UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2011

or

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

For the transition period from              to             

Commission file number 1-14760

RAIT FINANCIAL TRUST

(Exact name of registrant as specified in its charter)

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

(215) 243-9000

(Registrant’s telephone number, including area code)

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

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

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

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

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

A total of 40,077,148 common shares of beneficial interest, par value $0.03 per share, of the registrant were outstanding as of November 2, 2011.

RAIT FINANCIAL TRUST

TABLE OF CONTENTS

		Page
	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010		1
	Consolidated Statements of Operations for the Three-Month and Nine-Month Periods Ended September 30, 2011 and 2010		2
	Consolidated Statements of Comprehensive Income (Loss) for the Three-Month and Nine-Month Periods Ended September 30, 2011 and 2010		3
	Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2011 and 2010		4
	Notes to Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		44
Item 4.	Controls and Procedures		44
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings		45
Item 1A.	Risk Factors		45
Item 6.	Exhibits		46
	Signatures		47

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

RAIT Financial Trust

Consolidated Balance Sheets

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

	As of September  30, 2011			As of December  31, 2010
Assets
Investments in mortgages and loans, at amortized cost:
Commercial mortgages, mezzanine loans, other loans and preferred equity interests	$	1,107,429		$	1,219,110
Allowance for losses		(56,126	)		(69,691	)
Total investments in mortgages and loans		1,051,303			1,149,419
Investments in real estate		849,232			839,192
Investments in securities and security-related receivables, at fair value		719,546			705,451
Cash and cash equivalents		29,693			27,230
Restricted cash		287,877			179,019
Accrued interest receivable		41,110			37,138
Other assets		43,851			32,840
Deferred financing costs, net of accumulated amortization of $11,010 and $9,943, respectively		22,791			19,954
Intangible assets, net of accumulated amortization of $2,197 and $1,777, respectively		2,769			3,189
Total assets	$	3,048,172		$	2,993,432
Liabilities and Equity
Indebtedness (including $114,440 and $152,494 at fair value, respectively)	$	1,793,250		$	1,838,177
Accrued interest payable		25,495			19,925
Accounts payable and accrued expenses		24,843			25,089
Derivative liabilities		194,224			184,878
Deferred taxes, borrowers’ escrows and other liabilities		91,499			6,833
Total liabilities		2,129,311			2,074,902
Equity:
Shareholders’ equity:
Preferred shares, $0.01 par value per share, 25,000,000 shares authorized;
7.75% Series A cumulative redeemable preferred shares, liquidation preference $25.00 per share, 2,760,000 shares issued and outstanding		28			28
8.375% Series B cumulative redeemable preferred shares, liquidation preference $25.00 per share, 2,258,300 shares issued and outstanding		23			23
8.875% Series C cumulative redeemable preferred shares, liquidation preference $25.00 per share, 1,600,000 shares issued and outstanding		16			16
Common shares, $0.03 par value per share, 200,000,000 shares authorized, 40,077,148 and 35,300,190 issued and outstanding		1,205			1,060
Additional paid in capital		1,730,373			1,691,681
Accumulated other comprehensive income (loss)		(126,081	)		(127,602	)
Retained earnings (deficit)		(690,542	)		(647,110	)
Total shareholders’ equity		915,022			918,096
Noncontrolling interests		3,839			434
Total equity		918,861			918,530
Total liabilities and equity	$	3,048,172		$	2,993,432

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

1

RAIT Financial Trust

Consolidated Statements of Operations

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

	For the  Three-Month Periods Ended September 30						For the  Nine-Month Periods Ended September 30
	2011			2010			2011			2010
Revenue:
Interest income	$	33,549		$	37,252		$	101,590		$	117,755
Rental income		23,635			18,443			67,063			52,203
Fee and other income		2,905			3,204			8,578			15,555
Total revenue		60,089			58,899			177,231			185,513
Expenses:
Interest expense		22,689			24,038			68,384			74,170
Real estate operating expense		14,563			13,951			40,971			37,872
Compensation expense		6,898			6,766			19,179			21,704
General and administrative expense		4,042			4,331			13,441			14,588
Provision for losses		500			10,813			3,400			35,807
Depreciation and amortization expense		7,300			7,380			21,668			20,576
Total expenses		55,992			67,279			167,043			204,717
Operating Income		4,097			(8,380	)		10,188			(19,204	)
Interest and other income (expense)		145			42			295			401
Gains (losses) on sale of assets		1,455			0			3,434			11,616
Gains (losses) on extinguishment of debt		11,371			14,278			14,540			51,290
Change in fair value of financial instruments		(34,997	)		14,237			(55,113	)		35,120
Income (loss) before taxes and discontinued operations		(17,929	)		20,177			(26,656	)		79,223
Income tax benefit (provision)		158			627			468			484
Income (loss) from continuing operations		(17,771	)		20,804			(26,188	)		79,707
Income (loss) from discontinued operations		(50	)		(2,556	)		747			(1,630	)
Net income (loss)		(17,821	)		18,248			(25,441	)		78,077
(Income) loss allocated to preferred shares		(3,407	)		(3,406	)		(10,235	)		(10,227	)
(Income) loss allocated to noncontrolling interests		59			210			176			803
Net income (loss) allocable to common shares	$	(21,169	)	$	15,052		$	(35,500	)	$	68,653
Earnings (loss) per share—Basic:
Continuing operations	$	(0.55	)	$	0.58		$	(0.96	)	$	2.57
Discontinued operations		0.00			(0.08	)		0.02			(0.06	)
Total earnings (loss) per share—Basic	$	(0.55	)	$	0.50		$	(0.94	)	$	2.51
Weighted-average shares outstanding—Basic		38,771,022			30,330,259			37,822,750			27,384,451
Earnings (loss) per share—Diluted:
Continuing operations	$	(0.55	)	$	0.57		$	(0.96	)	$	2.53
Discontinued operations		0.00			(0.08	)		0.02			(0.06	)
Total earnings (loss) per share—Diluted	$	(0.55	)	$	0.49		$	(0.94	)	$	2.47
Weighted-average shares outstanding—Diluted		38,771,022			30,887,145			37,822,750			27,800,648
Distributions declared per common share	$	0.06		$	0.00		$	0.21		$	0.00

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

2

RAIT Financial Trust

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited and dollars in thousands)

	For the  Three-Month Periods Ended September 30						For the  Nine-Month Periods Ended September 30
	2011			2010			2011			2010
Net income (loss)	$	(17,821	)	$	18,248		$	(25,441	)	$	78,077
Other comprehensive income (loss):
Change in fair value of interest rate hedges		(18,332	)		(20,720	)		(31,526	)		(63,423	)
Reclassification adjustments associated with unrealized losses (gains) from interest rate hedges included in net income (loss)		0			(12	)		(8	)		(50	)
Realized (gains) losses on interest rate hedges reclassified to earnings		10,748			11,391			32,884			34,662
Change in fair value of available-for-sale securities		(12	)		901			171			(4,074	)
Total other comprehensive income (loss)		(7,596	)		(8,440	)		1,521			(32,885	)
Comprehensive income (loss) before allocation to noncontrolling interests		(25,417	)		9,808			(23,920	)		45,192
Allocation to noncontrolling interests		59			210			176			803
Comprehensive income (loss)	$	(25,358	)	$	10,018		$	(23,744	)	$	45,995

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

3

RAIT Financial Trust

Consolidated Statements of Cash Flows

(Unaudited and dollars in thousands)

	For the  Nine-Month Periods Ended September 30
	2011			2010
Operating activities:
Net income (loss)	$	(25,441	)	$	78,077
Adjustments to reconcile net income (loss) to cash flow from operating activities:
Provision for losses		3,400			35,807
Share-based compensation expense		395			2,277
Depreciation and amortization		21,668			22,432
Amortization of deferred financing costs and debt discounts		3,582			2,046
Accretion of discounts on investments		(1,940	)		(3,193	)
(Gains) losses on sales of assets		(3,434	)		(8,971	)
(Gains) losses on extinguishment of debt		(14,540	)		(51,290	)
Change in fair value of financial instruments		55,113			(35,120	)
Other items		(8	)		(145	)
Changes in assets and liabilities:
Accrued interest receivable		(4,300	)		573
Other assets		(5,828	)		443
Accrued interest payable		(28,814	)		(29,872	)
Accounts payable and accrued expenses		487			(1,499	)
Deferred taxes, borrowers’ escrows and other liabilities		(1,619	)		(6,098	)
Cash flow from operating activities		(1,279	)		5,467
Investing activities:
Proceeds from sales of other securities		12,793			18,040
Purchase and origination of loans for investment		(79,632	)		(19,346	)
Principal repayments on loans		128,709			82,710
Investments in real estate		(22,546	)		(13,752	)
Proceeds from dispositions of real estate		65,750			7,064
Acquisition of Independence Realty Trust, Inc. and associated entities		(2,578	)		0
Proceeds from sale of collateral management rights		0			14,105
(Increase) Decrease in restricted cash		(62,976	)		(45,783	)
Cash flow from investing activities		39,520			43,038
Financing activities:
Repayments on secured credit facilities and loans payable on real estate		(46,266	)		(14,062	)
Proceeds from loans payable on real estate		37,400			0
Repayments and repurchase of CDO notes payable		(28,758	)		(17,380	)
Proceeds from issuance of 7.0% convertible senior notes		115,000			0
Repayments and repurchase of 6.875% convertible senior notes		(119,320	)		(12,357	)
Issuance (acquisition) of noncontrolling interests		3,581			(47	)
Payments for deferred costs		(7,080	)		(170	)
Common share issuance, net of costs incurred		25,413			6,384
Distributions paid to preferred shareholders		(10,235	)		(10,227	)
Distributions paid to common shareholders		(5,513	)		0
Cash flow from financing activities		(35,778	)		(47,859	)
Net change in cash and cash equivalents		2,463			646
Cash and cash equivalents at the beginning of the period		27,230			25,034
Cash and cash equivalents at the end of the period	$	29,693		$	25,680
Supplemental cash flow information:
Cash paid for interest	$	24,771		$	31,471
Cash paid (refunds received) for taxes		63			(1,774	)
Non-cash increase in investments in real estate from the conversion of loans		78,300			91,287
Non-cash decrease in indebtedness from conversion to shares or debt extinguishments		(16,246	)		(32,934	)

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

4

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

NOTE 1: THE COMPANY

RAIT Financial Trust invests in and manages a portfolio of real-estate related assets, including direct ownership of real estate properties, and provides a comprehensive set of debt financing options to the real estate industry. References to “RAIT”, “we”, “us”, and “our” refer to RAIT Financial Trust and its subsidiaries, unless the context otherwise requires. We conduct our business through our subsidiaries, RAIT Partnership, L.P. and Taberna Realty Finance Trust, or Taberna, as well as through their respective subsidiaries. RAIT is a self-managed and self-advised Maryland real estate investment trust, or REIT. Taberna is also a Maryland REIT.

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

We are subject to significant competition in all aspects of our business. Existing industry participants and potential new entrants compete with us for the available supply of investments suitable for origination or acquisition, as well as for debt and equity capital. We compete with many third parties engaged in real estate finance and investment activities, including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodies and other entities.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles, or GAAP. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the included disclosures are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements should be read in conjunction with our audited financial statements as of and for the year ended December 31, 2010 included in our Annual Report on Form 10-K. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position and consolidated results of operations and cash flows are included. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year.

Certain prior period amounts have been reclassified to conform with the current period presentation. Previously, interest expense was included as part of net interest margin within total revenue. We have now classified interest expense as a component of expenses. Additionally, interest expense associated with third party financing provided on our owned real estate is included in interest expense whereas previously it was reflected within property operating expenses.

b. Principles of Consolidation

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

Under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 810, “Consolidation”, the determination of whether to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. We define the power to direct the activities that most significantly impact the VIE’s economic performance as the ability to buy, sell, refinance, or recapitalize assets or entities, and solely control other material operating events or items of the respective entity. For our commercial mortgages, mezzanine loans, and preferred equity investments, certain rights we hold are protective in nature and would preclude us from having the power to direct the activities that most significantly impact the VIE’s economic performance. Assuming both criteria are met, we would be considered the primary beneficiary and would consolidate the VIE. We will continually assess our involvement with VIEs and consolidated the VIEs when we are the primary beneficiary. See Note 9 for additional disclosures pertaining to VIEs.

5

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

c. Use of Estimates

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

d. Investments in Loans

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

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

We maintain an allowance for losses on our investments in commercial mortgages, mezzanine loans and other loans. Management’s periodic evaluation of the adequacy of the allowance is based upon expected and inherent risks in the portfolio, the estimated value of underlying collateral, and current economic conditions. Management reviews loans for impairment and establishes specific reserves when a loss is probable and reasonably estimable under the provisions of FASB ASC Topic 310, “Receivables.” As part of the detailed loan review, we consider many factors about the specific loan, including payment history, asset performance, borrower’s financial capability and other characteristics. If any trends or characteristics indicate that it is probable that other loans, with similar characteristics to those of impaired loans, have incurred a loss, we consider whether an allowance for loss is needed pursuant to FASB ASC Topic 450, “Contingencies.” Management evaluates loans for non-accrual status each reporting period. A loan is placed on non-accrual status when the loan payment deficiencies exceed 90 days. Payments received for non-accrual or impaired loans are applied to principal until the loan is removed from non-accrual status or no longer impaired. Past due interest is recognized on non-accrual loans when they are removed from non-accrual status and are making current interest payments. The allowance for losses is increased by charges to operations and decreased by charge-offs (net of recoveries). Management charges off impaired loans when the investment is no longer realizable and legally discharged.

f. Investments in Real Estate

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

We acquire real estate assets either directly or through the conversion of our investments in loans into owned real estate. Acquisitions of real estate assets and any related intangible assets are recorded initially at fair value under FASB ASC Topic 805, “Business Combinations.” Fair value is determined by management based on market conditions and inputs at the time the asset is acquired. All expenses incurred to acquire a real estate asset are expensed as incurred.

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

g. Investments in Securities

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

6

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

We account for investments in securities where the transfer meets the criteria as a financing under FASB ASC Topic 860, “Transfers and Servicing”, at amortized cost. Our investments in security-related receivables represent securities that were transferred to issuers of collateralized debt obligations, or CDOs, in which the transferors maintained some level of continuing involvement.

We use our judgment to determine whether an investment in securities has sustained an other-than-temporary decline in value. If management determines that an investment in securities has sustained an other-than-temporary decline in its value, the investment is written down to its fair value by a charge to earnings, and we establish a new cost basis for the investment. Our evaluation of an other-than-temporary decline is dependent on the specific facts and circumstances. Factors that we consider in determining whether an other-than-temporary decline in value has occurred include: the estimated fair value of the investment in relation to our cost basis; the financial condition of the related entity; and the intent and ability to retain the investment for a sufficient period of time to allow for recovery of the fair value of the investment.

h. Revenue Recognition

1) Interest income—We recognize interest income from investments in commercial mortgages, mezzanine loans, and other securities on a yield to maturity basis. Upon the acquisition of a loan at a discount, we assess the portions of the discount that constitute accretable yields and non-accretable differences. The accretable yield represents the excess of our expected cash flows from the loan over the amount we paid for the loan. That amount, the accretable yield, is accreted to interest income over the remaining life of the loan. Many of our commercial mortgages and mezzanine loans provide for the accrual of interest at specified rates which differ from current payment terms. Interest income is recognized on such loans at the accrual rate subject to management’s determination that accrued interest and outstanding principal are ultimately collectible.

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

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

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

2) Rental income—We generate rental income from tenant rent and other tenant-related activities at our consolidated real estate properties. For multi-family real estate properties, rental income is recorded when due from residents and recognized monthly as it is earned and realizable, under lease terms which are generally for periods of one year or less. For retail and office real estate properties, rental income is recognized on a straight-line basis from the later of the date of the commencement of the lease or the date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. Leases also typically provide for tenant reimbursement of a portion of common area maintenance and other operating expenses to the extent that a tenant’s pro rata share of expenses exceeds a base year level set in the lease.

