalents $ 19,583 $ 43,071
Restricted cash equivalents 35,115 37,376
Securities available for sale, at fair value
Subordinated commercial mortgage-backed securities (CMBS) $ - $ 360,159
Investment grade securities 793,181 1,085,795
-------------- --------------
Total securities available for sale 793,181 1,445,954
Securities held for trading, at fair value 663,609 564,081
Securities held to maturity
Subordinated commercial mortgage-backed securities (CMBS) 395,467 -
Investment grade securities 134,420 -
-------------- --------------
Total securities held to maturity 529,887 -
Commercial mortgage loans, net 141,690 142,637
Investments in real estate joint ventures 8,230 8,317
Equity investment in Carbon Capital, Inc. 8,969 8,784
Receivable for investments sold 297,129 344,789
Other assets 23,401 18,267
-------------- ---------------
Total Assets $2,520,794 $ 2,613,276
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Borrowings:
Secured by pledge of subordinated CMBS available for sale $ - $ 178,631
Secured by pledge of other securities available for sale
and restricted cash equivalents 799,314 1,039,469
Secured by pledge of securities held for trading 523,105 559,145
Secured by pledge of securities held to maturity 247,970 -
Secured by pledge of investments in real estate joint ventures 1,337 1,337
Secured by pledge of commercial mortgage loans 56,816 57,356
-------------- --------------
Total borrowings $ 1,628,542 $ 1,835,938
Payable for investments purchased 451,976 346,913
Distributions payable 17,472 17,245
Other liabilities 14,533 29,807
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Total Liabilities 2,112,523 2,229,903
-------------- ---------------
10.5% Series A preferred stock, redeemable convertible, liquidation
preference $285 in 2001 - 258
-------------- ---------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $0.001 per share; 400,000 shares authorized; 45,968
shares issued and outstanding in 2002; and
29,792 shares issued and outstanding in 2001 46 45
10% Series B preferred stock, liquidation preference $55,317 42,086 42,086
Additional paid-in capital 500,139 492,531
Distributions in excess of earnings (3,320) (13,588)
Accumulated other comprehensive loss (130,680) (137,959)
-------------- ---------------
Total Stockholders' Equity 408,271 383,115
-------------- ---------------
Total Liabilities and Stockholders' Equity $ 2,520,794 $ 2,613,276
============== ===============
The accompanying notes are an integral part of these financial statements.
Anthracite Capital, Inc.
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
For the Three For the Three
Months Ended Months Ended
March 31, 2002 March 31, 2001
------------------ ------------------
Income:
Interest from securities $ 28,679 $ 17,247
Interest from commercial mortgage loans 3,619 5,987
Interest from mortgage loan pools - 1,438
Interest from trading securities 6,288 1,104
Earnings from real estate joint ventures 261 367
Earnings from equity investment 185 -
Interest from cash and cash equivalents 319 197
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Total income 39,351 26,340
------------------ ------------------
Expenses:
Interest 8,032 11,593
Interest-trading securities 3,608 871
Management and incentive fee 5,407 2,449
Other expenses - net 576 494
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Total expenses 17,623 15,407
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Other gain (losses):
Gain (loss) on sale of securities available for sale (4,079) 1,947
Gain on securities held for trading 4,014 692
Foreign currency gain (loss) (247) 104
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Total other gain (loss) (312) 2,743
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Income before cumulative transition adjustment 21,416 13,676
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Cumulative transition adjustment - SFAS 142 6,327 -
Cumulative transition adjustment - SFAS 133 - (1,903)
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Net Income 27,743 11,773
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Dividends and accretion on preferred stock 1,389 2,289
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Net Income available to Common Shareholders $ 26,354 $ 9,484
================== ==================
Net income per common share, basic:
Income before cumulative transition adjustment $0.44 $0.42
Cumulative transition adjustment - SFAS 142 0.14 -
Cumulative transition adjustment - SFAS 133 - (0.07)
------------------ ------------------
Net income $0.58 $0.35
================== ==================
Net income per common share, diluted:
Income before cumulative transition adjustment $0.44 $0.39
Cumulative transition adjustment - SFAS 142 0.14 -
Cumulative transition adjustment - SFAS 133 - (0.06)
------------------ ------------------
Net income $0.58 $0.33
================== ==================
Weighted average number of shares outstanding:
Basic 45,654 27,003
Diluted 45,731 31,116
The accompanying notes are an integral part of these financial statements.
Anthracite Capital, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
For the Three Months Ended March 31, 2002
(in thousands)
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Series Accumulated
Common B Additional Distributions Other Total
Stock, Preferred Paid-In In Excess Comprehensive Comprehensive Stockholders'
Par Value Stock Capital Of Earnings Loss Income Equity
Balance at January 1, 2002 $45 $42,086 $492,531 ($13,588) ($137,959) $383,115
Net income 27,743 $27,743 27,743
Unrealized gain on cash flow hedges 6,033 6,033 6,033
Reclassification adjustments from cash
flow hedges included in net income 248 248 248
Change in net unrealized gain (loss)
on securities available for sale,
net of reclassification adjustment 998 998 998
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Other Comprehensive gain 7,279
Comprehensive Income $35,022
===========
Dividends declared-common stock (16,086) (16,086)
Dividends and accretion on
preferred stock (1,389) (1,389)
Issuance of common stock 1 7,350 7,351
Conversion of Series A preferred stock
to common stock 258 258
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Balance at March 31, 2002 $46 $42,086 $500,139 ($3,320) ($130,680) $408,271
======================================================================================
Disclosure of reclassification adjustment:
Unrealized holding loss $5,077
Less: reclassification for realized gains
previously recorded as unrealized (4,079)
----------
998
Unrealized gain on cash flow hedges 6,033
Reclassification adjustments from cash
flow hedges included in net income 248
----------
Net unrealized gain on securities $7,279
==========
The accompanying notes are an integral part of these financial statements.
Anthracite Capital, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)(in thousands)
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For the Three For the Three
Months Ended Months Ended March
March 31, 2002 31, 2001
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Cash flows from operating activities:
Net income $ 27,743 $ 11,773
Adjustments to reconcile net income to net cash provided by operating
activities:
Net (purchase) sale of trading securities (13,170) 54,736
Amortization on negative goodwill - (425)
Compensation cost - stock options - 28
Cumulative transition adjustment (6,327) 1,903
Premium amortization (discount accretion), net 3,932 (7,051)
Non-cash portion of net foreign currency loss (gain) 82 (104)
Net loss (gain) on sale of securities 65 (2,639)
Distributions in excess of (less than) earnings
from real estate joint ventures 87 (39)
(Increase) decrease in other assets (3,251) (5,892)
(Decrease) increase in other liabilities (8,947) (3,144)
--------------- ---------------
Net cash provided by operating activities 214 49,146
--------------- ---------------
Cash flows from investing activities:
Purchase of securities available for sale (224,144) (443,140)
Repayments received from commercial mortgage loans 865 36,739
Decrease (increase) in restricted cash equivalents 2,261 (13,977)
Principal payments received on securities available for sale 62,491 17,528
Principal payments received on mortgage loan pools - 10,981
Proceeds from sales of securities available for sale and
and mortgage loan pools 354,187 315,975
Net proceeds (payments) from hedging securities (2,069) (5,662)
--------------- ---------------
Net cash provided by (used in) investing activities 193,591 (81,556)
--------------- ---------------
Cash flows from financing activities:
Net (decrease) increase in borrowings (207,396) 1,151
Proceeds from issuance of common stock, net of offering costs 7,351 38,222
Distributions on common stock (15,859) (7,429)
Distributions on preferred stock (1,389) (2,313)
--------------- ---------------
Net cash (used in) provided by financing activities (217,293) 29,631
--------------- ---------------
Net decrease in cash and cash equivalents (23,488) (2,779)
Cash and cash equivalents, beginning of period $ 43,071 $ 37,829
--------------- ---------------
Cash and cash equivalents, end of period $ 19,583 $ 35,050
=============== ===============
Supplemental disclosure of cash flow information:
Interest paid $19,449 $ 15,315
=============== ===============
Investments purchased not settled $ 451,976 $ 306,837
=============== ===============
Investments sold not settled $ 297,129 $ 13,475
=============== ===============
The accompanying notes are an integral part of these financial statements.
Anthracite Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(In thousands, except per share data)
Note 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Anthracite Capital, Inc. (the "Company"), a Maryland corporation, is a real
estate finance company that generates income based on the spread between
the interest income on its mortgage loans and securities investments and
the interest expense from borrowings used to finance its investments. The
Company seeks to earn high returns on a risk-adjusted basis to support a
consistent quarterly dividend. The Company has elected to be taxed as a
Real Estate Investment Trust, therefore, its income is largely exempt from
corporate taxation. The Company commenced operations on March 24, 1998.
The Company's business focuses on (i) originating high yield commercial
real estate loans, (ii) investing in below investment grade commercial
mortgage backed securities ("CMBS") where the Company has the right to
control the foreclosure/workout process on the underlying loans, and (iii)
acquiring investment grade real estate related securities as a liquidity
diversification.
The accompanying unaudited financial statements have been prepared in
conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of
Regulation S-X for interim financial statements. Accordingly, they do not
include all of the information and footnotes required by accounting
principles generally accepted in the United States of America ("GAAP") for
complete financial statements. These financial statements should be read in
conjunction with the annual financial statements and notes thereto included
in the Company's annual report on Form 10-K for 2001 filed with the
Securities and Exchange Commission.