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

During the three-month periods ended September 30, 2011 and 2010, we received $1,308 and $1,343, respectively, of earned asset management fees associated with CDOs, of which we eliminated $919 and $983, respectively, of management fee income with consolidated CDOs.

During the nine-month periods ended September 30, 2011 and 2010, we received $3,908 and $6,447, respectively, of earned asset management fees associated with CDOs, of which we eliminated $2,802 and $2,965, respectively, of management fee income with consolidated CDOs.

i. Fair Value of Financial Instruments

In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management

7

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined in FASB ASC Topic 820, “Fair Value Measurements and Disclosures” and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, are as follows:

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

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

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

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

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

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that management believes market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that management believes are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be transferred from Level 1 to Level 2 or Level 2 to Level 3.

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

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

8

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

j. Income Taxes

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

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

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

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

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

k. Recent Accounting Pronouncements

On January 1, 2010, we adopted Accounting Standards Update (ASU) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” This accounting standard requires new disclosures for significant transfers in and out of Level 1 and 2 fair value measurements and a description of the reasons for the transfer. This accounting standard also updates existing disclosures by providing fair value measurement disclosures for each class of assets and liabilities and provides disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. For Level 3 fair value measurements, new disclosures will require entities to present information separately for purchases, sales, issuances, and settlements. These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard did not have a material effect on our consolidated financial statements.

On January 1, 2011, we adopted ASU No. 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” This accounting standard requires that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This accounting standard also expands the supplemental pro forma disclosures under FASB ASU Topic 805, “Business Combinations” to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The adoption of this standard did not have a material effect on our consolidated financial statements.

9

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

In April 2011, the FASB issued accounting standards classified under FASB ASC Topic 310, “Receivables”. This accounting standard amends existing guidance to provide additional guidance on the determination of whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. This standard is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of this standard did not have a material effect on our consolidated financial statements.

NOTE 3: INVESTMENTS IN LOANS

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

The following table summarizes our investments in commercial mortgages, mezzanine loans, other loans and preferred equity interests as of September 30, 2011:

	Unpaid Principal Balance			Unamortized (Discounts) Premiums			Carrying Amount			Number of Loans		Weighted- Average Coupon (1)			Range of Maturity Dates
Commercial Real Estate (CRE) Loans
Commercial mortgages	$	658,446		$	(3,949	)	$	654,497			39		6.7	%	Nov. 2011 to May 2021
Mezzanine loans		344,870			(5,027	)		339,843			93		8.9	%	Nov. 2011 to Nov. 2038
Preferred equity interests		61,200			(1,130	)		60,070			21		10.5	%	Nov. 2011 to Aug. 2025
Total CRE Loans		1,064,516			(10,106	)		1,054,410			153		7.6	%
Other loans		54,842			(616	)		54,226			4		6.4	%	Nov. 2011 to Oct. 2016
Total Loans	$	1,119,358		$	(10,722	)	$	1,108,636			157		7.6	%
Deferred fees		(1,207	)		0			(1,207	)
Total investments in loans	$	1,118,151		$	(10,722	)	$	1,107,429

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

During the nine-month periods ended September 30, 2011 and 2010, we completed the conversion of three and seven commercial real estate loans with a carrying value of $85,114 and $110,528 to real estate owned properties. During the nine-month periods ended September 30, 2011 and 2010, we charged off $6,814 and $19,241, respectively, related to the conversion of commercial real estate loans to owned properties. See Note 5.

The following table summarizes the delinquency statistics of our commercial real estate loans as of September 30, 2011 and December 31, 2010:

Delinquency Status	As of September  30, 2011		As of December  31, 2010
30 to 59 days	$	1,230	$	27,978
60 to 89 days		7,400		0
90 days or more		31,855		55,450
In foreclosure or bankruptcy proceedings		39,800		46,578
Total	$	80,285	$	130,006

As of September 30, 2011 and December 31, 2010, approximately $91,833 and $122,306, respectively, of our commercial real estate loans were on non-accrual status and had a weighted-average interest rate of 9.6% and 8.8%, respectively. As of September 30, 2011 and December 31, 2010, approximately $19,501 and $20,908 of one other loan was on non-accrual status and had a weighted-average interest rate of 7.2%.

10

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

Allowance For Losses And Impaired Loans

The following table provides a roll-forward of our allowance for losses for our commercial mortgages, mezzanine loans, and other loans for the three-month periods ended September 30, 2011 and 2010:

	For the  Three-Month Period Ended September 30, 2011			For the  Three-Month Period Ended September 30, 2010
Beginning balance	$	57,866		$	78,672
Provision		500			10,813
Charge-offs, net of recoveries		(2,240	)		(8,497	)
Ending balance	$	56,126		$	80,988

The following table provides a roll-forward of our allowance for losses for our commercial mortgages, mezzanine loans, and other loans for the nine-month periods ended September 30, 2011 and 2010:

	For the  Nine-Month Period Ended September 30, 2011			For the  Nine-Month Period Ended September 30, 2010
Beginning balance	$	69,691		$	86,609
Provision		3,400			35,807
Charge-offs, net of recoveries		(16,965	)		(41,428	)
Ending balance	$	56,126		$	80,988

As of September 30, 2011 and December 31, 2010, we identified 19 and 27 commercial mortgages, mezzanine loans and other loans with unpaid principal balances of $120,470 and $157,746 as impaired.

The average unpaid principal balance of total impaired loans was $118,164 and $181,301 during the three-month periods ended September 30, 2011 and 2010 and $134,585 and $181,169 during the nine-month periods ended September 30, 2011 and 2010. We recorded interest income from impaired loans of $2 and $141 for the three-month periods ended September 30, 2011 and 2010 and $526 and $2,633 for the nine-month periods ended September 30, 2011 and 2010.

NOTE 4: INVESTMENTS IN SECURITIES

Our investments in securities and security-related receivables are accounted for at fair value. The following table summarizes our investments in securities as of September 30, 2011:

Investment Description	Amortized Cost		Net Fair Value Adjustments			Estimated Fair  Value		Weighted Average Coupon (1)			Weighted Average Years to Maturity
Trading securities
TruPS	$	637,376	$	(156,769	)	$	480,607		4.6	%		22.8
Other securities		11,020		(11,020	)		0		4.8	%		41.1
Total trading securities		648,396		(167,789	)		480,607		4.6	%		23.1
Available-for-sale securities		3,600		(3,598	)		2		2.1	%		31.1
Security-related receivables
TruPS receivables		111,199		(27,037	)		84,162		6.9	%		11.2
Unsecured REIT note receivables		61,000		2,477			63,477		6.6	%		6.2
CMBS receivables (2)		153,868		(83,159	)		70,709		5.7	%		32.6
Other securities		73,585		(52,996	)		20,589		3.3	%		30.9
Total security-related receivables		399,652		(160,715	)		238,937		5.7	%		22.3
Total investments in securities	$	1,051,648	$	(332,102	)	$	719,546		5.0	%		22.9

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

(2) CMBS receivables include securities with a fair value totaling $21,101 that are rated between “AAA” and “A-” by Standard & Poor’s, securities with a fair value totaling $39,989 that are rated “BBB+” and “B-” by Standard & Poor’s, securities with a fair value totaling $7,560 that are rated “CCC” by Standard & Poor’s and securities with a fair value totaling $2,059 that are rated “D” by Standard & Poor’s.

11

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

A substantial portion of our gross unrealized losses is greater than 12 months.

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

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

	As of September 30, 2011							As of December 31, 2010
	Principal /Par Amount  on Non-accrual		Weighted Average  Coupon			Fair Value		Principal /Par Amount  on Non-accrual		Weighted Average  Coupon			Fair Value
TruPS and TruPS receivables	$	75,557		1.0	%	$	2,944	$	133,682		4.1	%	$	5,581
Other securities		34,035		3.3	%		2		42,754		2.8	%		976
CMBS receivables		37,204		5.9	%		2,489		29,204		5.9	%		975

The assets of our consolidated CDOs collateralize the debt of such entities and are not available to our creditors. As of September 30, 2011 and December 31, 2010, investment in securities of $748,575 and $806,700, respectively, in principal amount of TruPS and subordinated debentures, and $212,921 and $219,868, respectively, in principal amount of unsecured REIT note receivables and CMBS receivables, collateralized the consolidated CDO notes payable of such entities.

NOTE 5: INVESTMENTS IN REAL ESTATE

The table below summarizes our investments in real estate:

	As of September 30, 2011					As of December 31, 2010
	Book Value			Number  of Properties		Book Value			Number  of Properties
Multi-family real estate properties	$	591,341			33	$	602,183			33
Office real estate properties		249,212			10		219,567			9
Retail real estate properties		48,979			2		41,838			2
Parcels of land		22,208			3		22,208			3
Subtotal		911,740			48		885,796			47
Less: Accumulated depreciation and amortization		(62,508	)				(46,604	)
Investments in real estate	$	849,232				$	839,192

As of September 30, 2011, our investments in real estate of $849,232 are financed through $91,953 of mortgages held by third parties and $791,804 of mortgages held by our consolidated securitizations. Together, along with commercial real estate loans held by these securitizations, these mortgages serve as collateral for the CDO notes payable issued by our consolidated securitizations. All intercompany balances and interest charges are eliminated in consolidation.

Acquisitions:

During the nine-month period ended September 30, 2011, we converted three loans with a carrying value of $85,388, relating to one office property and two multi-family properties, to owned real estate. Upon conversion, we recorded the investment in real estate acquired including any related working capital at fair value of $78,167.

The following table summarizes the aggregate estimated fair value of the assets and liabilities associated with the three properties acquired during the nine-month period ended September 30, 2011, on the respective date of each conversion, for the real estate accounted for under FASB ASC Topic 805.

Description	Estimated Fair  Value
Assets acquired:
Investments in real estate	$	78,300
Cash and cash equivalents		402
Restricted cash		582
Other assets		137
Total assets acquired		79,421

12

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

Description	Estimated Fair  Value
Liabilities assumed:
Accounts payable and accrued expenses		775
Other liabilities		479
Total liabilities assumed		1,254
Estimated fair value of net assets acquired	$	78,167

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

Description	Estimated Fair  Value
Fair value of consideration transferred:
Commercial real estate loans	$	78,300
Other considerations		(133	)
Total fair value of consideration transferred	$	78,167

During the nine-month period ended September 30, 2011, these investments contributed revenue of $3,803 and a net income allocable to common shares of $1,176. During the nine-month period ended September 30, 2011, we did not incur any third-party acquisition-related costs.

Our consolidated unaudited pro forma information, after including the acquisition of real estate properties, is presented below as if the acquisition occurred on January 1, 2010. These pro forma results are not necessarily indicative of the results which actually would have occurred if the acquisition had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods:

Description	For the Nine-Month Period Ended September 30, 2011			For the Nine-Month Period Ended September 30, 2010
Total revenue, as reported	$	177,231		$	185,513
Pro forma revenue		180,011			192,034
Net income (loss) allocable to common shares, as reported		(35,500	)		68,653
Pro forma net income (loss) allocable to common shares		(34,705	)		70,282

These amounts have been calculated after adjusting the results of the acquired businesses to reflect the additional depreciation that would have been charged assuming the fair value adjustments to our investments in real estate had been applied from January 1, 2010 together with the consequential tax effects.

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

Dispositions:

During the nine-month period ended September 30, 2011, we sold two multi-family properties for a total purchase price of $67,550. We recorded losses on the sale of these assets of $218.

13

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

NOTE 6: INDEBTEDNESS

We maintain various forms of short-term and long-term financing arrangements. Generally, these financing agreements are collateralized by assets within securitizations. The following table summarizes our total recourse and non-recourse indebtedness as of September 30, 2011:

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
7.0% convertible senior notes (1)	$	115,000	$	107,466		7.0	%	Apr. 2031
6.875% convertible senior notes (2)		38,813		38,950		6.9	%	Apr. 2027
Secured credit facilities		10,554		10,554		3.0	%	Dec. 2016
Senior secured notes (7)		43,000		43,000		12.5	%	Apr. 2014
Junior subordinated notes, at fair value (3)		38,052		22,450		5.2	%	Oct. 2015 to Mar. 2035
Junior subordinated notes, at amortized cost		25,100		25,100		7.7	%	Apr. 2037
Total recourse indebtedness		270,519		247,520		7.5	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (4)(5)		1,323,046		1,323,046		0.6	%	2045 to 2046
CDO notes payable, at fair value (3)(4)(6)		1,122,495		130,694		0.9	%	2037 to 2038
Loans payable on real estate		91,990		91,990		5.9	%	Sept. 2015 to May 2021
Total non-recourse indebtedness		2,537,531		1,545,730		0.9	%
Total indebtedness	$	2,808,050	$	1,793,250		1.6	%

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

(2) Our 6.875% convertible senior notes are redeemable, at par at the option of the holder, in April 2012, April 2017, and April 2022. During October 2011, we repurchased and retired $34,231 in aggregate principal amount of our 6.875% convertible senior notes, leaving $4,582 outstanding.

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

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

(5) Collateralized by $1,744,031 principal amount of commercial mortgages, mezzanine loans, other loans and preferred equity interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(6) Collateralized by $1,223,158 principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of September 30, 2011 was $879,380. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(7) In October 2011, we prepaid, in full, our $43,000 12.5% Senior Secured Notes due to mature in April 2014.

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

The current status or activity in our financing arrangements occurring as of or during the nine-month period ended September 30, 2011 is as follows:

Recourse Indebtedness

6.875% convertible senior notes. During the nine-month period ended September 30, 2011, we repurchased $104,800 in aggregate principal amount of our 6.875% Convertible Senior Notes due 2027, or the 6.875% convertible senior notes, for an aggregate purchase price of $103,213. As a result of these transactions, we recorded losses on extinguishment of debt of $120, net of deferred financing costs and unamortized discounts that were written off.

Our 6.875% convertible senior notes are redeemable, at the option of the holder, in April 2012. We expect to acquire, redeem, refinance or otherwise enter into transactions to satisfy our 6.875% convertible senior notes which may include any combination of payments of cash, issuances of our debt and/or equity securities, sales or exchanges of our assets or other methods.

14

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

7.0% convertible senior notes. On March 21, 2011, we issued and sold in a public offering $115,000 aggregate principal amount of our 7.0% Convertible Senior Notes due 2031, or the 7.0% convertible senior notes. After deducting the underwriting discount and the estimated offering costs, we received approximately $109,000 of net proceeds. Interest on the 7.0% convertible senior notes is paid semi-annually and the 7.0% convertible senior notes mature on April 1, 2031.

Prior to April 5, 2016, the 7.0% convertible senior notes are not redeemable at RAIT’s option, except to preserve RAIT’s status as a REIT. On or after April 5, 2016, RAIT may redeem all or a portion of the 7.0% convertible senior notes at a redemption price equal to the principal amount plus accrued and unpaid interest. Holders of 7.0% convertible senior notes may require RAIT to repurchase all or a portion of the 7.0% convertible senior notes at a purchase price equal to the principal amount plus accrued and unpaid interest on April 1, 2016, April 1, 2021, and April 1, 2026, or upon the occurrence of certain defined fundamental changes.

The 7.0% convertible senior notes are convertible at the option of the holder at a current conversion rate of 131.3268 common shares per $1,000 principal amount of 7.0% convertible senior notes (equivalent to a current conversion price of $7.61 per common share). Upon conversion of 7.0% convertible senior notes by a holder, the holder will receive cash, our common shares or a combination of cash and our common shares, at our election. We include the 7.0% convertible senior notes in earnings per share using the treasury stock method if the conversion value in excess of the par amount is considered in the money during the respective periods.

According to FASB ASC Topic 470, “Debt”, we recorded a discount on our issued and outstanding 7.0% convertible senior notes of $8,228. This discount reflects the fair value of the embedded conversion option within the 7.0% convertible senior notes and was recorded as an increase to additional paid in capital. The fair value was calculated by discounting the cash flows required in the indenture relating to the 7.0% convertible senior notes agreement by a discount rate that represents management’s estimate of our senior, unsecured, non-convertible debt borrowing rate at the time when the 7.0% convertible senior notes were issued. The discount will be amortized to interest expense through April 1, 2016, the date at which holders of our 7.0% convertible senior notes could require repayment.

Secured credit facilities. During the nine-month period ending September 30, 2011, we repaid, in full, a $16,160 secured credit facility due to mature in October 2011.

As of September 30, 2011, we have $10,554 outstanding under our remaining secured credit facility. During the three-month period ended September 30, 2011, we renewed our remaining secured credit facility by repaying $8,993 of the $19,547 outstanding principal amount and amending the terms of the remaining $10,554 balance to extend the maturity date from December 2011 to December 2016 and provide for the full amortization of that balance over that five year period. In addition, the interest rate on our secured credit facility was amended to be a floating interest rate of LIBOR plus 275 basis points.

Senior secured notes. During the nine-month period ended September 30, 2011, the holder of the 10.0% senior secured convertible note, or the 10.0% senior note, converted $5,250 principal amount of the 10.0% senior note into 1,500,000 common shares. On April 26, 2011, we prepaid the remaining $15,700 principal amount of the 10.0% senior note.

Loans payable on real estate. During the nine-month period ended September 30, 2011 we refinanced recourse financing consisting of a first mortgage of $12,500 principal amount with a fixed rate of 5.8%, due in April 2012, that was associated with one of our owned real estate properties with non-recourse financing provided by a consolidated securitization. In addition, we refinanced recourse financing consisting of a first mortgage of $7,113 principal amount with a fixed rate of 5.0% due in September 2013, that was associated with one of our owned real estate properties with non-recourse financing provided by a consolidated securitization.

Non-Recourse Indebtedness

CDO notes payable, at amortized cost. CDO notes payable at amortized cost represent notes issued by consolidated CDO entities which are used to finance the acquisition of unsecured REIT notes, CMBS securities, commercial mortgages, mezzanine loans, and other loans in our commercial real estate portfolio. Generally, CDO notes payable are comprised of various classes of notes payable, with each class bearing interest at variable or fixed rates. Both of our CRE CDOs are meeting all of their overcollateralization, or OC, and interest coverage, or IC, trigger tests as of September 30, 2011.

During the nine-month period ended September 30, 2011, we repurchased, from the market, a total of $6,700 in aggregate principal amount of CDO notes payable issued by our RAIT I CDO securitization. The aggregate purchase price was $2,499 and we recorded a gain on extinguishment of debt of $4,202.

15

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

During the nine-month period ended September 30, 2011, we repurchased, from the market, a total of $15,000 in aggregate principal amount of CDO notes payable issued by our RAIT II CDO securitization. The aggregate purchase price was $4,542 and we recorded a gain on extinguishment of debt of $10,458.

CDO notes payable, at fair value. Both of our Taberna consolidated CDOs are failing OC trigger tests which cause a change to the priority of payments to the debt and equity holders of the respective securitizations. Upon the failure of an OC test, the indenture of each CDO requires cash flows that would otherwise have been distributed to us as equity distributions, or in some cases interest payments on our retained CDO notes payable, be used to pay down sequentially the outstanding principal balance of the most senior note holders. The OC tests failures are due to defaulted collateral assets and credit risk securities. During the nine-month period ended September 30, 2011, $24,618 of cash flows were re-directed from our retained interests in these CDOs and were used to repay the most senior holders of our CDO notes payable.

Loans payable on real estate. During the nine-month period ended September 30, 2011, we obtained a first mortgage on an investment in real estate from the Federal National Mortgage Association that has a principal balance of $13,400, 7 year term, and a 5.12% interest rate and a first mortgage on an investment in real estate from Bank of America that has a principal balance of $24,000, 10 year term, and a 6.09% interest rate.

NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS

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

Cash Flow Hedges

We have entered into various interest rate swap contracts to hedge interest rate exposure on floating rate indebtedness. We designate interest rate hedge agreements at inception and determine whether or not the interest rate hedge agreement is highly effective in offsetting interest rate fluctuations associated with the identified indebtedness. At designation, certain of these interest rate swaps had a fair value not equal to zero. However, we concluded, at designation, that these hedging arrangements were highly effective during their term using regression analysis and determined that the hypothetical derivative method would be used in measuring any ineffectiveness. At each reporting period, we update our regression analysis and, as of September 30, 2011, we concluded that these hedging arrangements were highly effective during their remaining term and used the hypothetical derivative method in measuring the ineffective portions of these hedging arrangements.

The following table summarizes the aggregate notional amount and estimated net fair value of our derivative instruments as of September 30, 2011 and December 31, 2010:

	As of September 30, 2011					As of December 31, 2010
	Notional		Fair Value			Notional		Fair Value
Cash flow hedges:
Interest rate swaps	$	1,677,900	$	(194,224	)	$	1,786,698	$	(184,878	)
Interest rate caps		36,000		1,308			36,000		1,496
Net fair value	$	1,713,900	$	(192,916	)	$	1,822,698	$	(183,382	)

In November 2011, an interest rate swap agreement, that had a notional amount of $107,113 and strike rate of 5.25%, as of September 30, 2011, will terminate in accordance with its terms.

For interest rate swaps that are considered effective hedges, we reclassified realized losses of $10,748 and $11,391 to earnings for the three-month periods ended September 30, 2011 and 2010 and $32,884 and $34,662 for the nine-month periods ended September 30, 2011 and 2010. For interest rate swaps that are considered ineffective hedges, we reclassified unrealized gains of $12 to earnings for the three-month period ended September 30, 2010 and $50 for the nine-month period ended September 30, 2010.

On January 1, 2008, we adopted the fair value option, which has been classified under FASB ASC Topic 825, “Financial Instruments”, for certain of our CDO notes payable. Upon the adoption of this standard, hedge accounting for any previously designated cash flow hedges associated with these CDO notes payable was discontinued and all changes in fair value of these cash flow hedges are recorded in earnings. As of September 30, 2011, the notional value associated with these cash flow hedges where hedge accounting was discontinued was $967,276 and had a liability balance with a fair value of $99,012. See Note 8: “Fair Value of Financial Instruments” for the changes in value of these hedges during the three-month and nine-month periods ended September 30, 2011 and 2010. The change in value of these hedges was recorded as a component of the change in fair value of financial instruments in our consolidated statement of operations.

16

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

Amounts reclassified to earnings associated with effective cash flow hedges are reported in interest expense and the fair value of these hedge agreements is included in other assets or derivative liabilities.

NOTE 8: FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

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

The following table summarizes the carrying amount and the fair value of our financial instruments as of September 30, 2011:

Financial Instrument	Carrying Amount		Estimated Fair  Value
Assets
Commercial mortgages, mezzanine loans and other loans	$	1,107,429	$	1,055,886
Investments in securities and security-related receivables		719,546		719,546
Cash and cash equivalents		29,693		29,693
Restricted cash		287,877		287,877
Derivative assets		1,308		1,308
Liabilities
Recourse indebtedness:
7.0% convertible senior notes		107,466		78,775
6.875% convertible senior notes		38,950		38,413
Secured credit facilities		10,554		10,554
Senior secured notes		43,000		43,000
Junior subordinated notes, at fair value		22,450		22,450
Junior subordinated notes, at amortized cost		25,100		14,809
Non-recourse indebtedness:
CDO notes payable, at amortized cost		1,323,046		722,012
CDO notes payable, at fair value		130,694		130,694
Loans payable on real estate		91,990		91,990
Derivative liabilities		194,224		194,224

Fair Value Measurements

The following tables summarize information about our assets and liabilities measured at fair value on a recurring basis as of September 30, 2011, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:

Assets:	Quoted Prices in Active  Markets for Identical Assets (Level 1) (a)		Significant Other Observable  Inputs (Level 2) (a)		Significant Unobservable  Inputs (Level 3) ) (a)		Balance as of September  30, 2011
Trading securities
TruPS	$	0	$	0	$	480,607	$	480,607
Other securities		0		0		0		0
Available-for-sale securities		0		2		0		2
Security-related receivables
TruPS receivables		0		0		84,162		84,162
Unsecured REIT note receivables		0		63,477		0		63,477
CMBS receivables		0		70,709		0		70,709
Other securities		0		20,589		0		20,589
Derivative assets		0		1,308		0		1,308
Total assets	$	0	$	156,085	$	564,769	$	720,854

17

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

Liabilities:	Quoted Prices in Active  Markets for Identical Assets (Level 1) (a)		Significant Other Observable  Inputs (Level 2) (a)		Significant Unobservable  Inputs (Level 3) ) (a)		Balance as of September  30, 2011
Junior subordinated notes, at fair value	$	0	$	0	$	22,450	$	22,450
CDO notes payable, at fair value		0		0		130,694		130,694
Derivative liabilities		0		93,904		100,320		194,224
Total liabilities	$	0	$	93,904	$	253,464	$	347,368

(a) During the nine-month period ended September 30, 2011, there were no transfers between Level 1 and Level 2, as well as, there were no transfers into and out of Level 3.

The following tables summarize additional information about assets and liabilities that are measured at fair value on a recurring basis for which we have utilized level 3 inputs to determine fair value for the nine-month period ended September 30, 2011:

Assets	Trading Securities—TruPS and Subordinated Debentures			Security-Related Receivables—TruPS and Subordinated Debenture Receivables		Total Level 3 Assets
Balance, as of December 31, 2010	$	454,473		$	83,087	$	537,560
Change in fair value of financial instruments		84,259			1,075		85,334
Purchases		0			0		0
Sales		(58,125	)		0		(58,125	)
Balance, as of September 30, 2011	$	480,607		$	84,162	$	564,769

Liabilities	Derivative Liabilities		CDO Notes Payable,  at Fair Value			Junior Subordinated Notes, at Fair Value		Total Level 3 Liabilities
Balance, as of December 31, 2010	$	87,632	$	148,072		$	4,422	$	240,126
Change in fair value of financial instruments		12,688		7,239			18,028		37,955
Purchases		0		0			0		0
Sales		0		0			0		0
Principal repayments		0		(24,617	)		0		(24,617	)
Balance, as of September 30, 2011	$	100,320	$	130,694		$	22,450	$	253,464

Change in Fair Value of Financial Instruments

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

	For the  Three-Month Periods Ended September 30						For the  Nine-Month Periods Ended September 30
Description	2011			2010			2011			2010
Change in fair value of trading securities and security-related receivables	$	2,924		$	26,004		$	21,559		$	109,003
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		(11,406	)		7,555			(25,268	)		(891	)
Change in fair value of derivatives		(26,515	)		(19,322	)		(51,404	)		(72,992	)
Change in fair value of financial instruments	$	(34,997	)	$	14,237		$	(55,113	)	$	35,120

The changes in the fair value for the investment in securities, CDO notes payable and other liabilities for which the fair value option was elected for the three-month and nine-month periods ended September 30, 2011 and 2010 was primarily attributable to changes in instrument specific credit risks. The changes in the fair value of derivatives for which the fair value option was elected for the three-month and nine-month periods ended September 30, 2011 and 2010 was mainly due to changes in interest rates.

18

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

NOTE 9: VARIABLE INTEREST ENTITIES

The following table presents the assets and liabilities of our consolidated VIEs as of each respective date. As of September 30, 2011 our consolidated VIEs were: Taberna Preferred Funding VIII, Ltd., Taberna Preferred Funding IX, Ltd, RAIT CRE CDO I, Ltd., RAIT Preferred Funding II, Ltd., Willow Grove and Cherry Hill.

	As of September 30, 2011			As of December 31, 2010
Assets
Investments in mortgages and loans, at amortized cost:
Commercial mortgages, mezzanine loans, other loans and preferred equity interests	$	1,869,713		$	1,913,089
Allowance for losses		(13,083	)		(15,526	)
Total investments in mortgages and loans		1,856,630			1,897,563
Investments in real estate		21,046			21,054
Investments in securities and security-related receivables, at fair value		719,555			705,455
Cash and cash equivalents		327			73
Restricted cash		149,972			151,045
Accrued interest receivable		56,894			55,105
Other assets		27,421			0
Deferred financing costs, net of accumulated amortization of $10,359 and $8,608, respectively		16,021			17,999
Total assets	$	2,847,866		$	2,848,294
Liabilities and Equity
Indebtedness (including $130,694 and $148,072 at fair value, respectively)	$	1,691,049		$	1,707,352
Accrued interest payable		45,144			34,745
Accounts payable and accrued expenses		1,450			1,450
Derivative liabilities		194,224			184,878
Deferred taxes, borrowers’ escrows and other liabilities		0			3,814
Total liabilities		1,931,867			1,932,239
Equity:
Shareholders’ equity:
Accumulated other comprehensive income (loss)		(121,966	)		(123,316	)
RAIT Investment		55,700			103,862
Retained earnings		982,265			935,509
Total shareholders’ equity		915,999			916,055
Total liabilities and equity	$	2,847,866		$	2,848,294

The assets of the VIEs can only be used to settle obligations of the VIEs and are not available to our creditors. Certain amounts included in the table above are eliminated upon consolidation with other RAIT subsidiaries that maintain investments in the debt or equity securities issued by these entities.

RAIT does not have any contractual obligation to provide the VIEs listed above with any financial support. RAIT has not provided and does not intend to provide financial support to these VIEs that we were not previously contractually required to provide.

NOTE 10: EQUITY

Preferred Shares

On January 25, 2011, our board of trustees declared a first quarter 2011 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on March 31, 2011 to holders of record on March 1, 2011 and totaled $3,414.

On May 17, 2011, our board of trustees declared a second quarter 2011 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on June 30, 2011 to holders of record on June 1, 2011 and totaled $3,414.

On July 26, 2011, our board of trustees declared a third quarter 2011 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on September 30, 2011 to holders of record on September 1, 2011 and totaled $3,407.

19

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

On October 25, 2011, our board of trustees declared a fourth quarter 2011 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends will be paid on January 3, 2012 to holders of record on December 1, 2011.

Common Shares

Dividends:

On January 10, 2011, the board of trustees declared a $0.09 dividend on our common shares to holders of record as of January 21, 2011. The dividend was paid on January 31, 2011 and totaled $3,204.

On May 17, 2011, the board of trustees declared a $0.06 dividend on our common shares to holders of record as of July 8, 2011. The dividend was paid on July 29, 2011 and totaled $2,293.

On September 12, 2011, the board of trustees declared a $0.06 dividend on our common shares to holders of record as of October 7, 2011. The dividend was paid on October 31, 2011 and totaled $2,405 and is included in other liabilities in the accompanying consolidated balance sheet.

Reverse Stock Split:

On May 17, 2011, the board of trustees authorized a 1-for-3 reverse stock split of our common shares of beneficial interest that became effective on June 30, 2011, or the effective time. At the effective time, every three common shares issued and outstanding were automatically combined into one issued and outstanding new common share. The par value of new common shares changed to $0.03 per share after the reverse stock split from the par value of common shares prior to the reverse stock split of $0.01 per share. The reverse stock split reduced the number of common shares outstanding but did not change the number of authorized common shares. The reverse stock split did not affect our preferred shares of beneficial interest. All references in the accompanying financial statements to the number of common shares and earnings per share data for all periods presented have been adjusted to reflect the reverse stock split.