In the opinion of management, the accompanying financial statements contain
all adjustments, consisting of normal and recurring accruals (except for
the cumulative transition adjustment for SFAS 142 in the first quarter of
2002 - see note 2, and SFAS 133 in the first quarter of 2001), necessary
for a fair presentation of the results for the interim periods. Operating
results for interim periods are not necessarily indicative of the results
that may be expected for the entire year.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the statements of financial condition and revenues and expenses
for the periods covered. Actual results could differ from those estimates
and assumptions. Significant estimates in the financial statements include
the valuation of certain of the Company's mortgage-backed securities and
certain other investments.
Note 2 ACCOUNTING CHANGE - BUSINESS COMBINATIONS
In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, "Business Combinations" and No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). These standards change the accounting for
business combinations by, among other things, prohibiting the prospective
use of pooling-of-interests accounting and requiring companies to stop
amortizing goodwill and certain intangible assets with an indefinite useful
life. Instead, goodwill and intangible assets deemed to have an indefinite
useful life will be subject to an annual review for impairment. The new
standards generally were effective for the Company in the first quarter of
2002. Upon adoption of FAS 142 in the first quarter of 2002, the Company
recorded a one-time, noncash adjustment of approximately $6,327 to write
off the unamortized balance of its negative goodwill. Such charge is
non-operational in nature and is reflected as a cumulative effect of an
accounting change in the accompanying consolidated statement of operations.
Amortization of negative goodwill was $425 during the first quarter of
2001. If such negative goodwill had not been amortized, the Company's
income before cumulative translation adjustment would have been $13,357 for
the first quarter of 2001.
Note 3 NET INCOME PER SHARE
Net income per share is computed in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share. Basic income (loss) per
share is calculated by dividing net income (loss) available to common
shareholders by the weighted average number of common shares outstanding
during the period. Diluted income (loss) per share is calculated using the
weighted average number of common shares outstanding during the period plus
the additional dilutive effect of common stock equivalents. The dilutive
effect of outstanding stock options is calculated using the treasury stock
method, and the dilutive effect of preferred stock is calculated using the
"if converted" method.
For the Three For the Three
Months Ended Months Ended
March 31, 2002 March 31, 2001
-------------- ---------------
Numerator:
Net Income available to common shareholders
before cumulative transition adjustment $ 20,027 $11,387
Cumulative transition adjustment 6,327 (1,903)
--------------- ---------------
Numerator for basic earnings per share -
weighted average common shares outstanding 26,354 9,484
Effect of 10.5% series A senior cumulative
redeemable preferred stock - 900
--------------- ---------------
Numerator for diluted earnings per share $ 26,354 $ 10,384
=============== ===============
Denominator:
Denominator for basic earnings per share
weighted average common shares outstanding 45,654 27,003
Effect of 10.5% series A senior cumulative
redeemable preferred stock 30 4,091
Dilutive effect of stock options 47 22
--------------- ---------------
Denominator for diluted earnings per share--
weighted average common shares
outstanding and common share equivalents outstanding 45,731 31,116
=============== ===============
Basic net income per weighted average common share:
Income before cumulative transition adjustment $0.44 $0.42
Cumulative transition adjustment - SFAS 142 0.14 -
Cumulative transition adjustment - SFAS 133 - (0.07)
--------------- ---------------
Net income $ 0.58 $ 0.35
=============== ===============
Diluted net income per weighted average common share
and common share equivalents:
Income before cumulative transition adjustment $ 0.44 $ 0.39
Cumulative transition adjustment - SFAS 142 0.14 -
Cumulative transition adjustment - SFAS 133 - (0.06)
--------------- ---------------
Net income $0.58 $0.33
=============== ===============
Note 4 SECURITIES AVAILABLE FOR SALE
The Company's securities available for sale are carried at estimated fair
value. The amortized cost and estimated fair value of securities available
for sale as of March 31, 2002 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Security Description Cost Gain Loss Value
------------------------------------------------------------------------------------------------------------------------------
Commercial mortgage-backed securities ("CMBS"):
CMBS IOs $ 33,925 $ 262 $ (418) $ 33,769
Investment grade CMBS 20,308 - (7,906) 12,402
---------------------------------------------------------------
Total CMBS 54,233 262 (8,324) 46,171
---------------------------------------------------------------
Single-family residential mortgage-backed securities
("RMBS"):
Agency adjustable rate securities 67,808 634 (207) 68,235
Agency fixed rate securities 611,174 1,848 (8,293) 604,729
Residential CMOs 23,865 - (140) 23,725
Home Equity Loans 22,411 669 - 23,080
Hybrid Arms 27,254 - (13) 27,241
---------------------------------------------------------------
Total RMBS 752,512 3,151 (8,653) 747,010
---------------------------------------------------------------
---------------------------------------------------------------
Total securities available for sale 806,745 3,413 (16,977) 793,181
===============================================================
As of March 31, 2002, an aggregate of $777,564 in estimated fair value of
the Company's securities available for sale was pledged to secure its
collateralized borrowings.
As of March 31, 2002, the anticipated weighted average unlevered yield to
maturity based upon the adjusted cost of the Company's securities available
for sale was 6.03% per annum. The Company's anticipated yields to maturity
on its securities available for sale are based upon a number of assumptions
that are subject to certain business and economic uncertainties and
contingencies. Examples of these include, among other things, the rate and
timing of principal payments (including prepayments, repurchases, defaults
and liquidations), the pass-through or coupon rate and interest rate
fluctuations. As these uncertainties and contingencies are difficult to
predict and are subject to future events, which may alter these
assumptions, no assurance can be given that the anticipated yields to
maturity, discussed above and elsewhere, will be achieved.
As discussed in Note 6, on March 31, 2002, the Company reclassified its
subordinated non-investment grade CMBS from available-for-sale to held to
maturity.
Note 5 SECURITIES HELD FOR TRADING
Securities held for trading reflect short-term trading strategies, which
the Company employs from time to time, designed to generate economic and
taxable gains. As part of its trading strategies, the Company may acquire
long or short positions in U.S. Treasury or agency securities, forward
commitments to purchase such securities, financial futures contracts and
other fixed income or fixed income derivative securities.
The Company's securities held for trading are carried at estimated fair
value. At March 31, 2002, the Company's securities held for trading
consisted of FNMA Mortgage Pools with an estimated fair value of $664,148,
a short 10 year U.S. Treasury Note with an estimated fair value of
$(3,284), and interest rate swap agreements which represented a notional
amount of $70,000 and a fair value of $2,745. The FNMA Mortgage Pools, and
the underlying mortgages, bear interest at fixed rates for specified
periods, generally three to seven years after which the rates are
periodically reset to market.
The Company's trading strategies are subject to the risk of unanticipated
changes in the relative prices of long and short positions in trading
securities, but are designed to be relatively unaffected by changes in the
overall level of interest rates.
Note 6 SECURITIES HELD TO MATURITY
At the end of the first quarter of 2002 the Company reclassified its
subordinated commercial mortgage-backed securities on the balance sheet
from available for sale to held to maturity. This reclassification reflects
the Company's current intent and ability to hold these assets until
maturity, based on the Company's expectation that it can successfully
complete a long-term financing for these securities (see Note 11). The
effect of this change is that these assets will be presented on the balance
sheet at their adjusted cost basis, rather than previously at their fair
market value. As this reclassification was effective on March 31, 2002, the
fair market value as of March 31, 2002 is equal to adjusted cost basis for
all assets purchased prior to January 1, 2002. Any unamortized gain or loss
relating to the securities remains in accumulated other comprehensive loss
("OCI") and will be amortized as an adjustment of yield over the
anticipated life of the security. This reclassification does not change the
reported GAAP yield of the securities. For those assets purchased during
the first three months of 2002, an approximate par of $186,000, the
adjusted cost basis is equal to the original purchase price.
The par value, amortized cost, carrying value and estimated fair value of
securities held to maturity as of March 31, 2002 are summarized as follows:
Par Unamortized Amortized Unamortized Carrying Estimated
Discount Cost Balance in OCI Value Fair Value
-------------------------------------------------------------------------------------------------------------------------------
Non-investment grade rated subordinated
securities $ 647,524 $ (189,378) $ 458,146 $ (88,226) $369,920 $ 369,208
Non-rated subordinated securities 126,010 (91,752) 34,258 (8,711) 25,547 25,547
Investment grade CMBS 47,730 (1,186) 46,544 0 46,544 46,942
-----------------------------------------------------------------------------------
Total CMBS 821,264 (282,316) 538,948 (96,937) 442,011 441,696
-----------------------------------------------------------------------------------
Investment grade REIT debt securities 88,175 (299) 87,876 0 87,876 86,523
-----------------------------------------------------------------------------------
Total investment grade REIT debt 88,175 (299) 87,876 0 87,876 86,523
-----------------------------------------------------------------------------------
Total securities held to maturity $ 909,439 $(282,615) $626,824 $ (96,937) $529,887 $528,219
===================================================================================
As of March 31, 2002, the anticipated weighted average yield to maturity
based upon the amortized cost of the subordinated CMBS was 10.1% per annum.
The anticipated weighted average yield to maturity of the Company's
investment grade securities held to maturity was 7.2%. The Company's
anticipated yields to maturity on its subordinated CMBS and investment
grade securities held to maturity are based upon a number of assumptions
that are subject to certain business and economic uncertainties and
contingencies. Examples of these include, among other things, the rate and
timing of principal payments (including prepayments, repurchases, defaults,
and liquidations), the pass-through or coupon rate, and interest rate
fluctuations. Additional factors that may affect the Company's anticipated
yields to maturity on its subordinated CMBS include interest payment
shortfalls due to delinquencies on the underlining mortgage loans, and the
timing and magnitude of credit losses on the mortgage loans underlying the
subordinated CMBS that are a result of the general condition of the real
estate market (including competition for tenants and their related credit
quality) and changes in market rental rates. As these uncertainties and
contingencies are difficult to predict and are subject to future events,
which may alter these assumptions, no assurance can be given that the
anticipated yields to maturity, discussed above and elsewhere, will be
achieved.