Share Repurchases:

On January 25, 2011, the compensation committee of our board of trustees approved a cash payment to the board’s eight non-management trustees intended to constitute a portion of their respective 2011 annual non-management trustee compensation. The cash payment was subject to terms and conditions set forth in a letter agreement, or the letter agreement, between each of the non-management trustees and RAIT. The terms and conditions included a requirement that each trustee use a portion of the cash payment to purchase RAIT’s common shares in purchases that, individually and in the aggregate with all purchases made by all the other non-management trustees pursuant to their respective letter agreements, complied with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. The aggregate amount required to be used by all of the non-management trustees to purchase common shares was $210 and was used to purchase 18,898 common shares, in the aggregate, in February 2011.

Equity Compensation:

During the nine-months ended September 30, 2011, 340,649 phantom unit awards were redeemed for common shares, a portion of which was withheld in order to satisfy the applicable withholding taxes. These phantom units were fully vested at the time of redemption.

Dividend Reinvestment and Share Purchase Plan (DRSPP):

We implemented an amended and restated dividend reinvestment and share purchase plan, or DRSPP, effective as of March 13, 2008, pursuant to which we registered and reserved for issuance 6,262,545 common shares. During the nine-month period ended September 30, 2011, we issued a total of 1,158,292 common shares pursuant to the DRSPP at a weighted-average price of $3.74 per share and we received $4,257 of net proceeds. As of September 30, 2011, 2,740,920 common shares, in aggregate, remain available for issuance under the DRSPP. Effective October 28, 2011, we registered and reserved for issuance an additional 7,759,080 common shares for issuance under the DRSPP so that the aggregate number of common shares available for issuance under the DRSPP was 10,500,000 common shares.

Capital on Demand™ Sales Agreement:

On August 6, 2010, we entered into a Capital on Demand™ Sales Agreement, or the COD sales agreement, with JonesTrading Institutional Services LLC, or JonesTrading, pursuant to which we may issue and sell up to 5,833,333 of our common shares from time to time through JonesTrading acting as agent and/or principal, subject to the terms and conditions of the COD sales agreement. For the nine-month period ended September 30, 2011, 2,815,528 common shares were issued pursuant to this arrangement at a

20

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

weighted average price of $8.77 and we received $22,934 of proceeds. As of September 30, 2011, there are no common shares that remain available for issuance under the COD sales agreement.

NOTE 11: EARNINGS (LOSS) PER SHARE

The following table presents a reconciliation of basic and diluted earnings (loss) per share for the three-month and nine-month periods ended September 30, 2011 and 2010:

	For the  Three-Month Periods Ended September 30						For the  Nine-Month Periods Ended September 30
	2011			2010			2011			2010
Income (loss) from continuing operations	$	(17,771	)	$	20,804		$	(26,188	)	$	79,707
(Income) loss allocated to preferred shares		(3,407	)		(3,406	)		(10,235	)		(10,227	)
(Income) loss allocated to noncontrolling interests		59			210			176			803
Income (loss) from continuing operations allocable to common shares		(21,119	)		17,608			(36,247	)		70,283
Income (loss) from discontinued operations		(50	)		(2,556	)		747			(1,630	)
Net income (loss) allocable to common shares	$	(21,169	)	$	15,052		$	(35,500	)	$	68,653
Weighted-average shares outstanding—Basic		38,771,022			30,330,259			37,822,750			27,384,451
Dilutive securities under the treasury stock method		0			556,886			0			416,197
Weighted-average shares outstanding—Diluted		38,771,022			30,887,145			37,822,750			27,800,648
Earnings (loss) per share—Basic:
Continuing operations	$	(0.55	)	$	0.58		$	(0.96	)	$	2.57
Discontinued operations		0.00			(0.08	)		0.02			(0.06	)
Total earnings (loss) per share—Basic	$	(0.55	)	$	0.50		$	(0.94	)	$	2.51
Earnings (loss) per share—Diluted:
Continuing operations	$	(0.55	)	$	0.57		$	(0.96	)	$	2.53
Discontinued operations		0.00			(0.08	)		0.02			(0.06	)
Total earnings (loss) per share—Diluted	$	(0.55	)	$	0.49		$	(0.94	)	$	2.47

For the three-month and nine-month periods ended September 30, 2011, securities convertible into 1,275,244 common shares, respectively, were excluded from the earnings (loss) per share computations because their effect would have been anti-dilutive. For the three-month and nine-month periods ended September 30, 2010, securities convertible into 3,698,272 common shares, respectively, were excluded from the earnings (loss) per share computations because their effect would have been anti-dilutive.

NOTE 12: RELATED PARTY TRANSACTIONS

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

Scott F. Schaeffer is our Chairman, Chief Executive Officer and President, and is a Trustee. Mr. Schaeffer’s spouse is a director of The Bancorp, Inc., or Bancorp, and she and Mr. Schaeffer own, in the aggregate, less than 1% of Bancorp’s outstanding common shares. Each transaction with Bancorp is described below:

a). Cash and Restricted Cash—We maintain checking and demand deposit accounts at Bancorp. As of September 30, 2011 and December 31, 2010, we had $7,848 and $72, respectively, of cash and cash equivalents and $577 and $985, respectively, of restricted cash on deposit at Bancorp. We did not receive any interest income from the Bancorp during the three-month and nine-month periods ended September 30, 2011 and 2010. Restricted cash held at Bancorp relates to borrowers’ escrows for taxes, insurance and capital reserves. Any interest earned on these deposits enures to the benefit of the specific borrower and not to us.

b). Office Leases—We sublease a portion of our downtown Philadelphia office space from Bancorp under a lease agreement extending through August 2014 at an annual rental expense based upon the amount of square footage occupied. We have a sublease agreement with a third party for the remaining term of our sublease. Rent paid to Bancorp was $78 and

21

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

$79 for the three-month periods ended September 30, 2011 and 2010, respectively and $240 and $226 for the nine-month periods ended September 30, 2011 and 2010. Rent received for our sublease was $42 for the three-month periods ended September 30, 2011 and 2010 and was $127 and $124 for the nine-month periods ended September 30, 2011 and 2010.

NOTE 13: DISCONTINUED OPERATIONS

For the three-month and nine-month periods ended September 30, 2011, income (loss) from discontinued operations relates to one real estate property sold since January 1, 2011. For the three-month and nine-month periods ended September 30, 2010, income (loss) from discontinued operations relates to three real estate properties designated as held for sale and four real estate properties that we sold or deconsolidated since January 1, 2010. The following table summarizes revenue and expense information for real estate properties classified as discontinued operations:

	For the  Three-Month Periods Ended September 30						For the  Nine-Month Periods Ended September 30
	2011			2010			2011			2010
Revenue:
Rental income	$	0		$	2,397		$	2,072		$	7,495
Expenses:
Real estate operating expense		(3	)		1,411			1,205			4,626
General and administrative expense		0			0			1			0
Depreciation expense		0			631			0			1,856
Total expenses		(3	)		2,042			1,206			6,482
Income (loss) before interest and other income		3			355			866			1,013
Interest and other income		0			0			0			2
Income (loss) from discontinued operations		3			355			866			1,015
Gain (loss) on sale of assets		(53	)		(2,911	)		(119	)		(2,645	)
Total income (loss) from discontinued operations	$	(50	)	$	(2,556	)	$	747		$	(1,630	)

Discontinued operations have not been segregated in the consolidated statements of cash flows. Therefore, amounts for certain captions will not agree with respective data in the consolidated statements of operations.

NOTE 14: COMMITMENTS AND CONTINGENCIES

Routine Litigation

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

NOTE 15: ACQUISITIONS

On January 20, 2011, we acquired a development stage, non-traded public REIT and subsequently changed its name to Independence Realty Trust, Inc., or Independence. We paid approximately $2.5 million for Independence and certain of its affiliated entities including the entity that serves as Independence’s external advisor and its dealer manager. Independence is currently a subsidiary of RAIT.

We are the external manager of Independence and expect Independence to raise capital for investing in multi-family commercial real estate assets through a public offering of its common stock. The registration statement relating to Independence’s public offering of its common stock was declared effective by the SEC on June 10, 2011. We are the sponsor of Independence’s offering and we incurred expenses on Independence’s behalf in connection with this offering. Our ability to be reimbursed for these expenses will depend on the terms and success of the offering. Any disclosure concerning Independence is neither an offer nor a solicitation to purchase securities issued by Independence.

22

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2011

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

NOTE 16: SUBSEQUENT EVENTS

On October 5, 2011, we entered into an exchange agreement with Taberna VIII pursuant to which we issued four senior secured notes, or the senior notes, with an aggregate principal amount equal to $100 million to Taberna VIII in exchange for a portfolio of real estate related debt securities, or the exchanged securities, held by Taberna VIII. Taberna VIII is a subsidiary of ours and, as a result, the senior secured notes will be eliminated in consolidation. The senior notes and the exchanged securities were determined to have approximately equivalent fair market value at the time of the exchange.

The senior notes were issued pursuant to an indenture agreement dated October 5, 2011 and contains customary events of default, including those relating to nonpayment of principal or interest when due and defaults based upon events of bankruptcy and insolvency. The four senior notes have the following terms:

Note Number	Principal Amount		Fixed Interest Rate			Maturity Date
1	$	25,000		6.75	%	April 30, 2017
2	$	25,000		6.85	%	October 30, 2017
3	$	25,000		7.15	%	October 30, 2018
4	$	25,000		7.25	%	April 30, 2019

Interest accrues from October 5, 2011 and will be payable quarterly in arrears on October 30, January 30, April 30 and July 30 of each year, beginning October 30, 2011. The senior notes are secured and are not convertible into equity securities of RAIT.

In October 2011, we sold four commercial real estate mortgages with an unpaid principal balance of $60,869 for gross proceeds of $63,991. As of September 30, 2011, we were holding $64,152 in restricted cash that was pending the completion of our sale of four loans in October 2011.

During October 2011, we repurchased $34,231 in aggregate principal amount of our 6.875% Convertible Senior Notes due 2027, which are redeemable at the option of the holder in April 2012, for an aggregate purchase price of $34,347. As a result of these transactions we recorded a loss on the extinguishment of debt of $777.

Subsequent to September 30, 2011, we prepaid, in full, our $43,000 12.5% Senior Secured Notes due to mature in April 2014.

On October 27, 2011, we entered into a two year repurchase agreement, or the CMBS facility, pursuant to which we may sell, and later repurchase, performing whole mortgage loans or senior interests in whole mortgage loans secured by first liens on stabilized commercial properties which meet current standards for inclusion in commercial mortgage-backed securities, or CMBS, transactions. The aggregate principal amount of the CMBS facility is $100,000 and incurs interest at LIBOR plus 250 basis points. The CMBS facility contains standard margin call provisions and financial covenants.

Subsequent to September 30, 2011, we completed the conversion of one commercial real estate loan with a carrying value of $22,797 to real estate owned properties. We are completing the process of estimating the fair value of the assets acquired.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Trustees and Shareholders of RAIT Financial Trust

We have reviewed the accompanying consolidated balance sheet of RAIT Financial Trust and subsidiaries as of September 30, 2011 and the related consolidated statements of operations, other comprehensive income (loss) and cash flows for the three and nine month periods ended September 30, 2011 and 2010. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

The Company adopted the new accounting standards classified under FASB ASC Topic 810, “Consolidation” for variable interest entities on January 1, 2010.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2010, and the related consolidated statements of operations, other comprehensive income (loss), shareholders’ equity and cash flows for the year then ended (not presented herein), and in our report dated February 25, 2011, we expressed an unqualified opinion on those consolidated financial statements.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania

November 4, 2011

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

Forward-Looking Statements

In addition to historical information, this discussion and analysis contains forward-looking statements. These statements can be identified by the use of forward-looking terminology including “may,” “believe,” “will,” “expect,” “anticipate,” “estimate,” “continue” or similar words. These forward-looking statements are subject to risks and uncertainties, as more particularly set forth in our filings with the Securities and Exchange Commission, including those described in the “Forward Looking Statements” and “Risk Factors” sections of our Annual Report on Form 10-K for the year ended December 31, 2010, that could cause actual results to differ materially from those projected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report, except as may be required by applicable law.

Overview

We are a vertically integrated commercial real estate company capable of originating, investing in, managing, servicing, trading and advising on commercial real estate-related assets. We continue to progress in adapting RAIT to the current market environment. We are positioning RAIT for future growth in the area of its historical core competency, commercial real estate lending, while diversifying the revenue generated from our commercial real estate loans and properties and reducing or removing other non-core assets and activities.

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

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

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

• reducing our leverage while developing new financing sources;

• accessing capital through the independent broker-dealer networks;

• managing our investment portfolios to reposition non-performing assets, increase our cash flows and ultimately recover the value of our assets over time; and

• managing the size and cost structure of our business to match our operating environment.

We generated net loss allocable to common shares of $35.5 million, or $0.94 per common share-diluted, during the nine-month period ended September 30, 2011. The primary items affecting our performance were the following:

• Change in fair value of financial instruments. For the nine-month period ended September 30, 2011, the net change in fair value of financial instruments decreased net income by $55.1 million. The primary driver of this decrease was our interest rate hedges and CDO Notes payable that we record at fair value under FASB ASC Topic 825, “Financial Instruments”. During the nine-months ended September 30, 2011, we experienced a general decline in interest rates across the interest rate curve which caused declines in the value of our interest rate hedges.

• Gains (losses) on debt extinguishments. During the nine-month period ended September 30, 2011, we repurchased $104.8 million of our 6.875% convertible senior notes for an aggregate purchase price of $103.2 million. These transactions generated a loss on debt extinguishment of $0.1 million, including the write-off of unamortized deferred financing costs. During the nine-month period ended September 30, 2011, we repurchased, from the market, a total of $21,700 in aggregate principal amount of CDO notes payable issued by our RAIT I CDO and RAIT II CDO securitizations. The aggregate purchase price was $7,041 and we recorded a gain on extinguishment of debt of $14,659. See “Liquidity and Capital Resources-Capitalization” below for more information regarding these transactions.

We expect to continue to focus our efforts on enhancing our commercial real estate loan portfolio and our investments in real estate, which are our primary investment portfolios. Although economic conditions are improving, some of our borrowers within our commercial real estate loan portfolio are under financial stress. Where it is likely to enhance our ultimate returns, we will consider restructuring loans or foreclosing on the underlying property. During the nine-month period ended September 30, 2011, we converted two loans into direct ownership. We expect to engage in ongoing workout activity with respect to our commercial real estate loans that may result in the conversion of the property into owned real estate. We may take a non-cash charge to earnings at the time of any loan conversion to the extent the amount of our loan, reduced by any allowance for losses and certain other expenses, exceeds the fair value of the property at the time of the conversion.

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We are expanding our ability to benefit from positive developments in the commercial mortgage-backed securities, or CMBS, markets. We believe there is growing demand from unaffiliated commercial mortgage-backed securitizations for commercial real estate loans which meet market standards for inclusion in securitizations. We completed the sale of $61.0 million of CMBS eligible loans into an unaffiliated CMBS securitization in October 2011 and recently entered into a $100.0 million CMBS facility, which will be used to fund CMBS eligible loans we originate for sale into future CMBS securitizations.

We continue to explore opportunities arising from sponsoring non-traded REITs and similar vehicles due to our capacity to originate and manage commercial real estate-related assets. We believe non-traded REITs and similar vehicles offer new funding sources to raise equity capital through independent broker-dealer networks. We expect to benefit from non-traded REITs we form from compensation we would receive in its offering, managing its operations and any distributions on, or appreciation of, equity or other securities we may retain in them. To-date, we have sponsored Independence Realty Trust, Inc. that we acquired in January 2011.

Key Statistics

Set forth below are key statistics relating to our business through September 30, 2011 (dollars in thousands, except per share data):

	As of or For the Three-Month Periods Ended
	September 30, 2011			June 30, 2011			March 31, 2011			December 31, 2010			September 30, 2010
Financial Statistics:
Recourse debt maturing within 1-year (a)	$	1,833		$	19,745		$	20,040		$	41,489		$	7,919
Assets under management	$	3,633,133		$	3,763,184		$	3,822,534		$	3,837,526		$	3,901,342
Debt to equity		2.3	x		2.2	x		2.1	x		2.3	x		2.6	x
Total revenue	$	60,089		$	58,863		$	58,279		$	59,057		$	58,899
Earnings per share, diluted	$	(0.55	)	$	(0.53	)	$	0.16		$	0.86		$	0.49
Common dividend declared	$	0.06		$	0.06		$	0.09	(b)	$	0.00	(b)	$	0.00	(b)
Commercial Real Estate (“CRE”) Loan Portfolio (c):
Reported CRE Loans—unpaid principal	$	1,064,946		$	1,122,898		$	1,149,169		$	1,173,141		$	1,216,875
Non-accrual loans—unpaid principal	$	91,833		$	94,117		$	121,054		$	122,306		$	143,212
Non-accrual loans as a % of reported loans		8.6	%		8.4	%		10.5	%		10.4	%		11.8	%
Reserve for losses	$	50,609		$	49,906		$	58,809		$	61,731		$	73,029
Reserves as a % of non-accrual loans		55.1	%		53.0	%		48.6	%		50.5	%		51.0	%
Provision for losses	$	500		$	950		$	1,950		$	2,500		$	10,813
CRE Property Portfolio:
Reported investments in real estate	$	849,232		$	851,916		$	859,983		$	839,192		$	818,184
Number of properties owned		48			48			48			47			47
Multifamily units owned		8,014			8,014			8,311			8,311			8,231
Office square feet owned		1,786,860			1,786,908			1,786,908			1,632,978			1,634,997
Retail square feet owned		1,114,250			1,116,171			1,116,063			1,116,112			1,069,588
Average physical occupancy data:
Multifamily properties		89.8	%		88.6	%		88.0	%		85.5	%		84.6	%
Office properties		68.5	%		68.8	%		70.7	%		67.8	%		52.5	%
Retail properties		68.9	%		62.0	%		56.3	%		58.8	%		57.7	%
Total		84.5	%		83.1	%		82.4	%		79.2	%		74.8	%

(a) Excludes our 6.875% convertible senior notes that have a final maturity in April 2027 but are redeemable in full in April 2012. Includes any principal amortization on recourse debt that is required prior to the stated maturity.

(b) On January 10, 2011, we declared a 2010 annual cash dividend on our common shares of $0.09 per common share, split adjusted. The dividends were paid on January 31, 2011 to holders of record on January 21, 2011.

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

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Investors should read Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, or the Annual Report, for a detailed discussion of the following items:

• Credit, capital markets and liquidity risk.

• Interest rate environment.

• Prepayment rates.

• Commercial real estate lack of liquidity and reduced performance.

Our Investment Portfolio

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

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

The tables below describe certain characteristics of our commercial mortgages, mezzanine loans, other loans and preferred equity interests as of September 30, 2011 (dollars in thousands):

	Book Value		Weighted- Average Coupon			Range of Maturities	Number of Loans
Commercial Real Estate (CRE) Loans
Commercial mortgages	$	654,497		6.7	%	Nov. 2011 to May 2021		39
Mezzanine loans		339,843		8.9	%	Nov. 2011 to Nov. 2038		93
Preferred equity interests		60,070		10.5	%	Nov. 2011 to Aug. 2025		21
Total CRE Loans		1,054,410		7.6	%			153
Other loans		54,226		6.4	%	Nov. 2011 to Oct. 2016		4
Total investments in loans	$	1,108,636		7.6	%			157

We currently have limited capacity to originate new investments. However, we are focusing on this asset class as economic conditions improve and our lending capacity increases. For the nine month period ended September 30, 2011, we originated $79.6 million in commercial mortgages.

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The charts below describe the property types and the geographic breakdown of our commercial mortgages, mezzanine loans, other loans, and preferred equity interests as of September 30, 2011:

(a) Based on book value.

Investments in real estate. We generate a return on our real estate investments through rental income and other sources of income from the operations of our real estate investments. By owning real estate, we also participate in any increase in the value of the real estate in addition to current income. We finance our real estate holdings through a combination of secured mortgage financing provided by financial institutions and existing financing provided by our two CRE loan securitizations. During the nine-month period ended September 30, 2011, we acquired $78.3 million of real estate investments upon conversion of $85.4 million of commercial real estate loans, typically retaining the existing financing provided by our two CRE loan securitizations.

The table below describes certain characteristics of our investments in real estate as of September 30, 2011 (dollars in thousands, except average effective rent):

	Investments in Real  Estate (a)		Average Physical Occupancy			Units/ Square Feet/ Acres		Number  of Properties		Average Effective Rent (a)
Multi-family real estate properties (b)	$	555,916		89.8	%		8,014		33	$	688
Office real estate properties (c)		224,981		68.5	%		1,786,860		10		18.93
Retail real estate properties (c)		46,127		68.9	%		1,114,250		2		8.65
Parcels of land		22,208		0	%		7.3		3		N/A
Total	$	849,232		84.5	%				48

(a) Based on operating performance for the nine-month period ended September 30, 2011.

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

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

We expect this asset category to increase in size as we may find it desirable to protect or enhance our risk-adjusted returns by taking control of properties underlying our commercial real estate loans when restructuring or otherwise exercising our remedies regarding underperforming loans.

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The charts below describe the property types and the geographic breakdown of our investments in real estate as of September 30, 2011:

(a) Based on book value.

Investment in debt securities—TruPS and Subordinated Debentures. Historically, we provided REITs and real estate operating companies the ability to raise subordinated debt capital through TruPS and subordinated debentures. TruPS are long-term instruments, with maturities ranging from 5 to 30 years, which are priced based on short-term variable rates, such as the three-month London Inter-Bank Offered Rate, or LIBOR. TruPS are unsecured and generally contain minimal financial and operating covenants. We financed most of our debt securities portfolio in a series of non-recourse securitizations which provided long-dated, interest-only, match funded financing to the TruPS and subordinated debenture investments. As of September 30, 2011, we retained a controlling interest in two such securitizations—Taberna VIII and Taberna IX, which are consolidated entities. All of the collateral assets for the debt securities and the related non-recourse securitization financing obligations are presented at fair value in our consolidated financial statements. During 2011, due to the non-recourse nature of these entities and the recent credit performance of the underlying collateral, we received only our senior collateral management fees from these two securitizations.

The table below describes our investment in TruPS and subordinated debentures as included in our consolidated financial statements as of September 30, 2011 (dollars in thousands):

						Issuer Statistics
Industry Sector	Estimated Fair  Value		Weighted- Average Coupon			Weighted Average Ratio of Debt to Total Capitalization			Weighted Average Interest Coverage Ratio
Commercial Mortgage	$	103,249		2.8	%		68.9	%		2.4x
Office		139,940		7.8	%		61.7	%		1.8x
Residential Mortgage		45,173		2.5	%		79.7	%		2.1x
Specialty Finance		86,239		5.0	%		84.2	%		(0.7	)x
Homebuilders		60,814		7.8	%		62.6	%		1.0x
Retail		74,510		3.9	%		60.6	%		1.6x
Hospitality		29,568		6.3	%		88.2	%		2.4x
Storage		25,276		8.0	%		58.8	%		4.5x
Total	$	564,769		5.0	%		69.1	%		1.6x

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The chart below describes the equity capitalization of our investment in TruPS and subordinated debentures as included in our consolidated financial statements as of September 30, 2011:

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

(b) Based on estimated fair value.

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

Unsecured REIT notes are publicly traded debentures issued by large public reporting REITs and other real estate companies. These debentures generally pay interest semi-annually. These companies are generally rated investment grade by one or more nationally recognized rating agencies.

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

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The table and the chart below describe certain characteristics of our real estate-related debt securities as of September 30, 2011 (dollars in thousands):

Investment Description	Estimated Fair  Value		Weighted- Average Coupon			Weighted- Average Years to Maturity		Book Value
Unsecured REIT note receivables	$	63,477		6.6	%		6.2	$	61,000
CMBS receivables		70,709		5.7	%		32.6		153,868
Other securities		20,591		3.2	%		32.0		88,205
Total	$	154,777		5.1	%		27.3	$	303,073

(a) S&P Ratings as of September 30, 2011.

Independence Realty Trust, Inc.

On January 20, 2011, we acquired a development stage, non-traded public REIT and subsequently changed its name to Independence Realty Trust, Inc. We paid approximately $2.5 million for Independence and certain of its affiliated entities. Independence is currently a subsidiary of RAIT.

We expect Independence to raise capital for investing in multi-family commercial real estate assets and sponsored its public offering of its common stock. Independence plans to offer a minimum of $2,500,000 and a maximum of $1,095,000,000 in shares of its common stock in its offering. These shares are being offered on a best efforts basis and we cannot assure you whether Independence will be able to raise capital in its offering and, if so, when and how much. No amounts have been raised in Independence’s offering as of the date of this filing. Any disclosure concerning Independence is neither an offer nor a solicitation to purchase securities issued by Independence. We incurred expenses on Independence’s behalf in connection with this offering. Our ability to be reimbursed for these expenses will depend on the terms and success of the offering.

Our subsidiaries serve as the dealer-manager, external advisor and property manager of Independence. We have contributed six multifamily properties with an aggregate purchase price of $103.8 million to Independence in exchange for the assumption by Independence of indebtedness associated with those properties of $64.6 million and $39.2 million of limited partner interests in Independence’s operating partnership. We may contribute additional properties to Independence.

Securitization Summary

Overview. We have used securitizations, mainly through CDOs, to match fund the interest rates and maturities of our assets with the interest rates and maturities of the related financing. This strategy has helped us reduce interest rate and funding risks on our portfolios for the long-term. To finance our investments in the foreseeable future, management will seek to structure match funded financing through reinvesting asset repayments in our existing securitizations, loan participations, bank lines of credit, joint-venture opportunities and other methods that preserve our capital while making investments that generate an attractive return.

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CDO Performance. Our CDOs contain interest coverage and overcollateralization triggers, or OC Triggers, that must be met in order for us to receive our subordinated management fees and our lower-rated debt or residual equity returns. If the interest coverage or OC Triggers are not met in a given period, then the cash flows are redirected from lower rated tranches and used to repay the principal amounts to the senior tranches of CDO notes payable. These conditions and the re-direction of cash flow continue until the triggers are met by curing the underlying payment defaults, paying down the CDO notes payable or other actions permitted under the relevant CDO indenture.

As of the most recent payment information, the Taberna I, Taberna VIII and Taberna IX CDO securitizations that we manage were not passing all of their required interest coverage or OC Triggers and we received only senior asset management fees. While events of default do not currently exist in the CDO securitizations that we manage, we are unable to predict with certainty which CDOs, in the future, will experience events of default or which, if any, remedies the appropriate note holders may seek to exercise in the future. All applicable interest coverage and OC Triggers continue to be met for our two commercial real estate CDOs, RAIT I and RAIT II, and we continue to receive all of our management fees, interest and residual returns from these CDOs.

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

• RAIT I—RAIT I has $1.0 billion of total collateral, of which $63.4 million is defaulted. The current overcollateralization (O/C) test is passing at 123.7% with an O/C trigger of 116.2%. We currently own $243.7 million of the securities issued by this CDO. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our collateral management fees. In October 2011, we pledged $43.7 million of these securities we own as collateral for a senior secured note we issued.

• RAIT II—RAIT II has $822.7 million of total collateral, of which $4.2 million is defaulted. The current O/C test is passing at 119.1% with an O/C trigger of 111.7%. We currently own $244.7 million of the securities issued by this CDO. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our collateral management fees. In October 2011, we pledged $104.0 million of these securities we own as collateral for a senior secured note we issued.

• Taberna VIII—Taberna VIII has $590.0 million of total collateral, of which $90.7 million is defaulted. The current O/C test is failing at 82.7% with an O/C trigger of 103.5%. We currently own $133.0 million of the securities issued by this CDO. We do not expect to receive any distributions from this securitization other than our senior management fees for the foreseeable future.

• Taberna IX—Taberna IX has $618.7 million of total collateral, of which $134.5 million is defaulted. The current O/C test is failing at 75.4% with an O/C trigger of 105.4%. We currently own $186.5 million of the securities issued by this CDO. We do not expect to receive any distributions from this securitization other than our senior management fees for the foreseeable future.

Generally, our investments in the subordinated notes and equity securities in our consolidated CDOs are subordinate in right of payment and in liquidation to the senior notes issued by the CDOs. We may also own common shares, or the non-economic residual interest, in certain of the entities above.

Non-GAAP Financial Measures

Funds from Operations and Adjusted Funds from Operations

We believe that funds from operations, or FFO, and adjusted funds from operations, or AFFO, each of which are non-GAAP measures, are additional appropriate measures of the operating performance of a REIT and us in particular. We compute FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT, as net income or loss allocated to common shares (computed in accordance with GAAP), excluding real estate-related depreciation and amortization expense, gains or losses on sales of real estate and the cumulative effect of changes in accounting principles.

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

Our calculation of AFFO differs from the methodology used for calculating AFFO by certain other REITs and, accordingly, our AFFO may not be comparable to AFFO reported by other REITs. Our management utilizes FFO and AFFO as measures of our operating performance, and believes they are also useful to investors, because they facilitate an understanding of our operating performance after adjustment for certain non-cash items, such as real estate depreciation, share-based compensation and various other items required by GAAP that may not necessarily be indicative of current operating performance and that may not accurately compare our operating performance between periods. Furthermore, although FFO, AFFO and other supplemental performance measures are

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defined in various ways throughout the REIT industry, we also believe that FFO and AFFO may provide us and our investors with an additional useful measure to compare our financial performance to certain other REITs.

Neither FFO nor AFFO is equivalent to net income or cash generated from operating activities determined in accordance with U.S. GAAP. Furthermore, FFO and AFFO do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Neither FFO nor AFFO should be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity.

Set forth below is a reconciliation of FFO and AFFO to net income (loss) allocable to common shares for the three-month and nine-month periods ended September 30, 2011 and 2010 (in thousands, except share information):

	For the  Three-Month Periods Ended September 30						For the  Nine-Month Periods Ended September 30
	2011			2010			2011			2010
Funds From Operations:
Net income (loss) allocable to common shares	$	(21,169	)	$	15,052		$	(35,500	)	$	68,653
Adjustments:
Real estate depreciation and amortization		7,024			7,702			20,817			21,151
(Gains) losses on the sale of real estate		50			2,911			218			2,645
Funds From Operations	$	(14,095	)	$	25,665		$	(14,465	)	$	92,449
Weighted-average shares—diluted		38,771,022			30,887,145			37,822,750			27,800,648
Adjusted Funds From Operations:
Funds From Operations	$	(14,095	)	$	25,665		$	(14,465	)	$	92,449
Adjustments:
Change in fair value of financial instruments		34,997			(14,237	)		55,113			(35,120	)
(Gains) losses on debt extinguishment		(11,371	)		(14,278	)		(14,540	)		(51,290	)
Capital expenditures, net of direct financing		(671	)		(568	)		(1,446	)		(1,136	)
Straight-line rental adjustments		(1,096	)		75			(2,783	)		40
Amortization of deferred items and intangible assets		1,046			371			2,482			(475	)
Share-based compensation		79			583			396			2,877
Adjusted Funds From Operations	$	8,889		$	(2,389	)	$	24,757		$	7,345
Weighted-average shares—diluted		38,771,022			30,887,145			37,822,750			27,800,648

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Assets Under Management

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

The table below summarizes our AUM as of September 30, 2011 and December 31, 2010 (dollars in thousands):

	AUM as of September 30, 2011		AUM as of December 31, 2010
Commercial real estate portfolio (1)	$	1,902,399	$	1,976,815
U.S. TruPS portfolio (2)		1,730,734		1,860,711
Total	$	3,633,133	$	3,837,526

(1) As of September 30, 2011 and December 31, 2010, our commercial real estate portfolio was comprised of $1.0 billion and $1.1 billion of assets collateralizing RAIT I and RAIT II, $849.2 million and $839.2 million, respectively, of investments in real estate and $25.2 million and $30.4 million, respectively, of commercial mortgages, mezzanine loans and preferred equity interests that were not securitized.