The following table sets forth certain information relating to the
aggregate principal balance and payment status of delinquent mortgage loans
underlying the subordinated CMBS held by the Company as of March 31, 2002:
--------------------------------------------------------------------------------------------
March 31, 2002
--------------------------------------------------------------------------------------------
Number of % of
Principal Loans Collateral
--------------------------------------------------------------------------------------------
Past due 30 days to 60 days $21,431 9 0.22%
--------------------------------------------------------------------------------------------
Past due 60 days to 90 days 12,245 4 0.12
--------------------------------------------------------------------------------------------
Past due 90 days or more 154,592 22 1.57
--------------------------------------------------------------------------------------------
REO 16,393 3 0.17
--------------------------------------------------------------------------------------------
Total $204,661 38 2.08%
--------------------------------------------------------------------------------------------
Total principal balance $9,832,658 1,907
--------------------------------------------------------------------------------------------
To the extent that the Company's expectation of realized losses on
individual loans supporting the CMBS, if any, or such resolutions differ
significantly from the Company's original loss estimates, it may be
necessary to reduce the projected GAAP yield on the applicable CMBS
investment to better reflect such investment's expected earnings net of
expected losses, and write the investment down to its fair value. While
realized losses on individual loans may be higher or lower than original
estimates, the Company currently believes its aggregate loss estimates and
GAAP yields are appropriate on all investments.
Note 7 COMMON STOCK
On March 14, 2002, the Company declared distributions to its common
shareholders of $0.35 per share, payable on April 30, 2002 to stockholders
of record on April 4, 2002. For U.S. Federal income tax purposes, the
dividends are expected to be ordinary income to the Company's stockholders.
In March 2002, the remaining 10,000 shares of Series A Preferred Stock were
converted to 34,427 shares of the Company's Common Stock at a price of
$7.26 per share in accordance with the terms of the Series A Preferred Stock.
For the three months ended March 31, 2002, the Company issued 519,303
shares of common stock under its Dividend Reinvestment Plan. Net proceeds
to the Company were approximately $5,661. No shares were issued for the
three months ended March 31, 2001 under the Dividend Reinvestment Plan.
Note 8 TRANSACTIONS WITH AFFILIATES
The Company has a Management Agreement with the "Manager", a majority owned
indirect subsidiary of PNC Financial Services Group, Inc. ("PNC Bank") and
the employer of certain directors and officers of the Company, under which
the Manager manages the Company's day-to-day operations, subject to the
direction and oversight of the Company's Board of Directors. The initial
two year term of the Management Agreement was to expire on March 27, 2000;
on March 16, 2000, the Management Agreement was extended for an additional
two years, with the unanimous approval of the unaffiliated directors, on
terms similar to the prior agreement. On March 25, 2002, the Management
Agreement was extended for one year through March 27, 2003, with the
unanimous approval of the unaffiliated directors, on terms similar to the
prior agreement with the following changes: (i) the incentive fee
calculation would be based on GAAP earnings instead of funds from
operations, (ii) the removal of the four year period to value the
Management Agreement in the event of termination, and (iii) subsequent
renewal periods of the Management Agreement would be for one year instead
of two years. The Board was advised by Houlihan Lokey Howard & Zukin
Financial Advisors, Inc. ("Houlihan Lokey") in the renewal process.
Houlihan Lokey is a national investment banking and financial advisory firm.
The Company pays the Manager an annual base management fee equal to a
percentage of the average invested assets of the Company as defined in the
Management Agreement. The base management fee is equal to 1% per annum of
the average invested assets rated less than BB- or not rated, 0.75% of
average invested assets rated BB- to BB+, and 0.20% of average invested
assets rated above BB+.
The Company incurred $2,219 and $1,866 in base management fees in
accordance with the terms of the Management Agreement for the three months
ended March 31, 2002 and 2001, respectively. In accordance with the
provisions of the Management Agreement, the Company recorded reimbursements
to the Manager of $5 and $37 for certain expenses incurred on behalf of the
Company during the three months end March 31, 2002 and 2001, respectively.
Through March 28, 2002, the Company paid the Manager on a quarterly basis,
as incentive compensation, an amount equal to 25% of the funds from
operations of the Company (as defined) plus gains (minus losses) from debt
restructuring and sales of property, before incentive compensation in
excess of a threshold rate. The threshold rate for the six months ended
June 30, 2001 was based upon an annualized return on equity equal to 3.5%
over the ten year U.S. Treasury Rate on the adjusted issue price of the
Common Stock. Effective July 1, 2001, the Manager revised the threshold
rate to be the greater of 3.5% over the ten-year U.S. Treasury Rate or 9.5%.
Pursuant to the March 25, 2002 one-year Management Agreement extension,
such incentive fee will be based on 25% of the Company's GAAP net income.
For purposes of the incentive compensation calculation, equity is generally
defined as proceeds from issuance of Common Stock before underwriting
discounts and commissions and other costs of issuance. Additionally, the
Manager agreed that in determining GAAP earnings for purposes of
calculating the incentive fee, GAAP earnings for the three months ended
March 31, 2002 would not include the $6,327 income recognized as the
cumulative effect of implementing SFAS 142. Instead, the income from the
cumulative effect of SFAS 142 will be included in GAAP income in the
periods in which it would have been earned had the Company not adopted SFAS
142. The Company incurred $3,188 and $583 in incentive compensation for the
three months ended March 31, 2002 and 2001, respectively.
Under the terms of an administration agreement, the Manager provides
financial reporting, audit coordination and accounting oversight services.
The Company pays the Manager a monthly administrative fee at an annual rate
of 0.06% of the first $125 million of average net assets, 0.04% of the next
$125 million of average net assets and 0.03% of average net assets in
excess of $250 million subject to a minimum annual fee of $120. For the
three month period ended March 31, 2002 and 2001, the administration fee
was $43 and $30, respectively.
In March 2001, the Company purchased twelve certificates each representing
a 1% interest in different classes of Owner Trust NS I Trust ("Owner
Trusts") for an aggregate investment of $37,868. These certificates were
purchased from PNC Bank. The assets of the Owner Trusts consist of
commercial mortgage loans originated or acquired by an affiliate of PNC.
The Company entered into a $50,000 committed line of credit from PNC
Funding Corp. to borrow up to 95% of the fair market value of the Company's
interest in the Owner Trusts. Outstanding borrowings against this line of
credit bear interest at a LIBOR based variable rate. As of December 31,
2001, there was $13,885 borrowed under this line of credit. The Company
earned $121 from the Owner Trusts and paid interest of approximately $99 to
PNC Funding Corp. as interest on borrowings under a related line of credit
for three months ended March 31, 2001. The outstanding borrowings were
repaid prior to the expiration on March 13, 2002; at which time the
remaining trusts were sold at a gain of $90.
On July 20, 2001, the Company entered into a $50 million commitment to
acquire shares in Carbon Capital, Inc. ("Carbon"), a private commercial
real estate income opportunity fund managed by BlackRock Financial
Management, Inc., who is also the manager of the Company. The Company does
not pay BlackRock management or incentive fees through Carbon and has
received a reduced fee for this investment on its own management contract
with BlackRock. On November 7, 2001 the Company received a capital call
notice to fund a portion of its Carbon Capital, Inc. investment. The total
amount of the capital call was $8,784, which was paid on November 19, 2001.
The proceeds were used by Carbon to acquire three commercial loans all of
which are secured by office buildings. The Company's remaining commitment
is $41,216. On March 31, 2002, the Company owned 32.5% of the outstanding
shares in Carbon, and BlackRock Financial Management, Inc., its affiliates,
officers, directors and employees collectively own 5%.
At the time of the Core-Cap merger, the Manager agreed to pay GMAC Mortgage
Asset Management, Inc. (GMAC) $12,500 over a ten-year period (Installment
Payment). The Company agreed that should it terminate the Manager without
cause, the Company would pay to the Manager an amount equal to the
Installment Payment less the sum of all payments made by the Manager to
GMAC. As of March 31, 2002, the installment payment would be $11,000
payable over nine years. The Company does not accrue for this contingent
liability.
Note 9 BORROWINGS
Certain information with respect to the Company's collateralized borrowings
at March 31, 2002 is summarized as follows:
Reverse Total
Lines of Credit Repurchase Collateralized
and Term Loans Agreements Borrowings
------------------------------------------------------------
Outstanding borrowings $ 101,444 $1,527,098 $1,628,542
Weighted average borrowing rate 3.52% 1.94% 2.04%
Weighted average remaining maturity 304 days 17 days 35 days
Estimated fair value of assets $160,193 $1,575,726 $1,735,919
pledged
As of March 31, 2002, $19,939 of borrowings outstanding under the lines of
credit were denominated in pounds sterling and interest payable is based on
sterling LIBOR.
As of March 31, 2002, the Company's collateralized borrowings had the
following remaining maturities:
Reverse Total
Lines of Credit Repurchase Collateralized
and Term Loans Agreements Borrowings
------------------------------------------------------------
Within 30 days $ - $1,502,919 $1,502,919
31 to 59 days - 24,179 24,179
Over 60 days 101,444 - 101,444
------------------------------------------------------------
$101,444 $1,527,098 $1,628,542
=============================================================
Under the lines of credit and the reverse repurchase agreements, the
respective lender retains the right to mark the underlying collateral to
estimated market value. A reduction in the value of its pledged assets will
require the Company to provide additional collateral or fund margin calls.
From time to time, the Company expects that it will be required to provide
such additional collateral or fund margin calls.
Note 10 DERIVATIVE INSTRUMENTS
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and
for hedging activities. All derivatives, whether designated in hedging
relationships or not, are required to be recorded on the balance sheet at
fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings. If the
derivative is designated as a cash flow hedge, the effective portions of
change in the fair value of the derivative are recorded in other
comprehensive income (OCI) and are recognized in the income statement when
the hedged item affects earnings. Ineffective portions of changes in the
fair value of cash flow hedges are recognized in earnings.
The Company uses interest rate swaps to manage exposure to variable cash
flows on portions of its borrowings under reverse repurchase agreements and
as trading derivatives intended to offset changes in fair value related to
securities held as trading assets. On the date in which the derivative
contract is entered, the Company designates the derivative as either a cash
flow hedge or a trading derivative.
As of March 31, 2002, the Company had interest rate swaps with notional
amounts aggregating $682,000 that were designated as cash flow hedges of
borrowings under reverse repurchase agreements. Their aggregate fair value
was a $2,877 asset included in other assets on the statement of financial
condition. For the three months ended March 31, 2002, the net change in the
fair value of the interest rate swaps was an increase of $7,208 of which
$1,174 was deemed ineffective and is included as a reduction of interest
expense and $6,034 was recorded as an addition to OCI. As of March 31,
2002, the $682,000 notional of swaps which were designated as cash flow
hedges had a weighted average remaining term of 4.4 years.
As of March 31, 2002, the Company had interest rate swaps with notional
amounts aggregating $70,000 designated as trading derivatives. Their
aggregate fair value at March 31, 2002 of $2,745 is included in trading
securities. For the three months ended March 31, 2002, the change in fair
value for these trading derivatives was an increase of $2,782 and is
included as a reduction of loss on securities held for trading in the
consolidated statement of operations. As of March 31, 2002, the $70,000
notional of swaps which were designated as trading derivatives had a
weighted average remaining term of 29.7 years.
Occasionally, counterparties will require the Company or the Company will
require counterparties to provide collateral for the interest rate swap
agreements in the form of margin deposits. Net deposits are recorded as a
component of accounts receivable or other liabilities. Should the
counterparty fail to return deposits paid, the Company would be at risk for
the fair market value of that asset. At March 31, 2002 and 2001, the
balance of such net margin deposits owed to counterparties as collateral
under these agreements totaled $680 and $11,050, respectively.
The contracts identified in the remaining portion of this footnote have
been entered into to limit the Company's mark to market exposure to
long-term interest rates.
At March 31, 2002, the Company had outstanding short positions of 80
thirty-year U.S. Treasury Bond future contracts, 2,610 ten-year U.S.
Treasury Note future contracts and 681 five-year U.S. Treasury Note future
contracts expiring in June 2002, which represented $8,000, and $329,100 in
face amount of U.S. Treasury Bonds and Notes respectively. The estimated
fair value of these contracts was approximately $(348,610) at March 31,
2002, included in securities held for trading, and the change in fair value
related to these contracts is included as a component of loss on securities
held for trading.
Note 11 SUBSEQUENT EVENTS
The New York City Loan is a $13,170 subordinate interest in a $57,750 first
mortgage secured by a commercial office building located in midtown New
York City. In April 2002, the New York City Loan paid off its balance in
full. The originally scheduled maturity of the loan was in January 2004.
The Company owns several subordinate tranches of the GMAC 98 C-1 CMBS
securitization, included in securities held to maturity. On May 14, 2002, a
borrower whose loan is included in the securitization filed Chapter 11
bankruptcy. The loan is secured by mortgages on 82 skilled nursing
facilities as well as a surety bond from a AA- rated surety for
approximately 66% of the principal amount of the loan. The principal amount of
the loan is $210,053. The Company performs a detailed review of its loss
assumptions on the loans included in securities it holds, and will adjust
the loss assumptions when it believes that credit experience or
expectations justify such an adjustment. At this time, the Company does not
believe that an adjustment is required for possible losses on this loan.
The Company is financing a portion of the Company's CMBS portfolio and
unsecured real estate investment trust obligations through a Collateralized
Debt Obligation (CDO) offering in the approximate amount of $419,185. The
CDO is designed to match fund such portion of the Company's CMBS portfolio
and unsecured real estate investment trust obligations. The Company intends
to obtain the equity interest in the issuer of the CDO and will account for
this transaction on its balance sheet as a financing. Anthracite will use
the proceeds of this offering to replace 87% of the short-term liabilities
currently used to finance its larger credit sensitive portfolio. All notes
will be issued at a fixed rate or hedged to create a total fixed cost of
funds of approximately 7.29%. On May 14, 2002, the Company established the
price and par amounts of its CDO debt issuance. Successful execution of
this strategy will significantly increase the quality of the Company's
earnings by eliminating the risk of financing the assets contributed to the
CDO. The notes offered pursuant to the CDO will not be registered under the
Securities Act of 1933, as amended, and may not be offered or sold in the
United States absent registration or an applicable exemption from
registration requirements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
During the first quarter of 2002, the Company paid $0.35 per common share
in dividends and GAAP book value rose from $7.53 to $7.97. The Company's
first quarter operating results represent an annualized return on the
quarter's average common stock equity (Annualized ROE) of 21.9% and net
interest margin of 5.01%.
The Company's long-term goal is to provide a consistent dividend supported
by stable long-term earnings. During the first quarter of 2002 the Company
took significant steps towards furthering that objective. During 2001 the
Company took advantage of opportunities to raise capital on an accretive
basis. That new capital was invested in short-term opportunities in the
high credit quality Residential Mortgage Backed Securities (RMBS) market
until optimal long-term commercial real estate investment opportunities
could be identified. During the quarter ended December 31, 2001, the
Company began to redeploy capital into long-term commercial opportunities.
That activity continued in the first quarter of 2002 as the Company
acquired $172,433 of commercial assets in the form of CMBS and unsecured
real estate investment trust obligations of publicly traded commercial real
estate companies ("REIT debt"). The strategic focus of this activity is to
assemble a portfolio that will complement the existing CMBS portfolio and
assist in providing an optimal execution for a matched funding strategy
that will eliminate the long-term funding risk of holding the portfolio to
its maturity.
Throughout the first and second quarters of 2002 the Company has been
actively pursuing the issuance of secured debt through a collateralized
debt obligation offering (CDO). The CDO is being structured to match fund
the cash flows from a significant portion of the CMBS and REIT debt
portfolio. The portfolio is currently financed with thirty-day repurchase
agreements with various counterparties that mark the assets to market on a
daily basis. Through the CDO the Company will issue long-term fixed and
floating rate debt securities. All floating rate debt will be hedged to
fixed rates, thus matching the fixed coupons of the assets. This will
eliminate the funding risk, the short-term rate risk, and mark to market
risk currently associated with financing these assets.
The market value as of March 31, 2002 of the portfolio that will secure the
CDO debt is expected to consist of 76.2% CMBS rated B or higher and 23.8%
REIT debt rated BBB or higher. The CMBS component represents 60.9% of the
Company's CMBS portfolio as of March 31, 2002. Upon completion the CDO will
eliminate 56.4% of the short-term financing of the Company's CMBS
portfolio.
Market Conditions and Their Effect on Company Performance
The principal performance risks that the Company faces are (i) credit risk
on the CMBS and commercial real estate loans it underwrites; (ii) interest
rate risk, which affects the market value of the Company's assets and the
cost of funds needed to finance these assets and (iii) liquidity risk,
which affects the Company's ability to finance itself over the long term.
Credit Risk and Company Performance: The Company's primary risk is
commercial real estate credit risk. These investments take two forms: (1)
below investment grade CMBS 2) commercial real estate loans.
CMBS: The Company considers delinquency information from the Lehman
Brothers Conduit Guide for 1998 vintage transactions to be the most
relevant measure of credit performance market conditions applicable to its
below investment grade CMBS holdings. The broader measure of all
transactions tracked in the Conduit Guide since 1994 also provides relevant
comparable information. The delinquency statistics are shown in the table
below:
-----------------------------------------------------------------------------------------------------------------------------
| Lehman Brothers Conduit Guide For 1998 | Lehman Brothers Conduit Guide For All Transactions
| Vintage Transactions |
------------|-------------------------------------------------------|--------------------------------------------------------
Date | Number of Collateral % | Number of Collateral %
| Securitizations Balance Delinquent | Securitizations Balance Delinquent
------------|-------------------------------------------------------|--------------------------------------------------------
3/31/02 | 39 $50,977,680 1.89% | 222 $195,063,193 1.61%
------------|-------------------------------------------------------|--------------------------------------------------------
12/31/01 | 39 $51,321,238 1.51% | 210 $185,756,237 1.51%
-----------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Witter (MSDW) also tracks CMBS loan delinquencies using
a slightly smaller universe. The MSDW index tracks all CMBS transactions
with more than $200,000 of collateral that have been seasoned for at least
one year. This will generally adjust for the lower delinquencies that occur
in newly originated collateral. As of March 31, 2002 the MSDW index
indicated that delinquencies on 180 securitizations was 2.08%. As of
December 31, 2001, this same index tracked 174 securitizations with
delinquencies of 1.85%. See the section titled "Quantitative and
Qualitative Disclosures About Market Risks" for a detailed discussion of
how delinquencies and loan losses affect the Company.