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

Results of Operations

Three-Month Period Ended September 30, 2011 Compared to the Three-Month Period Ended September 30, 2010

Interest income. Interest income decreased $3.8 million, or 10.2%, to $33.5 million for the three-month period ended September 30, 2011 from $37.3 million for the three-month period ended September 30, 2010. Generally, our interest income has declined, when compared to the three-month period ended September 30, 2010, as a result of a decrease in our average investments in loans and securities. Our average investments in loans and securities declined from $2.1 billion for the three months ended September 30, 2010 to $1.9 billion during the three months ended September 30, 2011. This decline was primarily caused by:

• principal repayments of $175.1 million on our investments in loans and $10.1 million from our investments in securities since September 30, 2010

• conversion of $88.5 million of loans to owned real estate since September 30, 2010,

• net of production of new investments totaling $85.2 million since September 30, 2010.

The weighted-average interest rates on our investments in loans decreased from 7.65% as of September 30, 2010 to 7.57% as of September 30, 2011.

Rental income. Rental income increased $5.2 million to $23.6 million for the three-month period ended September 30, 2011 from $18.4 million for the three-month period ended September 30, 2010. Five properties acquired or consolidated since September 30, 2010 contributed $2.7 million to the increase while an additional $0.4 million is attributable to two properties acquired in July 2010 which were present for a full quarter of operations in the third quarter in 2011. The remaining $2.1 million increase in rental income is due to improved occupancy and rental rates at properties we acquired prior to July 1, 2010.

Fee and other income. Fee and other income decreased $0.3 million, or 9.4%, to $2.9 million for the three-month period ended September 30, 2011 from $3.2 million for the three-month period ended September 30, 2010. This reduction is attributable to a decrease of $0.5 million in riskless trade and brokerage fee income and a $0.3 million decline in property reimbursement income due to lower expenses at managed properties. These were partially offset by $0.5 million of consulting fee income.

Expenses

Interest expense. Interest expense decreased $1.3 million, or 5.4%, to $22.7 million for the three-month period ended September 30, 2011 from $24.0 million for the three-month period ended September 30, 2010. The decrease is primarily attributable to repurchases of $104.8 million of our 6.875% convertible senior notes, $50.2 million of our CDO notes payable, and repayment of our $21 million senior secured convertible note, offset by additional interest and discount amortization expenses incurred for the issuance of new debt instruments since September 30, 2010. Our interest expense also decreased due to the effect on our floating rate indebtedness from the reduction in short-term LIBOR of approximately 10 basis points during the three-month period ended September 30, 2011 compared to the three-month period ended September 30, 2010.

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Real estate operating expense. Real estate operating expense increased $0.6 million to $14.6 million for the three-month period ended September 30, 2011 from $14.0 million for the three-month period ended September 30, 2010. The increase is attributable to $1.4 million of operating expenses from five new properties acquired or consolidated since September 30, 2010 and $0.1 million from two properties acquired during the three months ended September 30, 2010 which were present for a full quarter of operations in the third quarter in 2011. These increases were offset by $0.9 million of decreased expenses at our owned properties acquired prior to July 1, 2010.

Compensation expense. Compensation expense increased $0.1 million, or 1.5%, to $6.9 million for the three-month period ended September 30, 2011 from $6.8 million for the three-month period ended September 30, 2010. This increase was due to $1.2 million in severance paid during the quarter which was partially offset by a decrease in salary and related expenses of $0.6 million. Additionally, there was a reduction in stock-based compensation expense of $0.5 million as several awards were fully vested in 2010 and no corresponding awards were made in 2011.

General and administrative expense. General and administrative expense decreased $0.3 million, or 7.0%, to $4.0 million for the three-month period ended September 30, 2011 from $4.3 million for the three-month period ended September 30, 2010 due to a decline in expenses for professional fees related to legal, tax, and audit services.

Provision for losses. The provision for losses relates to our investments in our commercial mortgage loan portfolios. The provision for losses decreased by $10.3 million for the three-month period ended September 30, 2011 to $0.5 million as compared to $10.8 million for the three-month period ended September 30, 2010. The decrease is attributable to the improved performance of our investment in loans portfolio during 2011 as compared to 2010. At September 30, 2011 we had $111.3 million of investment in loans on non-accrual, down from $164.1 million of investment in loans on non-accrual as of September 30, 2010. While we believe we have properly reserved for the probable losses in our portfolio, we continually monitor our portfolio for evidence of loss and accrue additional provisions for loan losses as circumstances or conditions change.

Depreciation and amortization expense. Depreciation expense decreased $0.1 million to $7.3 million for the three-month period ended September 30, 2011 from $7.4 million for the three-month period ended September 30, 2010. The decrease is primarily attributable to a $0.9 million decrease in depreciation expense due to the full amortization of certain corporate fixed assets as well as those at properties acquired or consolidated prior to July 1, 2010. This reduction was offset by an increase of $0.7 million at five new properties, acquired or consolidated since September 30, 2010 and $0.1 from two properties acquired during the three months ended September 30, 2010 present for a full quarter during the three months ended September 30, 2011.

Interest and other income (expense)

Gains (Losses) on sale of assets. Gains on sale of assets were $1.5 million during the three-month period ended September 30, 2011 as a result of the sale of investments in securities.

Gains on extinguishment of debt. Gains on extinguishment of debt during the three-month period ended September 30, 2011 decreased $2.9 million to $11.4 million from $14.3 million for the three-month period ended September 30, 2010. These gains are attributable to the repurchase of $15.0 million principal amount of RAIT CRE CDO II debt notes from the market for $4.5 million of cash, resulting in gains on extinguishment of debt of $10.5 million.

Change in fair value of financial instruments. The change in fair value of financial instruments pertains to the majority of our assets within our investments in securities and any related CDO notes payable and derivative instruments used to finance such assets. During the three-month periods ended September 30, 2011 and 2010, the fair value adjustments we recorded were as follows (dollars in thousands):

Description	For the Three-Month Period Ended September 30, 2011			For the Three-Month Period Ended September 30, 2010
Change in fair value of trading securities and security-related receivables	$	2,924		$	26,004
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		(11,406	)		7,555
Change in fair value of derivatives		(26,515	)		(19,322	)
Change in fair value of financial instruments	$	(34,997	)	$	14,237

Discontinued operations. We recorded a $0.1 million loss from discontinued operations for the three-month period ended September 30, 2011 compared to a $2.6 million loss for the three-month period ended September 30, 2010. The decrease is attributable to the timing of properties acquired, sold, or deconsolidated during the respective periods.

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Nine-Month Period Ended September 30, 2011 Compared to the Nine-Month Period Ended September 30, 2010

Revenue

Interest income. Interest income decreased $16.2 million, or 13.8%, to $101.6 million for the nine-month period ended September 30, 2011 from $117.8 million for the nine-month period ended September 30, 2010. Generally, our interest income has declined, when compared to the nine-month period ended September 30, 2010, as a result of a decrease in our average investments in loans and securities. Our average investments in loans and securities declined from $2.3 billion for the nine months ended September 30, 2010 to $2.0 billion during the nine months ended September 30, 2011. This decline was primarily caused by:

• principal repayments of $175.1 million on our investments in loans and $10.1 million from our investments in securities since September 30, 2010

• conversion of $88.5 million of loans to owned real estate since September 30, 2010,

• net of production of new investments totaling $85.2 million since September 30, 2010.

The weighted-average interest rates on our investments in loans decreased from 7.65% as of September 30, 2010 to 7.57% as of September 30, 2011.

Rental income. Rental income increased $14.9 million to $67.1 million for the nine-month period ended September 30, 2011 from $52.2 million for the nine-month period ended September 30, 2010. Five properties acquired or consolidated since September 30, 2010 contributed $6.2 million to the increase, while $4.5 million is attributable to nine properties acquired or consolidated during the nine months ended September 30, 2010 which were present for all of the first three quarters of 2011. The remaining $4.2 million increase resulted from improved occupancy and rental rates at our owned properties acquired prior to January 1, 2010.

Fee and other income. Fee and other income decreased $7.0 million, or 44.9%, to $8.6 million for the nine-month period ended September 30, 2011 from $15.6 million for the nine-month period ended September 30, 2010. Collateral management and restructuring fee income decreased $2.4 million and $2.1 million, respectively, due to the sale or delegation of our collateral management rights on eight Taberna securitizations during April 2010. Additionally, riskless trade and brokerage fee income decreased $1.3 million and property reimbursement income decreased $1.1 million due to lower expenses at managed properties.

Expenses

Interest expense. Interest expense decreased $5.8 million, or 7.8%, to $68.4 million for the nine-month period ended September 30, 2011 from $74.2 million for the nine-month period ended September 30, 2010. The decrease is primarily attributable to repurchases of $104.8 million of our 6.875% convertible senior notes, $50.2 million of our CDO notes payable, and the repayment of a $21 million senior secured convertible note, offset by additional interest cost and discount amortization expense incurred for the issuance of new debt instruments since September 30, 2010. Additionally, the company repaid $25.9 million of our secured credit facilities, restructured a subordinated note, and our floating rate indebtedness was impacted by an approximate 10 basis point decline in short term LIBOR rates.

Real estate operating expense. Real estate operating expense increased $3.1 million to $41.0 million for the nine-month period ended September 30, 2011 from $37.9 million for the nine-month period ended September 30, 2010. The increase is attributable to $3.3 million of operating expenses from five new properties acquired or consolidated since September 30, 2010 and $1.3 million from nine properties acquired during the nine months ended September 30, 2010 which were present for all of the first three quarters of 2011. These increases were offset by $1.5 million of decreased expenses at our owned properties acquired prior to January 1, 2010.

Compensation expense. Compensation expense decreased $2.5 million, or 11.5%, to $19.2 million for the nine-month period ended September 30, 2011 from $21.7 million for the nine-month period ended September 30, 2010. Severance expense increased during the nine-month period ended September 30, 2011 by $1.2 million as compared to the nine-month period ended September 30, 2010 but was offset by reductions to salary and related expenses. Stock based compensation expense declined $2.5 million as several awards were fully vested in 2010 and no corresponding awards were made in 2011.

General and administrative expense. General and administrative expense decreased $1.2 million, or 8.2%, to $13.4 million for the nine-month period ended September 30, 2011 from $14.6 million for the nine-month period ended September 30, 2010. Expenses for professional fees related to legal, tax, and audit services declined $1.4 million, insurance expenses decreased by $0.3 million, and other G&A expenses including IT services, rent, and travel and entertainment decreased by $0.3 million. These decreases were offset by $0.8 million of acquisition expenses related to the acquisition and development of our non-traded public REIT, Independence Realty Trust, Inc.

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Provision for losses. The provision for losses relates to our investments in our commercial mortgage loan portfolios. The provision for losses decreased by $32.4 million for the nine-month period ended September 30, 2011 to $3.4 million as compared to $35.8 million for the nine-month period ended September 30, 2010. The decrease is attributable to the improved performance of our investment in loans portfolio during 2011 as compared to 2010. At September 30, 2011 we had $111.3 million of investment in loans on non-accrual, down from $164.1 million of investment in loans on non-accrual as of September 30, 2010. While we believe we have properly reserved for the probable losses in our portfolio, we continually monitor our portfolio for evidence of loss and accrue additional provisions for loan losses as circumstances or conditions change.

Depreciation and amortization expense. Depreciation expense increased $1.1 million to $21.7 million for the nine-month period ended September 30, 2011 from $20.6 million for the nine-month period ended September 30, 2010. This increase was primarily attributable to $1.2 million from five new properties, acquired or consolidated since September 30, 2010 and $0.8 million from nine properties acquired or consolidated during the nine-months ended September 30, 2010 present for a full three quarters of operations. These increases were offset by a $0.9 million decrease due to the full amortization of certain corporate fixed assets as well as those at properties acquired or consolidated prior to January 1, 2010.

Interest and other income (expense)

Gains (Losses) on sale of assets. Gains on sale of assets were $3.4 million during the nine-month period ended September 30, 2011. The gains principally relate to the sale of certain bonds held in our consolidated Taberna securitizations, Taberna Preferred Funding VIII, Ltd. and Taberna Preferred Funding IX, Ltd for which we recorded gains of $3.7 million as well as $1.5 million from the sale of investment securities. These gains were partially offset by $2.0 million of losses incurred from the disposition of four loans from our consolidated CRE securitizations.

Gains on extinguishment of debt. Gains on extinguishment of debt during the nine-month period ended September 30, 2011 are attributable to the repurchase of $6.7 million principal amount of RAIT CRE CDO I and $15.0 million principal amount of RAIT CRE CDO II debt notes from the market for $7.0 million of cash. As a result of these repurchases we recorded gains on extinguishment of debt of $14.7 million. These gains were partially offset by repurchases of $104.8 million in aggregate principal amount of our 6.875% convertible senior notes due April 2027. The notes were repurchased for $103.2 million of cash. As a result of these repurchases, we recorded losses on extinguishment of debt of $1.0 million, including the write-off of associated deferred financing costs and debt discounts.

Change in fair value of financial instruments. The change in fair value of financial instruments pertains to the majority of our assets within our investments in securities and any related CDO notes payable and derivative instruments used to finance such assets. During the nine-month periods ended September 30, 2011 and 2010, the fair value adjustments we recorded were as follows (dollars in thousands):

Description	For the Nine-Month Period Ended September 30, 2011			For the Nine-Month Period Ended September 30, 2010
Change in fair value of trading securities and security-related receivables	$	21,559		$	109,003
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		(25,268	)		(891	)
Change in fair value of derivatives		(51,404	)		(72,992	)
Change in fair value of financial instruments	$	(55,113	)	$	35,120

Discontinued operations. Income from discontinued operations increased $2.3 million to $0.7 million for the nine-month period ended September 30, 2011 compared to a loss of $1.6 million for the nine-month period ended September 30, 2010. The decrease is attributable to the timing of properties acquired, sold, or deconsolidated during the respective periods. Included in discontinued operations for the nine-months ended September 30, 2011 is $0.8 million net income from a sold property.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, pay distributions and other general business needs. Due to current market conditions, the cash flow to us from a number of the securitizations we sponsored has been reduced or eliminated. We are seeking to expand our use of short term financing and secured lines of credit while developing other financing resources that will permit us to originate or acquire new investments to generate attractive returns while preserving our capital, such as loan participations and joint venture financing arrangements.

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RAIT I and RAIT II, our consolidated securitizations collateralized by U.S. commercial real estate loans, continue to perform and make distributions on our retained interests and pay us management fees. In addition, the restricted cash in these securitizations from repayment of underlying loans and other sources can be used to make new investments held by those securitizations, including future funding commitments of existing investments. As we continue to recycle capital obtained from loan sales and loan repayments in these securitizations, we expect to reinvest the proceeds to fund commercial real estate loans. Distributions on our retained interests in RAIT I and RAIT II are our primary source of cash from our operations. We continue to explore strategies to generate liquidity from our investments in real estate and our investments in debt securities as we seek to focus on our commercial real estate lending platform.

We believe our available cash and restricted cash balances, other financing arrangements, and cash flows from operations will be sufficient to fund our liquidity requirements for the next 12 months. Should our liquidity needs exceed our available sources of liquidity, we believe that we could sell assets to raise additional cash. We may not be able to obtain additional financing when we desire to do so, or may not be able to obtain desired financing on terms and conditions acceptable to us. If we fail to obtain additional financing, our ability to maintain or grow our business will be constrained.