The Company's below investment grade CMBS portfolio has a total par amount
of $773,534. Of this amount, $126,010 is the par of the securities that
represent the first loss on the underlying mortgages, and $546,502 is the
par of the securities that represent the remaining tranches owned by the
Company when the Company owns the first loss security. There are 1,907
underlying loans supporting the Company's first loss CMBS with an aggregate
principal balance of over $9.8 billion as of March 31, 2002. The total
below investment grade CMBS portfolio represents 44.9% of invested equity
at quarter end.
The Company manages its credit risk through conservative underwriting,
diversification, active monitoring of loan performance and exercise of its
right to control the workout process as early as possible. All of these
processes are based on the extensive intranet-based analytic systems
developed by BlackRock.
The Company maintains diversification of credit exposures through its
underwriting process and can shift its focus in future investments by
adjusting the mix of loans in subsequent acquisitions. The comparative
profiles of the loans underlying the Company's CMBS by property type are:
-------------------------------------------------------------------------------------------
3/31/02 | 12/31/01
Exposure | Exposure
------------------------------------------|------------------------------------------------
Property Type Loan Balance | % of Total Loan Balance % of Total
------------------------------------------|------------------------------------------------
Multifamily $3,402,871 | 34.6% $3,432,708 34.6%
Retail 2,740,315 | 27.9 2,763,045 27.9
Office 1,855,873 | 18.9 1,866,338 18.8
Lodging 849,527 | 8.6 853,935 8.6
Industrial 602,157 | 6.1 604,852 6.1
Healthcare 351,837 | 3.6 353,697 3.6
Parking 30,079 | 0.3 35,225 0.4
------------------------------------------|------------------------------------------------
Total $9,832,659 | 100% $9,909,800 100%
-------------------------------------------------------------------------------------------
The following table shows a comparison of the Company's delinquencies:
----------------------------------------------------------------------------------------------------------------------
| March 31, 2002 | December 31, 2001
-----------------------------|-------------------------------------------|--------------------------------------------
| | | | | |
| | Number of | % of | | Number of | % of
| Principal | Loans | Collateral | Principal | Loans | Collateral
-----------------------------|---------------|------------|--------------|--------------|-------------|---------------
Past due 30 days to 60 days | $21,431 | 9 | 0.22% | $15,401 | 5 | 0.15%
-----------------------------|---------------|------------|--------------|--------------|-------------|---------------
Past due 60 days to 90 days | 12,245 | 4 | 0.12 | 9,865 | 4 | 0.10
-----------------------------|---------------|------------|--------------|--------------|-------------|---------------
Past due 90 days or more | 154,592 | 22 | 1.57 | 112,017 | 18 | 1.13
-----------------------------|---------------|------------|--------------|--------------|-------------|---------------
Real Estate owned | 16,393 | 3 | 0.17 | 8,805 | 1 | 0.09
----------------- | | | | | |
-----------------------------|---------------|------------|--------------|--------------|-------------|---------------
Total Delinquent | $204,661 | 38 | 2.08% | $146,088 | 28 | 1.47%
---------------- | | | | | |
-----------------------------|---------------|------------|--------------|--------------|-------------|---------------
Total Principal Balance | $9,832,658 | 1,907 | | $9,909,800 | 1,911 |
----------------------- | | | | | |
----------------------------------------------------------------------------------------------------------------------
Of the 38 delinquent loans as of March 31, 2002, 13 were delinquent due to
technical reasons, 3 were REO and being marketed for sale, 3 were in
foreclosure, and the remaining 19 loans were in some form of workout
negotiations. Aggregate realized losses of $66 were taken in the first
quarter of 2002. This brings aggregate losses to $5,122. This is in line
with the Company's loss expectations as realized losses are expected to
increase on the 1998 vintage loans as they age.
The subordinated CMBS owned by the Company has a delinquency experience of
2.08%, compared to 1.89% for directly comparable collateral pursuant to the
Lehman Brothers Conduit Guide for 1998 vintage transactions. The Company
expects delinquencies to continue to rise throughout 2002 in line with
expectations.
During the first quarter of 2002 the Company also experienced early payoffs
of $41,071, which represents 0.42% of the year-end pool balance. These
loans were paid-off at par with no loss. The anticipated losses
attributable to these loans will be reallocated to the loans remaining in
the pools.
Subsequent to March 31, 2002, 4 of the 38 delinquent loans were brought
current and 15 loans became delinquent.
The unrealized loss on the Company's holdings of CMBS at March 31, 2002 was
$97,650. This decline in the value of the investment portfolio represents
market valuation changes and is not due to credit experience or credit
expectations. The adjusted purchase price of the Company's CMBS portfolio
as of March 31, 2002 represents approximately 64% of its par amount. The
market value of the Company's CMBS portfolio as of March 31, 2002
represents approximately 51% of its par amount. As the portfolio matures
the Company expects to recoup the unrealized loss, provided that the credit
losses experienced are not greater than the credit losses assumed in the
purchase analysis. The Company performs a detailed review of its loss
assumptions on a quarterly basis and will adjust them when it believes that
credit experience or expectations justify such an adjustment. As of March
31, 2002 the Company concluded that real estate credit fundamentals remain
solid, and the Company believes there has been no material change in the
credit quality of its portfolio. As the portfolio matures and expected
losses occur subordination levels of the lower rated classes of a CMBS
investment will be reduced. This may cause the lower rated classes to be
downgraded. This would negatively affect the market value and liquidity of
the portfolio.
Commercial Real Estate Markets: Real estate markets generally lag the
economic recovery, so it is not surprising that the first quarter 2002 was
considerably slower than the prior year. Transaction volume is down
substantially and the volume of maturing commercial mortgages will not
increase until next year, consequently mortgage origination volume is down
as well. Although real estate market conditions have weakened significantly
due to the economic slowdown and increase in sublease space, the industry
remains in remarkably good shape, particularly when compared to where it
was in 1992, as it exited the last recession.
Commercial Real Estate Loans: The Company also owns seven loans and two
preferred equity interests in partnerships that own office buildings. The
Company's commercial loan portfolio generally emphasizes larger
transactions located in metropolitan markets as compared to the loans in
the CMBS portfolio. There are no delinquencies on the Company's direct
holdings of commercial mezzanine loans.
Interest Rate Risk and Company Performance: The Company generally makes
investments at long-term rates and borrows money to fund those investments
at short-term rates. The level of short-term rates and their relationship
to long-term rates directly affects the net investment income of the
Company. The value of the Company's assets is generally based on market
rates for ten-year U.S. Treasury notes and credit spreads. The Company
generally pledges its assets when it borrows funds. The value of the assets
pledged affects the amount of money the Company can borrow at a given time.
Credit spreads represent the premium above the treasury rates required by
the market to take credit risk. CMBS credit spreads remain at historically
wide levels despite continued strength in the commercial real estate credit
markets. The chart below compares the credit spreads for high yield CMBS to
high yield corporate bonds.
Average Credit Spreads (in basis points)*
-----------------------------------------
BB CMBS BB Corporate Difference
------- ------------ ----------
As of March 31, 2002 589 415 174
As of December 31, 2001 590 496 94
B CMBS B Corporate Difference
------ ----------- ----------
As of March 31, 2002 1046 614 432
As of December 31, 2001 1051 709 342
*Source - Lehman Brothers CMBS High Yield Index & Lehman Brothers
High Yield Index
All of the Company's borrowings bear interest at rates that are determined
with reference to LIBOR. To the extent that interest rates on the Company's
borrowings increase without an offsetting increase in the interest rates
earned on the Company's investments and hedges, the Company's earnings
could be negatively affected. The chart below compares the rate for
ten-year U.S. Treasury securities to the one-month LIBOR rate.
Ten Year
U.S Treasury One month
Securities LIBOR Difference
---------- ----- ----------
March 31, 2002 5.41% 1.88% 3.53%
December 31, 2001 5.04 1.87 3.17
On average the LIBOR rate was 35 basis points lower in the quarter ended
March 31, 2002, than the quarter ended December 31, 2001.
The Company actively hedges its exposure to both short-term and long-term
rates. The degree of hedging and the choice of hedging instruments depends
on market conditions. This information is reviewed on a daily basis and
changes are made accordingly. The Company uses a combination of interest
rate futures contracts and interest rate swap agreements to hedge these
exposures.
Liquidity Risk: The Company acquires its investments using its capital and
borrowed funds. The availability of funds is a key component of the
Company's operations. During times of market uncertainty the availability
of this type of financing can be very limited. The Company currently funds
itself mainly through short-term secured lending arrangements with various
counterparties. These arrangements are generally for 30-day terms and are
rolled over for 30-day periods at the end of each term. The Company also
has a committed borrowing facility from Deutsche Bank in the amount of
$185,000. This facility matures in July of 2002 and is currently under
negotiation to be extended.
The Company's debt to equity ratio has been approximately 4:1 throughout
2002. The three investment operations of the Company are all financed on a
secured basis at levels that take into account the specific risks of that
asset class. As of March 31, 2002 the Company's CMBS portfolio is financed
at a debt to equity ratio of .99:1, commercial lending at 0.58:1,
investment grade REIT debt securities at 2.51:1, and while the high credit
quality of the RMBS portfolio allows for financing levels of up to 20:1,
the Company operates this portfolio at much more conservative levels of
6.99:1. Generally the Company maintains debt to equity ratios of 1.5:1 on
CMBS, 1:1 on commercial lending and 9:1 on RMBS.