Our primary cash requirements are as follows:

• to make investments and fund the associated costs;

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

• to pay our expenses, including compensation to our employees;

• to pay U.S. federal, state, and local taxes of our TRSs; and

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

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

• the use of our cash and cash equivalent balances of $29.7 million as of September 30, 2011;

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

• proceeds from the sales of assets;

• proceeds from future borrowings; and

• proceeds from future offerings of our common and preferred shares, SEDA and DRSPP Plan.

Our two commercial real estate securitized financing arrangements, RAIT I and RAIT II, include a revolving credit option that allows us to repay the AAA rated debt tranches totaling $475.0 million as loan repayments occur, and then draw up to the available committed amounts through the fifth anniversary of each financing in November 2011 and June 2012, respectively. At September 30, 2011, these revolvers were fully utilized and had no additional capacity.

Our restricted cash balance was $287.9 million as of September 30, 2011. We have $69.6 million of restricted cash in RAIT I and RAIT II available to invest in qualifying commercial loans as of September 30, 2011, subject to $39.1 million of future funding commitments, leaving $30.5 million available to lend. This $69.6 million of restricted cash is not available to RAIT’s creditors or for other general trust purposes. As of September 30, 2011, $81.7 million of restricted cash was held by Taberna VIII and Taberna IX. This restricted cash reflects early prepayments of principal that cannot be used for any other general trust purposes. As of September 30, 2011, $64.2 million of restricted cash related to a cash deposit we received pending the completion of our sale of four loans in October 2011. Additionally, as of September 30, 2011, $27.4 million of our restricted cash related to principal repayments on our investments in loans we received in late September 2011 and remitted to RAIT I or RAIT II in early October 2011. The remaining balance of our restricted cash relates to escrows associated with loans to our borrowers for real estate taxes and insurance.

During 2011, we have been focused on reducing our leverage and restructuring the terms of our debt. To date, we have completed the following transactions with respect to our outstanding indebtedness:

• We issued $115.0 million aggregate principal amount of 7.0% Convertible Senior Notes Due 2031, or the 7.0% convertible senior notes, in an underwritten public offering which included the full exercise of the overallotment option;

• We repaid, in full, our $15.7 million 10.0% senior secured note;

• We repaid, in full, a $16.2 million secured credit facility that was maturing in October 2011;

• We repaid, in full, our $43.0 million 12.5% senior secured note;

• We repurchased and retired $139.0 million of our 6.875% convertible senior notes, leaving $4.6 million outstanding as of October 31, 2011;

• We repurchased $21.7 million of our CDO Notes Payable issued by RAIT CRE CDO I and RAIT CRE CDO II securitizations;

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• We amended our remaining secured credit facility repaying $9.0 million of the $19.5 million outstanding principal amount and amending the terms of the remaining $10.6 million balance to extend the maturity date from December 2011 to December 2016 and provide for the full amortization of that balance over that five year period. The amendment also reduced the interest rate to LIBOR plus 275 basis points;

• We refinanced $7.1 million of recourse first mortgage debt on owned real estate with non-recourse financing provided by our consolidated securitizations; and

• In October 2011, we issued $100.0 million of senior secured notes to Taberna VIII, a consolidated securitization, and received real estate related securities of equivalent value in exchange. The notes have a weighted-average coupon of 7.0% and a weighted-average maturity of 6.5 years.

We expect to continue to de-leverage in the future as capital availability and transaction terms provide attractive risk-adjusted returns.

Cash Flows

As of September 30, 2011 and 2010, we maintained cash and cash equivalents of approximately $29.7 million and $25.7 million, respectively. Our cash and cash equivalents were generated from the following activities (dollars in thousands):

	For the Nine-Month  Periods Ended September 30
	2011			2010
Cash flow from operating activities	$	(1,279	)	$	5,467
Cash flow from investing activities		39,520			43,038
Cash flow from financing activities		(35,778	)		(47,859	)
Net change in cash and cash equivalents		2,463			646
Cash and cash equivalents at beginning of period		27,230			25,034
Cash and cash equivalents at end of period	$	29,693		$	25,680

Our principal source of net cash inflow historically has been our investing activities as loan repayments outpaced new investments in loans or real estate properties. The key driver of lower cash inflows from our investing activities was that our outflows for new investments were significantly higher at $104.8 million for the nine-months ended September 30, 2011 as compared to $33.1 million for the same period in 2010. In the event the commercial real estate market improves, we expect that our new investments will outpace any proceeds received from loan repayments or asset sales. These increased outflows for new investments were offset by proceeds from loan repayments and proceeds from asset sales totaling $207.3 million for the nine-month period ended September 30, 2011 as compared to $107.8 million for the same period in 2010. Cash flows from our investing activities may vary in the future as we continue to execute on our investment strategies.

Cash flow from operating activities for the nine-months ended September 30, 2011, as compared to the same period in 2010, has decreased primarily due to an increase in other assets, including prepaid expenses for insurance and real estate taxes, as the size of our portfolio of real estate properties has grown.

The cash outflow from our financing activities during the nine-month period ended September 30, 2011 as compared to the cash outflow during the nine-month period ended September 30, 2010 is substantially due to the issuance of $115.0 million of 7.0% convertible senior notes, the repurchase of $104.8 million principal amount 6.875% convertible senior notes and the prepayment of the remaining $15.7 million principal amount of our 10.0% senior note. Other events that impacted our cash flows from financing activities were the repayment of our $16.2 million secured credit facility that was maturing in October 2011 and the $9.0 million payment on our secured credit facility that matures in December 2016, an increase in the proceeds received of $37.4 million from non-recourse loans payable on real estate, increased principal repayments on our CDO notes payable, an increase in the dividends paid in 2011 on our common shares, as we did not pay dividends on our common shares in 2010, and increased common share issuance during the nine-month period ended September 30, 2011 as compared to the nine-month period ended September 30, 2010.

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Capitalization

We maintain various forms of short-term and long-term financing arrangements. Generally, these financing agreements are collateralized by assets within securitizations. The following table summarizes our total recourse and non-recourse indebtedness as of September 30, 2011:

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
7.0% convertible senior notes (1)	$	115,000	$	107,466		7.0	%	Apr. 2031
6.875% convertible senior notes (2)		38,813		38,950		6.9	%	Apr. 2027
Secured credit facilities		10,554		10,554		3.0	%	Dec. 2016
Senior secured notes (7)		43,000		43,000		12.5	%	Apr. 2014
Junior subordinated notes, at fair value (3)		38,052		22,450		5.2	%	Oct. 2015 to Mar. 2035
Junior subordinated notes, at amortized cost		25,100		25,100		7.7	%	Apr. 2037
Total recourse indebtedness		270,519		247,520		7.5	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (4)(5)		1,323,046		1,323,046		0.6	%	2045 to 2046
CDO notes payable, at fair value (3)(4)(6)		1,122,495		130,694		0.9	%	2037 to 2038
Loans payable on real estate		91,990		91,990		5.9	%	Sept. 2015 to May 2021
Total non-recourse indebtedness		2,537,531		1,545,730		0.9	%
Total indebtedness	$	2,808,050	$	1,793,250		1.6	%

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

(2) Our 6.875% convertible senior notes are redeemable, at par at the option of the holder, in April 2012, April 2017, and April 2022. During October 2011, we repurchased and retired $34.2 million in aggregate principal amount of our 6.875% convertible senior notes, leaving $4.6 million outstanding.

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

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

(5) Collateralized by $1.7 billion principal amount of commercial mortgages, mezzanine loans, other loans and preferred equity interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(6) Collateralized by $1.2 billion principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of September 30, 2011 was $879.4 million. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(7) In October 2011, we prepaid, in full, our $43.0 million 12.5% Senior Secured Notes due to mature in April 2014.

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

The current status or activity in our financing arrangements occurring as of or during the nine-month period ended September 30, 2011 is as follows:

Recourse Indebtedness

6.875% convertible senior notes. During the nine-month period ended September 30, 2011, we repurchased $104.8 million in aggregate principal amount of our 6.875% Convertible Senior Notes due 2027, or the 6.875% convertible senior notes, for an aggregate purchase price of $103.2 million. As a result of these transactions, we recorded losses on extinguishment of debt of $0.1 million, net of deferred financing costs and unamortized discounts that were written off. Subsequent to September 30, 2011, we repurchased $34.2 million in aggregate principal amount of our 6.875% convertible senior notes for an aggregate purchase price of $34.3 million. As a result of these transactions we recorded a loss on the extinguishment of debt of $0.1 million.

Our 6.875% convertible senior notes are redeemable, at the option of the holder, in April 2012. We expect to acquire, redeem, refinance or otherwise enter into transactions to satisfy our 6.875% convertible senior notes which may include any combination of payments of cash, issuances of our debt and/or equity securities, sales or exchanges of our assets or other methods.

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7.0% convertible senior notes. On March 21, 2011, we issued and sold in a public offering $115.0 million aggregate principal amount of our 7.0% Convertible Senior Notes due 2031, or the 7.0% convertible senior notes. After deducting the underwriting discount and the estimated offering costs, we received approximately $109.0 million of net proceeds. Interest on the 7.0% convertible senior notes is paid semi-annually and the 7.0% convertible senior notes mature on April 1, 2031.

Prior to April 5, 2016, the 7.0% convertible senior notes are not redeemable at RAIT’s option, except to preserve RAIT’s status as a REIT. On or after April 5, 2016, RAIT may redeem all or a portion of the 7.0% convertible senior notes at a redemption price equal to the principal amount plus accrued and unpaid interest. Holders of 7.0% convertible senior notes may require RAIT to repurchase all or a portion of the 7.0% convertible senior notes at a purchase price equal to the principal amount plus accrued and unpaid interest on April 1, 2016, April 1, 2021, and April 1, 2026, or upon the occurrence of certain defined fundamental changes.

The 7.0% convertible senior notes are convertible at the option of the holder at a current conversion rate of 131.3268 common shares per $1,000 principal amount of 7.0% convertible senior notes (equivalent to a current conversion price of $7.61 per common share). Upon conversion of 7.0% convertible senior notes by a holder, the holder will receive cash, our common shares or a combination of cash and our common shares, at our election. We include the 7.0% convertible senior notes in earnings per share using the treasury stock method if the conversion value in excess of the par amount is considered in the money during the respective periods.

According to FASB ASC Topic 470, “Debt”, we recorded a discount on our issued and outstanding 7.0% convertible senior notes of $8.2 million. This discount reflects the fair value of the embedded conversion option within the 7.0% convertible senior notes and was recorded as an increase to additional paid in capital. The fair value was calculated by discounting the cash flows required in the indenture relating to the 7.0% convertible senior notes agreement by a discount rate that represents management’s estimate of our senior, unsecured, non-convertible debt borrowing rate at the time when the 7.0% convertible senior notes were issued. The discount will be amortized to interest expense through April 1, 2016, the date at which holders of our 7.0% convertible senior notes could require repayment.

Secured credit facilities. During the nine-month period ending September 30, 2011, we repaid, in full, a $16.2 million secured credit facility due to mature in October 2011.

As of September 30, 2011, we have $10.6 million outstanding under our remaining secured credit facility. During the three-month period ended September 30, 2011, we renewed our remaining secured credit facility by repaying $9.0 million of the $19.5 million outstanding principal amount and amending the terms of the remaining $10.6 million balance to extend the maturity date from December 2011 to December 2016 and provide for the full amortization of that balance over that five year period. In addition, the interest rate on our secured credit facility was amended to be a floating interest rate of LIBOR plus 275 basis points. Subsequent to September 30, 2011, we prepaid, in full, our $43.0 million 12.5% Senior Secured Notes due to mature in April 2014.

Senior secured notes. During the nine-month period ended September 30, 2011, the holder of the 10.0% senior secured convertible note, or the 10.0% senior note, converted $5.3 million principal amount of the 10.0% senior note into 1.5 million common shares. On April 26, 2011, we prepaid the remaining $15.7 million principal amount of the 10.0% senior note.

On October 5, 2011, we entered into an exchange agreement with Taberna VIII pursuant to which we issued four senior secured notes, or the senior notes, with an aggregate principal amount equal to $100 million to Taberna VIII in exchange for a portfolio of real estate related debt securities, or the exchanged securities, held by Taberna VIII. Taberna VIII is a subsidiary of ours and, as a result, the senior secured notes will be eliminated in consolidation. The senior notes and the exchanged securities were determined to have approximately equivalent fair market value at the time of the exchange.

The senior notes were issued pursuant to an indenture agreement dated October 5, 2011 and contains customary events of default, including those relating to nonpayment of principal or interest when due and defaults based upon events of bankruptcy and insolvency. The four senior notes are each $25.0 million principal amount with a weighted average interest rate of 7.0% and have maturity dates ranging from April 2017 to April 2019.

Interest is at a fixed rate and accrues from October 5, 2011 and will be payable quarterly in arrears on October 30, January 30, April 30 and July 30 of each year, beginning October 30, 2011. The senior notes are secured and are not convertible into equity securities of RAIT.

Loans payable on real estate. During the nine-month period ended September 30, 2011 we refinanced recourse financing consisting of a first mortgage of $12.5 million principal amount with a fixed rate of 5.8%, due in April 2012, that was associated with one of our owned real estate properties with non-recourse financing provided by a consolidated securitization. In addition, we refinanced

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recourse financing consisting of a first mortgage of $7.1 million principal amount with a fixed rate of 5.0%, due in September 2013, that was associated with one of our owned real estate properties with non-recourse financing provided by a consolidated securitization.

CMBS Facility. On October 27, 2011, we entered into a two year CMBS facility, pursuant to which we may sell, and later repurchase, performing whole mortgage loans or senior interests in whole mortgage loans secured by first liens on stabilized commercial properties which meet current standards for inclusion in CMBS transactions. The aggregate principal amount of the CMBS facility is $100 million and incurs interest at LIBOR plus 250 basis points. The CMBS facility contains standard margin call provisions and financial covenants.

Non-Recourse Indebtedness

CDO notes payable, at amortized cost. CDO notes payable at amortized cost represent notes issued by consolidated CDO entities which are used to finance the acquisition of unsecured REIT notes, CMBS securities, commercial mortgages, mezzanine loans, and other loans in our commercial real estate portfolio. Generally, CDO notes payable are comprised of various classes of notes payable, with each class bearing interest at variable or fixed rates. Both of our CRE CDOs are meeting all of their overcollateralization, or OC, and interest coverage, or IC, trigger tests as of September 30, 2011.

During the nine-month period ended September 30, 2011, we repurchased, from the market, a total of $6.7 million in aggregate principal amount of CDO notes payable issued by our RAIT I CDO securitization. The aggregate purchase price was $2.5 million and we recorded a gain on extinguishment of debt of $4.2 million.

During the nine-month period ended September 30, 2011, we repurchased, from the market, a total of $15.0 million in aggregate principal amount of CDO notes payable issued by our RAIT II CDO securitization. The aggregate purchase price was $4.5 million and we recorded a gain on extinguishment of debt of $10.5 million.

CDO notes payable, at fair value. Both of our Taberna consolidated CDOs are failing OC trigger tests which cause a change to the priority of payments to the debt and equity holders of the respective securitizations. Upon the failure of an OC test, the indenture of each CDO requires cash flows that would otherwise have been distributed to us as equity distributions, or in some cases interest payments on our retained CDO notes payable, be used to pay down sequentially the outstanding principal balance of the most senior note holders. The OC tests failures are due to defaulted collateral assets and credit risk securities. During the nine-month period ended September 30, 2011, $24.6 million of cash flows were re-directed from our retained interests in these CDOs and were used to repay the most senior holders of our CDO notes payable.