Yields on residential mortgage-backed securities trended lower during the
first two months of the quarter ended March 31, 2002, but rose sharply
during the month of March. From a relative value perspective residential
mortgages performed extremely well during the first quarter as volatility
dropped substantially and higher yields resulted in lower future supply and
lower prepayments. However, mortgage spread tightening and net interest
margin carry more than offset the back up in rates.
The Company's liquidity portfolio continues to enjoy exceptional carry, as
the yield curve remained steep. The Company's residential portfolio is
comprised of 15-year agency residential mortgages with coupons of 5.5% or
6.0%. This portfolio has performed well as this sector of the market
continues to gain investor interest due to significant carry and lower
prepayment risk.
Within the residential mortgage portfolio the Company maintains an active
trading strategy designed to take advantage of market opportunities and
generate realized capital gains. This activity is focused on lower risk
spread and yield curve trades. The Company commenced this strategy in the
fourth quarter of 1998 and has posted $0.01 to $0.03 gains in all but one
quarter. During the first quarter of 2002 the Company realized a gain of
$0.06 per share.
Consistent weekly drops in refinancing activity since December 2001 have
left mortgages strong technically as supply of lower coupons has decreased
dramatically.
Recent Events: In April 2002, the New York City Loan, a $13,170 subordinate
interest in a $57,750 first mortgage secured by a commercial office
building located in midtown New York City, paid off its balance in full.
The original maturity of the loan was in January 2004.
The Company owns several subordinate tranches of the GMAC 98 C-1 CMBS
securitization, included in securities held to maturity. On May 14, 2002, a
borrower whose loan is included in the securitization filed Chapter 11
bankruptcy. The loan is secured by mortgages on 82 skilled nursing
facilities as well as a surety bond from a AA- rated surety for
approximately 66% of the principal amount of the loan. The principal amount
of the loan is $210,053. The Company performs a detailed review of its loss
assumptions on the loans included in securities it holds, and will adjust
the loss assumptions when it believes that credit experience or
expectations justify such an adjustment. At this time, the Company does not
believe that an adjustment is required for possible losses on this loan.
The Company is financing a portion of the Company's CMBS portfolio and
unsecured real estate investment trust obligations through a Collateralized
Debt Obligation (CDO) offering in the approximate amount of $419,185. The
CDO is designed to match fund such portion of the Company's CMBS portfolio
and unsecured real estate investment trust obligations. The Company intends
to obtain the equity interest in the issuer of the CDO and will account for
this transaction on its balance sheet as a financing. Anthracite will use
the proceeds of this offering to replace 87% of the short-term liabilities
currently used to finance its larger credit sensitive portfolio. All notes
will be issued at a fixed rate or hedged to create a total fixed cost of
funds of approximately 7.29%. On May 14, 2002, the Company established the
price and par amounts of its CDO debt issuance. Successful execution of
this strategy will significantly increase the quality of the Company's
earnings by eliminating the risk of financing the assets contributed to the
CDO. The notes offered pursuant to the CDO will not be registered under the
Securities Act of 1933, as amended, and may not be offered or sold in the
United States absent registration or an applicable exemption from
registration requirements.
On May 14, 2002, the Company established the price and par amounts of
its CDO debt issuance as follows:
-----------------------------------------------------------------------------
Credit
Rating Par Coupon Support
-----------------------------------------------------------------------------
AAA 214,107 LIBOR + 45 BP 58.50%
-----------------------------------------------------------------------------
AA 24,433 LIBOR + 85 BP 49.50%
-----------------------------------------------------------------------------
AA 22,000 6.63% 49.50%
-----------------------------------------------------------------------------
A 30,000 LIBOR + 125 BP 38.00%
-----------------------------------------------------------------------------
A 29,331 7.04% 38.00%
-----------------------------------------------------------------------------
BBB 14,995 LIBOR + 220 BP 32.00%
-----------------------------------------------------------------------------
BBB 16,000 8.02% 32.00%
-----------------------------------------------------------------------------
BBB- 4,000 LIBOR + 350 BP 27.25%
-----------------------------------------------------------------------------
BBB- 20,506 9.31% 27.25%
-----------------------------------------------------------------------------
BB 43,853 Treasury + 657.5 BP 18.75%
-----------------------------------------------------------------------------
Total $ 419,185
-----------------------------------------------------------------------------
Results of Operations: Net income for the three months ended March 31, 2002
was $27,743 or $0.58 per share ($0.58 diluted). Net income for the three
months ended March 31, 2001 was $11,773 or $0.35 per share ($0.33 diluted).
Further details of the changes are set forth below.
The following tables sets forth information regarding the total amount of
income from certain of the Company's interest-earning assets.
For the Three Months Ended March 31,
2002 2001
-------------------------------------------------
Interest Interest
Income Income
-------------------------------------------------
CMBS $13,279 $10,307
Other securities 15,400 6,940
Commercial mortgage loans 3,619 5,987
Mortgage loan pools - 1,438
Cash and cash equivalents 319 197
-------------------------------------------------
Total $32,617 $24,869
=================================================
In addition to the foregoing, the Company earned $6,288 and $1,104 in
interest income from securities held for trading during the three months
ended March 31, 2002, and 2001, respectively, $261 and $367 in earnings
from real estate joint ventures during the three months ended March 31,
2002 and 2001, respectively, and $185 in earnings from an equity investment
during the three months ended March 31, 2002. There were no earnings from
an equity investment for the three months ended March 31, 2001.
Interest Expense: The following table sets forth information regarding the
total amount of interest expense from certain of the Company's
collateralized borrowings. Information is based on daily average balances
during the period.
For the Three Months Ended March 31,
2002 2001
---------------------------------------------
Interest Interest
Income Income
---------------------------------------------
Reverse repurchase agreements $ 8,147 $ 8,928
Lines of credit and term loan 695 3,708
---------------------------------------------
Total $ 8,842 $ 12,636
=============================================
The foregoing interest expense amounts for the three months ended March 31,
2002 do not include a $1,175 reduction of interest expense related to hedge
ineffectiveness, as well as a $3,973 addition to interest expense related
to swaps. The foregoing interest expense amounts for the three months ended
March 31, 2001 do not include a $172 reduction of interest expense related
to swaps. See Note 10, Derivative Instruments, for further description of
the Company's hedge ineffectiveness.
Net Interest Margin and Net Interest Spread from the Portfolio: The Company
considers its portfolio to consist of its securities available for sale,
mortgage loan pools, commercial mortgage loans, and cash and cash
equivalents because these assets relate to its core strategy of acquiring
and originating high yield loans and securities backed by commercial real
estate, while at the same time maintaining a portfolio of liquid investment
grade securities to enhance the Company's liquidity.
Net interest margin from the portfolio is annualized net interest income
from the portfolio divided by the average market value of interest-earning
assets in the portfolio. Net interest income from the portfolio is total
interest income from the portfolio less interest expense relating to
collateralized borrowings. Net interest spread from the portfolio equals
the yield on average assets for the period less the average cost of funds
for the period. The yield on average assets is interest income from the
portfolio divided by average amortized cost of interest earning assets in
the portfolio. The average cost of funds is interest expense from the
portfolio divided by average outstanding collateralized borrowings.
The following chart describes the interest income, interest expense, net
interest margin, and net interest spread for the Company's portfolio. The
following interest income and expense amounts exclude income and expense
related to real estate joint ventures, equity investment, and hedge
ineffectiveness.
For the Three Months Ended March 31
2002 2001
----------------------------------------
Interest income $39,090 $25,973
Interest expense $12,803 $12,212
Net interest margin 5.01% 5.04%
Net interest spread 4.56% 3.92%
Other Expenses: Expenses other than interest expense consist primarily of
management fees and general and administrative expenses. Management fees
paid to the Manager of $5,407 for the three months ended March 31, 2002
were comprised of base management fees of $2,219 and incentive fees of
$3,188. Management fees paid to the Manager of $2,449 for the three months
ended March 31, 2001 were comprised of base management fees of $1,866 and
incentive fees of $583. Other expenses/income-net of $576 and $494 for the
three months ended March 31, 2002, and 2001, respectively, were comprised
of accounting agent fees, custodial agent fees, directors' fees, fees for
professional services, insurance premiums, broken deal expenses, and due
diligence costs. Other expenses/income-net for the three months ended March
31, 2001 includes the amortization of negative goodwill of $425; negative
goodwill was written off effective January 1, 2002.
Other Gains (Losses): During the three months ended March 31, 2002 and
2001, the Company sold a portion of its securities available-for-sale for
total proceeds of $354,187 and $315,975, resulting in a realized loss of
$(4,079) and $(1,947), respectively. The gains on securities held for
trading were $4,014 and $692 for the three months ended March 31, 2002 and
2001, respectively. The foreign currency (losses) gains of $(247) and $104
for the three months ended March 31, 2002 and 2001, respectively, relate to
the Company's net investment in a commercial mortgage loan denominated in
pounds sterling and associated hedging.
Dividends Declared: On March 14, 2002, the Company declared distributions
to its shareholders of $.35 per share, payable on April 30, 2002 to
shareholders of record on April 4, 2002.