Loans payable on real estate. During the nine-month period ended September 30, 2011, we obtained a first mortgage on an investment in real estate from the Federal National Mortgage Association that has a principal balance of $13.4 million, 7 year term, and a 5.12% interest rate and a first mortgage on an investment in real estate from Bank of America that has a principal balance of $24.0 million, 10 year term, and a 6.09% interest rate.

Preferred Shares

On January 25, 2011, our board of trustees declared a first quarter 2011 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on March 31, 2011 to holders of record on March 1, 2011 and totaled $3.4 million.

On May 17, 2011, our board of trustees declared a second quarter 2011 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on June 30, 2011 to holders of record on June 1, 2011 and totaled $3.4 million.

On July 26, 2011, our board of trustees declared a third quarter 2011 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends were paid on September 30, 2011 to holders of record on September 1, 2011 and totaled $3.4 million.

On October 25, 2011, our board of trustees declared a fourth quarter 2011 cash dividend of $0.484375 per share on our 7.75% Series A Preferred Shares, $0.5234375 per share on our 8.375% Series B Preferred Shares and $0.5546875 per share on our 8.875% Series C Preferred Shares. The dividends will be paid on January 3, 2012 to holders of record on December 1, 2011.

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Common Shares

Dividends:

On January 10, 2011, the board of trustees declared a $0.09 dividend on our common shares to holders of record as of January 21, 2011. The dividend was paid on January 31, 2011 and totaled $3.2 million.

On May 17, 2011, the board of trustees declared a $0.06 dividend on our common shares to holders of record as of July 8, 2011. The dividend was paid on July 29, 2011 and totaled $2.3 million.

On September 12, 2011, the board of trustees declared a $0.06 dividend on our common shares to holders of record as of October 7, 2011. The dividend was paid on October 31, 2011 and totaled $2.4 million and is included in other liabilities in the accompanying consolidated balance sheet.

Reverse Stock Split:

On May 17, 2011, the board of trustees authorized a 1-for-3 reverse stock split of our common shares of beneficial interest that became effective on June 30, 2011, or the effective time. At the effective time, every three common shares issued and outstanding were automatically combined into one issued and outstanding new common share. The par value of new common shares changed to $0.03 per share after the reverse stock split from the par value of common shares prior to the reverse stock split of $0.01 per share. The reverse stock split reduced the number of common shares outstanding but did not change the number of authorized common shares. The reverse stock split did not affect our preferred shares of beneficial interest. All references in the accompanying financial statements to the number of common shares and earnings per share data for all periods presented have been adjusted to reflect the reverse stock split.

Share Repurchases:

On January 25, 2011, the compensation committee of our board of trustees approved a cash payment to the board’s eight non-management trustees intended to constitute a portion of their respective 2011 annual non-management trustee compensation. The cash payment was subject to terms and conditions set forth in a letter agreement, or the letter agreement, between each of the non-management trustees and RAIT. The terms and conditions included a requirement that each trustee use a portion of the cash payment to purchase RAIT’s common shares in purchases that, individually and in the aggregate with all purchases made by all the other non-management trustees pursuant to their respective letter agreements, complied with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. The aggregate amount required to be used by all of the non-management trustees to purchase common shares was $0.2 million and was used to purchase 18,898 common shares, in the aggregate, in February 2011.

Equity Compensation:

During the nine-months ended September 30, 2011, 340,649 phantom unit awards were redeemed for common shares, a portion of which was withheld in order to satisfy the applicable withholding taxes. These phantom units were fully vested at the time of redemption.

Dividend Reinvestment and Share Purchase Plan (DRSPP):

We implemented an amended and restated dividend reinvestment and share purchase plan, or DRSPP, effective as of March 13, 2008, pursuant to which we registered and reserved for issuance 6,262,545 common shares. During the nine-month period ended September 30, 2011, we issued a total of 1,158,292 common shares pursuant to the DRSPP at a weighted-average price of $3.74 per share and we received $4.3 million of net proceeds. As of September 30, 2011, 2,740,920 common shares, in aggregate, remain available for issuance under the DRSPP. Effective October 28, 2011, we registered and reserved for issuance an additional 7,759,080 common shares for issuance under the DRSPP so that the aggregate number of common shares available for issuance under the DRSPP was 10,500,000 common shares.

Capital on Demand™ Sales Agreement:

On August 6, 2010, we entered into a Capital on Demand™ Sales Agreement, or the COD sales agreement, with JonesTrading Institutional Services LLC, or JonesTrading, pursuant to which we may issue and sell up to 5,833,333 of our common shares from time to time through JonesTrading acting as agent and/or principal, subject to the terms and conditions of the COD sales agreement. For the nine-month period ended September 30, 2011, 2,815,528 common shares were issued pursuant to this arrangement at a weighted average price of $8.77 and we received $22.9 million of proceeds. As of September 30, 2011, there are no common shares that remain available for issuance under the COD sales agreement.

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Off-Balance Sheet Arrangements and Commitments

Not applicable.

Critical Accounting Estimates and Policies

Our Annual Report on Form 10-K for the year ended December 31, 2010 contains a discussion of our critical accounting policies. On January 1, 2011 we adopted several new accounting pronouncements and revised our accounting policies as described below. See Note 2 in our unaudited consolidated financial statements as set forth herein. Management discusses our critical accounting policies and management’s judgments and estimates with the audit committee of our board of trustees.

Recent Accounting Pronouncements

On January 1, 2010, we adopted Accounting Standards Update (ASU) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” This accounting standard requires new disclosures for significant transfers in and out of Level 1 and 2 fair value measurements and a description of the reasons for the transfer. This accounting standard also updates existing disclosures by providing fair value measurement disclosures for each class of assets and liabilities and provides disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. For Level 3 fair value measurements, new disclosures will require entities to present information separately for purchases, sales, issuances, and settlements. These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard did not have a material effect on our consolidated financial statements.

On January 1, 2011, we adopted ASU No. 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” This accounting standard requires that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This accounting standard also expands the supplemental pro forma disclosures under FASB ASU Topic 805, “Business Combinations” to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The adoption of this standard did not have a material effect on our consolidated financial statements.

In April 2011, the FASB issued accounting standards classified under FASB ASC Topic 310, “Receivables”. This accounting standard amends existing guidance to provide additional guidance on the determination of whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. This standard is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of this standard did not have a material effect on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, commodity prices and equity prices. In pursuing our business plan, the primary market risks to which we are exposed are interest rate risk and credit risk. Changes in the general level of interest rates prevailing in the financial markets may affect the spread between our yield on invested assets and cost of funds and, in turn, our ability to make distributions or payments to our shareholders. In the event of a significant rising interest rate environment, defaults could increase and result in losses to us which adversely affect our operating results and liquidity. In the current global recession, defaults have increased and resulted in losses to us which have adversely affected, and we expect will continue to adversely affect, our operating results and liquidity.

There have been no material changes in quantitative and qualitative market risks during the nine months ended September 30, 2011 from the disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2010. Reference is made to Item 7A included in our Annual Report on Form 10-K for the year ended December 31, 2010.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that

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any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our chief executive officer and chief financial officer and with the participation of our disclosure committee, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the three-month period ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

Routine Litigation

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

Item 1A. Risk Factors

The following risk factors should be read together with our risk factors previously disclosed in Item 1A— “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

A decline in the market value of our assets we finance pursuant to repurchase agreements or warehouse facilities may result in margin calls that may force us to sell assets under adverse market conditions.

Our current repurchase agreement allows, and we expect any warehouse facilities and repurchase agreements we enter into in the future to allow, our lender to make margin calls that would require us to make cash payments or deliver additional assets to our lender in the event that there is a decline in the market value of the assets that collateralize our repurchase agreements, warehouse facilities or similar debt or for other reasons. As a result, a decline in the market value of assets collateralizing any such debt may result in our lenders initiating margin calls and requiring a pledge of additional collateral or cash. Posting additional collateral or cash to support our borrowings would reduce our liquidity and limit our ability to leverage our assets, which could adversely affect our business. As a result, we could be forced to sell some of our assets in order to maintain liquidity. Forced sales typically result in lower sales prices than do market sales made in the normal course of business. If our investments were liquidated at prices below the amortized cost basis of such investments, we would incur losses, which could result in a rapid deterioration of our financial condition.

We are exposed to loss if lenders under our repurchase agreements, warehouse facilities or other short-term lenders liquidate our portfolio. Moreover, assets acquired by us pursuant to our repurchase agreements, warehouse facilities or other short-term debt may not be suitable for refinancing though future securitization transactions, which may require us to seek more costly financing for these assets or to liquidate assets.

We have entered into a repurchase agreement, and may in the future enter into other repurchase agreements, warehouse facilities or other debt with similar terms. Our lenders have the right under the our current repurchase agreement, and may have the right under such other debt, to liquidate assets acquired thereunder upon the occurrence of certain events, such as an event of default. We are exposed to loss if the proceeds received by the lender in the event of any such liquidation are insufficient to satisfy our obligation to the lender. We were also subject to the risk that the assets subject to such repurchase agreements, warehouse facilities or other debt with similar terms might not be suitable for refinancing though future securitization transactions. If we were unable to refinance these assets though future securitization transactions, we might be required to seek more costly financing for theses assets or to liquidate assets.

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We will lose money on our repurchase transactions if the counterparty to the transaction defaults on its obligation to resell the underlying security back to us at the end of the transaction term, or if the value of the underlying security has declined as of the end of the term or if we default on our obligations under the repurchase agreement.

When we engage in a repurchase transaction, we generally sell securities to the transaction counterparty and receive cash from the counterparty. The counterparty must resell the securities back to us at the end of the term of the transaction. Because the cash we receive from the counterparty when we initially sell the securities to the counterparty is less than the market value of those securities, if the counterparty defaults on its obligation to resell the securities back to us we will incur a loss on the transaction. We will also incur a loss if the value of the underlying securities has declined as of the end of the transaction term, as we will have to repurchase the securities for their initial value but would receive securities worth less than that amount. Any losses we incur on our repurchase transactions could reduce our earnings, and thus our cash available for distribution to our shareholders.

Our financing of our REIT qualifying assets with repurchase agreements and warehouse facilities could adversely affect our ability to qualify as a REIT.

We have entered into and intend to enter into, sale and repurchase agreements under which we nominally sell certain REIT qualifying assets to a counterparty and simultaneously enter into an agreement to repurchase the sold assets. We believe that we will be treated for U.S. federal income tax purposes as the owners of the assets that are the subject of any such agreement notwithstanding that we may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own the assets during the term of the sale and repurchase agreement, in which case our ability to qualify as a REIT would be adversely affected. If any of our REIT qualifying assets are subject to a repurchase agreement and are sold by the counterparty in connection with a margin call, the loss of those assets could impair our ability to qualify as a REIT. Accordingly, unlike other REITs, we may be subject to additional risk regarding our ability to qualify and maintain our qualification as a REIT.

Item 6. Exhibits

(a) Exhibits

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	RAIT FINANCIAL TRUST (Registrant)
Date: November 4, 2011	By:	/s/ Scott F. Schaeffer
		Scott F. Schaeffer, Chairman of the Board, Chief Executive Officer and President
		(On behalf of the registrant and as its Principal Executive Officer)
Date: November 4, 2011	By:	/s/ Jack E. Salmon
		Jack E. Salmon, Chief Financial Officer and Treasurer
		(On behalf of the registrant and as its Principal Financial Officer)
Date: November 4, 2011	By:	/s/ James J. Sebra
		James J. Sebra, Senior Vice President and Chief Accounting Officer
		(On behalf of the registrant and as its Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit Number	Description of Documents
3.1	Amended and Restated Declaration of Trust. (1)
3.1.1	Articles of Amendment to Amended and Restated Declaration of Trust. (2)
3.1.2	Articles of Amendment to Amended and Restated Declaration of Trust. (3)
3.1.3	Certificate of Correction to the Amended and Restated Declaration of Trust. (4)
3.1.4	Articles of Amendment to Amended and Restated Declaration of Trust. (5)
3.1.5	Articles of Amendment to Amended and Restated Declaration of Trust. (6)
3.1.6	Articles Supplementary relating to the 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series A Articles Supplementary”). (7)
3.1.7	Certificate of Correction to the Series A Articles Supplementary. (7)
3.1.8	Articles Supplementary relating to the 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest. (8)
3.1.9	Articles Supplementary relating to the 8.875% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest. (9)
3.2	By-laws. (10)
4.1	Form of Certificate for Common Shares of Beneficial Interest. (6)
4.2	Form of Certificate for 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest. (11)
4.3	Form of Certificate for 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest. (8)
4.4	Form of Certificate for 8.875% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest. (9)
4.5	Indenture dated as of April 18, 2007 among RAIT Financial Trust, as issuer, or RAIT, RAIT Partnership, L.P. and RAIT Asset Holdings, LLC, as guarantors, and Wells Fargo Bank, N.A., as trustee. (12)
4.6	Registration Rights Agreement dated as of April 18, 2007 between RAIT and Bear, Stearns & Co. Inc. (12)
4.7	Base Indenture dated as of March 21, 2011 between RAIT Financial Trust, as issuer, and Wells Fargo Bank, National Association., as trustee. (13)
4.8	Supplemental Indenture dated as of March 21, 2011 between RAIT Financial Trust, as issuer, and Wells Fargo Bank, National Association., as trustee. (13)
4.9	Indenture dated as of October 5, 2011 between RAIT and Wilmington Trust, National Association, as trustee.
10.1	Form of Letter Agreement between RAIT and each of its Non-Management Trustees dated as of January 25, 2011. (14)
10.2	Separation Agreement dated as of July 15, 2011 between RAIT Financial Trust and Plamen Mitrikov. (15)
10.3	Third Amended and Restated Employment Agreement dated as of August 4, 2011 between RAIT and Scott F. Schaeffer. (15)
10.4	First Amended and Restated Employment Agreement dated as of August 4, 2011 between RAIT and Ken R. Frappier. (15)
10.5	Exchange Agreement dated as of October 5, 2011 by and among RAIT and Taberna Preferred Funding VIII, Ltd.
10.6	6.75% Senior Secured Note No. 1 due 2017 dated as of October 5, 2011 made by RAIT, as payor, to Hare & Co., as nominee payee.
10.7	6.85% Senior Secured Note No. 2 due 2017 dated as of October 5, 2011 made by RAIT, as payor, to Hare & Co., as nominee payee.
10.8	7.15% Senior Secured Note No. 3 due 2018 dated as of October 5, 2011 made by RAIT, as payor, to Hare & Co., as nominee payee.

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Exhibit Number	Description of Documents
10.9	7.25% Senior Secured Note No. 4 due 2019 dated as of October 5, 2011 made by RAIT, as payor, to Hare & Co., as nominee payee.
10.10	Master Repurchase Agreement dated as of October 27, 2011, by and among RAIT CMBS Conduit I, LLC and Citibank, N.A.
10.11	Guaranty dated October 27, 2011 by RAIT, as guarantor, for the benefit of Citibank, N.A.
15.1	Awareness Letter from Independent Accountants.
31.1	Certification Pursuant to 13a-14 (a) under the Securities Exchange Act of 1934.
31.2	Certification Pursuant to 13a-14 (a) under the Securities Exchange Act of 1934.
32.1	Certification Pursuant to 18 U.S.C. Section 1350.
32.2	Certification Pursuant to 18 U.S.C. Section 1350.
101	Pursuant to Rule 405 of Regulation S-T, the following financial information from RAIT’s Quarterly Report on Form 10-Q for the period ended September 30, 2011 is formatted in XBRL interactive data files: (i) Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2011 and 2010; (ii) Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010; (iii) Consolidated Statements of Comprehensive Income (Loss) for the three-month and nine-month periods ended September 30, 2011 and 2010; (iv) Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2011 and 2010; and (v) Notes to Unaudited Consolidated Financial Statements. The information in this exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

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

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

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

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

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

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

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

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

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

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

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

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

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

(14) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on January 28, 2011 (File No. 1-14760).

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

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