Changes in Financial Condition
Securities Available for Sale: The Company's securities available for sale,
which are carried at estimated fair value, included the following at March
31, 2002 and December 31, 2001:
March 31, 2002 December 31,
Estimated 2001 Estimated
Security Description Fair Value Percentage Fair Value Percentage
------------------------------------------------------------------------------------------------------------------------------
Commercial mortgage-backed securities:
CMBS IOs $ 33,769 4.3% $ 79,204 5.5%
Investment grade CMBS 12,402 1.6 14,590 1.0
Non-investment grade rated subordinated securities - 0 328,532 22.7
Non-rated subordinated securities - 0 31,627 2.2
-----------------------------------------------------------------
46,171 5.9 453,953 31.4
-----------------------------------------------------------------
Single-family residential mortgage-backed securities:
Agency adjustable rate securities 68,235 8.6 75,035 5.2
Agency fixed rate securities 604,729 76.2 804,759 55.7
Residential CMOs 23,725 3.0 33,522 2.3
Home equity loans 23,080 2.9 27,299 1.9
Hybrid arms 27,241 3.4 51,386 3.5
-----------------------------------------------------------------
747,010 94.1 992,001 68.6
-----------------------------------------------------------------
-----------------------------------------------------------------
Total securities available for sale $ 793,181 100.0% $ 1,445,954 100.0%
=================================================================
Borrowings: As of March 31, 2002, the Company's debt consisted of
line-of-credit borrowings, term loans and reverse repurchase agreements,
collateralized by a pledge of most of the Company's securities available
for sale, securities held for trading, and its commercial mortgage loans.
The Company's financial flexibility is affected by its ability to renew or
replace on a continuous basis its maturing short-term borrowings. As of
March 31, 2002, the Company has obtained financing in amounts and at
interest rates consistent with the Company's short-term financing
objectives.
Under the lines of credit, term loans, and the reverse repurchase
agreements, the lender retains the right to mark the underlying collateral
to market value. A reduction in the value of its pledged assets will
require the Company to provide additional collateral or fund margin calls.
From time to time, the Company expects that it will be required to provide
such additional collateral or fund margin calls.
The following table sets forth information regarding the Company's
collateralized borrowings.
For the Three Months Ended
March 31, 2002
----------------------------------------------------------------
March 31, 2002 Maximum Range of
Balance Balance Maturities
----------------------------------------------------------------
Reverse repurchase agreements 1,502,919 1,725,283 2 to 54 days
Line of credit and term loan borrowings 101,444 101,444 109 to 740 days
----------------------------------------------------------------
Hedging Instruments: From time to time the Company may reduce its exposure
to market interest rates by entering into various financial instruments
that adjust portfolio duration. These financial instruments are intended to
mitigate the effect of interest rates on the value of certain assets in the
Company's portfolio. At March 31, 2002, the Company had outstanding short
positions of 80 thirty-year U.S. Treasury Bond future contracts, 2,610
ten-year U.S. Treasury Note future contracts and 681 five-year U.S.
Treasury Note future contracts. At December 31, 2001, the Company had
outstanding short positions of 80 thirty-year U.S. Treasury Bond futures,
500 ten-year U.S. Treasury Note future contracts, and a short call
swaptions with a notional amount of $400,000.
Interest rate swap agreements as of March 31, 2002 and December 31, 2001
consisted of the following:
March 31, 2002 December 31, 2001
Notional Estimated Unamortized Remaining Notional Estimated Unamortized Remaining
Value Fair Value Cost Term Value Fair Value Cost Term
---------------------------------------------------------- ----------------------------------------------------------
$752,000 $(2,307) $4,657 6.71 years $792,000 $(9,380) $4,764 8.12 years
As of March 31, 2002, the Company had designated $682,000 of the interest
rate swap agreements as cash flow hedges of borrowings under reverse
repurchase agreements.
Capital Resources and Liquidity
Liquidity is a measurement of the Company's ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, loan acquisition and lending activities and for other general
business purposes. The primary sources of funds for liquidity consist of
collateralized borrowings, principal and interest payments on and
maturities of securities available for sale, securities held for trading
and commercial mortgage loans, and proceeds from sales thereof.
To the extent that the Company may become unable to maintain its borrowings
at their current level due to changes in the financing markets for the
Company's assets, the Company may be required to sell assets in order to
achieve lower borrowing levels. In this event, the Company's level of net
earnings would decline. The Company's principal strategies for mitigating
this risk are to maintain portfolio leverage at levels it believes are
sustainable and to diversify the sources and types of available borrowing
and capital. The Company has utilized committed bank facilities, preferred
stock, and will consider resecuritization or other achievable term funding
of existing assets.
In March 2002, the Series A Preferred shareholder converted its remaining
10,000 shares of the Series A Preferred Stock into 34,427 shares of Company
Common Stock at a price of $7.26 per share pursuant to the terms of such
preferred stock, which is $0.09 lower than the original conversion price
due to the effects of anti-dilution provisions in the Series A Preferred
Stock.
For the quarter ended March 31, 2002, the Company issued 519,303 shares of
Common Stock under its Dividend Reinvestment Plan. Net proceeds to the
Company were approximately $5,661.
As of March 31, 2002 $141,611 of the Company's $185,000 committed credit
facility with Deutsche Bank, AG was available for future borrowings and
$141,945 was available under the Company's $200,000 term facility with
Merrill Lynch.
The Company's operating activities provided cash flows of $214 and $49,146
during the three months ended March 31, 2002 and 2001, respectively,
primarily through net income and purchases of trading securities in excess
of sales in 2001.
The Company's investing activities provided (used) cash flows totaling
$193,591 and $(81,556), during the three months ended March 31, 2002 and
2001, respectively, primarily to purchase securities available for sale and
to fund commercial mortgage loans, offset by significant sales of
securities.
The Company's financing activities (used) provided $(217,293) and $29,631
during the three months ended March 31, 2002 and 2001, respectively,
primarily from secondary and follow on offerings in 2001 and reductions of
the level of short-term borrowings.
Although the Company's portfolio of securities available for sale was
acquired at a net discount to the face amount of such securities, the
Company has received to date and expects to continue to have sufficient
cash flows from its portfolio to fund distributions to stockholders.
The Company is subject to various covenants in its lines of credit,
including maintaining: a minimum GAAP net worth of $140,000, a
debt-to-equity ratio not to exceed 5.0 to 1, a minimum cash requirement
based upon certain debt to equity ratios, a minimum debt service coverage
ratio of 1.5, and a minimum liquidity reserve of $10,000. Additionally, the
Company's GAAP net worth cannot decline by more than 37% during the course
of any two consecutive fiscal quarters. As of March 31, 2002, the Company
was in compliance with all such covenants.
The Company's ability to execute its business strategy depends to a
significant degree on its ability to obtain additional capital. Factors
which could affect the Company's access to the capital markets, or the
costs of such capital, include changes in interest rates, general economic
conditions and perception in the capital markets of the Company's business,
covenants under the Company's current and future credit facilities, results
of operations, leverage, financial conditions and business prospects.
Current conditions in the capital markets for REITS such as the Company
have made permanent financing transactions difficult and more expensive
than at the time of the Company's initial public offering. Consequently,
there can be no assurance that the Company will be able to effectively fund
future growth. Except as discussed herein, management is not aware of any
other trends, events, commitments or uncertainties that may have a
significant effect on liquidity.
REIT Status: The Company has elected to be taxed as a REIT and to comply
with the provisions of the Code, with respect thereto. Accordingly, the
Company generally will not be subject to Federal income tax to the extent
of its distributions to stockholders and as long as certain asset, income
and stock ownership tests are met. The Company may, however, be subject to
tax at corporate rates or at excise tax rates on net income or capital
gains not distributed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk: Market risk is the exposure to loss resulting from changes in
interest rates, credit curve spreads, foreign currency exchange rates,
commodity prices and equity prices. The primary market risks to which the
Company is exposed are interest rate risk and credit curve risk. Interest
rate risk is highly sensitive to many factors, including governmental,
monetary and tax policies, domestic and international economic and
political considerations and other factors beyond the control of the
Company. Credit risk is highly sensitive to dynamics of the markets for
commercial mortgage securities and other loans and securities held by the
Company. Excessive supply of these assets combined with reduced demand will
cause the market to require a higher yield. This demand for higher yield
will cause the market to use a higher spread over the U.S. Treasury
securities yield curve, or other benchmark interest rates, to value these
assets. Changes in the general level of the U.S. Treasury yield curve can
have significant effects on the market value of the Company's portfolio.
The majority of the Company's assets are fixed rate securities valued based
on a market credit spread to U.S. Treasuries. As U.S. Treasury securities
are priced to a higher yield and/or the spread to U.S. Treasuries used to
price the Company's assets is increased, the market value of the Company's
portfolio may decline. Conversely, as U.S. Treasury securities are priced
to a lower yield and/or the spread to U.S. Treasuries used to price the
Company's assets is decreased, the market value of the Company's portfolio
may increase. Changes in the market value of the Company's portfolio may
affect the Company's net income or cash flow directly through their impact
on unrealized gains or losses on securities held for trading or indirectly
through their impact on the Company's ability to borrow. Changes in the
level of the U.S. Treasury yield curve can also affect, among other things,
the prepayment assumptions used to value certain of the Company's
securities and the Company's ability to realize gains from the sale of such
assets. In addition, changes in the general level of the LIBOR money market
rates can affect the Company's net interest income. The majority of the
Company's liabilities are floating rate based on a market spread to U.S.
LIBOR. As the level of LIBOR increases or decreases, the Company's interest
expense will move in the same direction.
The Company may utilize a variety of financial instruments, including
interest rate swaps, caps, floors and other interest rate exchange
contracts, in order to limit the effects of fluctuations in interest rates
on its operations. The use of these types of derivatives to hedge
interest-earning assets and/or interest-bearing liabilities carries certain
risks, including the risk that losses on a hedge position will reduce the
funds available for payments to holders of securities and, indeed, that
such losses may exceed the amount invested in such instruments. A hedge may
not perform its intended purpose of offsetting losses or increased costs.
Moreover, with respect to certain of the instruments used as hedges, the
Company is exposed to the risk that the counterparties with which the
Company trades may cease making markets and quoting prices in such
instruments, which may render the Company unable to enter into an
offsetting transaction with respect to an open position. If the Company
anticipates that the income from any such hedging transaction will not be
qualifying income for REIT income test purposes, the Company may conduct
part or all of its hedging activities through a to-be-formed corporate
subsidiary that is fully subject to federal corporate income taxation. The
profitability of the Company may be adversely affected during any period as
a result of changing interest rates.
The following tables quantify the potential changes in the Company's net
portfolio value and net interest income under various interest rates and
credit-spread scenarios. Net portfolio value is defined as the value of
interest-earning assets net of the value of interest-bearing liabilities.
It is evaluated using an assumption that interest rates, as defined by the
U.S. Treasury yield curve, increase or decrease and the assumption that the
yield curves of the rate shocks will be parallel to each other.
Net interest income is defined as interest income earned from
interest-earning assets net of the interest expense incurred by the
interest bearing liabilities. It is evaluated using the assumptions that
interest rates, as defined by the U.S. LIBOR curve, increase or decrease
and the assumption that the yield curves of the LIBOR rate shocks will be
parallel to each other. Market value in this scenario is calculated using
the assumption that the U.S. Treasury yield curve remains constant.
All changes in income and value are measured as percentage changes from the
respective values calculated in the scenario labeled as "Base Case." The
base interest rate scenario assumes interest rates as of March 31, 2002.
Actual results could differ significantly from these estimates.
Projected Percentage Change In Portfolio Net Market Value
Given U.S. Treasury Yield Curve Movements
Change in Projected Change in
Treasury Yield Curve, Portfolio
+/- Basis Points Net Market Value
------------------------------------------------------
-300 6.9%
-200 5.9%
-100 3.6%
Base Case 0
+100 (4.9)%
+200 (11.1)%
+300 (18.6)%
Projected Percentage Change In Portfolio Net Market Value
Given Credit Spread Movements
Change in Projected Change in
Credit Spreads, Portfolio
+/- Basis Points Net Market Value
--------------------------------------------------
-300 55.1%
-200 38.0%
-100 19.6%
Base Case 0
+100 (20.9)%
+200 (43.2)%
+300 (66.7)%
Projected Percentage Change In Portfolio Net Interest Income and
Change in Net Income per Share Given LIBOR Movements
Projected Change in
Projected Change in Portfolio Net Interest
Change in LIBOR, Portfolio Income per Share
+/- Basis Points Net Interest Income
-----------------------------------------------------------------------------
-200 10.7% $0.25
-100 5.4% $0.12
-50 2.7% $0.06
Base Case 0 0
+50 (2.7)% $(0.06)
+100 (5.4)% $(0.12)
+200 ( 10.7)% $(0.25)
Credit Risk: Credit risk is the exposure to loss from loan defaults.
Default rates are subject to a wide variety of factors, including, but not
limited to, property performance, property management, supply/demand
factors, construction trends, consumer behavior, regional economics,
interest rates, the strength of the American economy, and other factors
beyond the control of the Company.
All loans are subject to a certain probability of default. The nature of
the CMBS assets owned is such that all losses experienced by a pool of
mortgages will be borne by the Company. Changes in the expected default
rates of the underlying mortgages will significantly affect the value of
the Company, the income it accrues and the cash flow it receives. An
increase in default rates will reduce the book value of the Company's
assets and the Company earnings and cash flow available to fund operations
and pay dividends.
The Company manages credit risk through the underwriting process,
establishing loss assumptions, and careful monitoring of loan performance.
Before acquiring a security that represents a pool of loans, the Company
will perform a rigorous analysis of the quality of substantially all of the
loans proposed for that security. As a result of this analysis, loans with
unacceptable risk profiles will be removed from the proposed security.
Information from this review is then used to establish loss assumptions.
The Company will assume that a certain portion of the loans will default
and calculate an expected, or loss adjusted yield based on that assumption.
After the securities have been acquired the Company monitors the
performance of the loans, as well as external factors that may affect their
value. Factors that indicate a higher loss severity or timing experience is
likely to cause a reduction in the expected yield and therefore reduce the
earnings of the Company, and may require a significant write down of
assets.
For purposes of illustration, a doubling of the losses in the Company's
credit sensitive portfolio, without a significant acceleration of those
losses would reduce the expected yield on adjusted purchase price from
10.1% to approximately 8.77%. This would reduce GAAP income going forward
by approximately $0.16 per common share per annum and cause a significant
write down in assets at the time the loss assumption is changed to reduce
the affected securities to their then fair value.
Asset and Liability Management: Asset and liability management is concerned
with the timing and magnitude of the repricing and/or maturing of assets
and liabilities. It is the objective of the Company to attempt to control
risks associated with interest rate movements. In general, management's
strategy is to match the term of the Company's liabilities as closely as
possible with the expected holding period of the Company's assets. This is
less important for those assets in the Company's portfolio considered
liquid as there is a very stable market for the financing of these
securities.
The Company uses interest rate duration as its primary measure of interest
rate risk. This metric, expressed when considering any existing leverage,
allows the Company's management to approximate changes in the net market
value of the Company's portfolio given potential changes in the U.S.
Treasury yield curve. Interest rate duration considers both assets and
liabilities. As of March 31, 2002, the Company's duration on equity was
approximately 4.25 years. This implies that a parallel shift of the U.S.
Treasury yield curve of 100 basis points would cause the Company's net
asset value to increase or decrease by approximately 4.25%. The difference
in the value change when rates rise versus fall is attributable to the
prepayment characteristics of the Company's RMBS portfolio. Because the
Company's assets, and their markets, have other, more complex sensitivities
to interest rates, the Company's management believes that this metric
represents a good approximation of the change in portfolio net market value
in response to changes in interest rates, though actual performance may
vary due to changes in prepayments, credit spreads and increased market
volatility.
Other methods for evaluating interest rate risk, such as interest rate
sensitivity "gap" (defined as the difference between interest-earning
assets and interest-bearing liabilities maturing or repricing within a
given time period), are used but are considered of lesser significance in
the daily management of the Company's portfolio. The majority of the
Company's assets pay a fixed coupon and the income from such assets are
relatively unaffected by interest rate changes. The majority of the
Company's liabilities are borrowings under its line of credit or reverse
repurchase agreements that bear interest at variable rates that reset
monthly. Given this relationship between assets and liabilities, the
Company's interest rate sensitivity gap is highly negative. This implies
that a period of falling short-term interest rates will tend to increase
the Company's net interest income while a period of rising short-term
interest rates will tend to reduce the Company's net interest income.
Management considers this relationship when reviewing the Company's hedging
strategies. Because different types of assets and liabilities with the same
or similar maturities react differently to changes in overall market rates
or conditions, changes in interest rates may affect the Company's net
interest income positively or negatively even if the Company were to be
perfectly matched in each maturity category.
The Company currently has positions in forward currency exchange contracts
to hedge currency exposure in connection with its commercial mortgage loan
denominated in pounds sterling. The purpose of the Company's foreign
currency-hedging activities is to protect the Company from the risk that
the eventual U.S. dollar net cash inflows from the commercial mortgage loan
will be adversely affected by changes in exchange rates. The Company's
current strategy is to roll these contracts from time to time to hedge the
expected cash flows from the loan. Fluctuations in foreign exchange rates
are not expected to have a material impact on the Company's net portfolio
value or net interest income.
Forward Looking Statements: Certain statements contained herein are not,
and certain statements contained in future filings by Anthracite Capital,
Inc. (the "Company") with the SEC, in the Company's press releases or in
the Company's other public or stockholder communications may not be based
on historical facts and are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements which are based on various assumptions (some of which are beyond
the Company's control) may be identified by reference to a future period or
periods, or by the use of forward-looking terminology, such as "may,"
"will," "believe," "expect," "anticipate," "continue," or similar terms or
variations on those terms, or the negative of those terms. Actual results
could differ materially from those set forth in forward-looking statements
due to a variety of factors, including, but not limited to, those related
to the economic environment, particularly in the market areas in which the
Company operates, competitive products and pricing, fiscal and monetary
policies of the U.S. government, changes in prevailing interest rates,
acquisitions and the integration of acquired businesses, credit risk
management, asset/liability management, currency risk management, the
financial and securities markets, the real estate markets, and the
availability of and costs associated with sources of liquidity. The Company
does not undertake, and specifically disclaims any obligation, to publicly
release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
At March 31, 2002 there were no pending legal proceedings to which the
Company was a party or of which any of its property was subject.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Third Amendment to the Management Agreement between the Company and
the Manager, dated as of March 25, 2002 (correcting Exhibit 10.3 to
the Company's Annual Report on Form 10-K for the year ended December
31, 2001, which Exhibit was filed with a typographical error.)
(b) Reports on Form 8-K
Current Report on Form 8-K filed with the SEC on February 13, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANTHRACITE CAPITAL, INC.
Dated: May 15, 2002 By: /s/ Hugh R. Frater
-----------------------------------
Name: Hugh R. Frater
Title: President and Chief
Executive Officer
(authorized officer of registrant)
Dated: May 15, 2002 By: /s/ Richard M. Shea
-----------------------------------
Name: Richard M. Shea
Title: Chief Operating Officer and
Chief Financial Officer
(principal accounting officer)