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 March 31, 2012

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 49,901,961 common shares of beneficial interest, par value $0.03 per share, of the registrant were outstanding as of May 8, 2012.

RAIT FINANCIAL TRUST

TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011		1
	Consolidated Statements of Operations for the Three-Month Periods Ended March 31, 2012 and 2011		2
	Consolidated Statements of Comprehensive Income (Loss) for the Three-Month Periods Ended March 31, 2012 and 2011		3
	Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2012 and 2011		4
	Notes to Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		34
Item 4.	Controls and Procedures		34
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings		35
Item 1A.	Risk Factors		35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		35
Item 5.	Other Information		35
Item 6.	Exhibits		35
	Signatures		36

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

RAIT Financial Trust

Consolidated Balance Sheets

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

	As of March 31, 2012			As of December  31, 2011
Assets
Investments in mortgages and loans, at amortized cost:
Commercial mortgages, mezzanine loans, other loans and preferred equity interests	$	1,032,844		$	996,363
Allowance for losses		(39,715	)		(46,082	)
Total investments in mortgages and loans		993,129			950,281
Investments in real estate, net of accumulated depreciation of $76,122 and $69,372, respectively		887,130			891,502
Investments in securities and security-related receivables, at fair value		653,589			647,461
Cash and cash equivalents		53,841			29,720
Restricted cash		153,285			278,607
Accrued interest receivable		41,059			39,455
Other assets		42,648			39,771
Deferred financing costs, net of accumulated amortization of $12,687 and $11,613, respectively		22,156			23,178
Intangible assets, net of accumulated amortization of $2,477 and $2,337, respectively		2,489			2,629
Total assets	$	2,849,326		$	2,902,604
Liabilities and Equity
Indebtedness (including $171,840 and $144,956 at fair value, respectively)	$	1,764,971		$	1,748,274
Accrued interest payable		25,525			22,541
Accounts payable and accrued expenses		18,209			20,825
Derivative liabilities		170,997			181,499
Deferred taxes, borrowers’ escrows and other liabilities		18,448			15,371
Total liabilities		1,998,150			1,988,510
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, 49,899,392 and 41,289,566 issued and outstanding		1,489			1,236
Additional paid in capital		1,777,974			1,735,969
Accumulated other comprehensive income (loss)		(112,284	)		(118,294	)
Retained earnings (deficit)		(819,802	)		(708,671	)
Total shareholders’ equity		847,444			910,307
Noncontrolling interests		3,732			3,787
Total equity		851,176			914,094
Total liabilities and equity	$	2,849,326		$	2,902,604

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

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RAIT Financial Trust

Consolidated Statements of Operations

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

	For the  Three-Month Periods Ended March 31
	2012			2011
Revenue:
Interest income	$	27,956		$	33,558
Rental income		24,831			21,290
Fee and other income		1,458			3,431
Total revenue		54,245			58,279
Expenses:
Interest expense		19,348			23,367
Real estate operating expense		13,797			12,617
Compensation expense		5,738			6,544
General and administrative expense		3,825			4,968
Provision for losses		500			1,950
Depreciation and amortization expense		7,663			7,119
Total expenses		50,871			56,565
Operating Income		3,374			1,714
Interest and other income (expense)		33			83
Gains (losses) on sale of assets		11			1,415
Gains (losses) on extinguishment of debt		1,574			(537	)
Change in fair value of financial instruments		(108,923	)		5,611
Income (loss) before taxes and discontinued operations		(103,931	)		8,286
Income tax benefit (provision)		267			54
Income (loss) from continuing operations		(103,664	)		8,340
Income (loss) from discontinued operations		0			791
Net income (loss)		(103,664	)		9,131
(Income) loss allocated to preferred shares		(3,410	)		(3,414	)
(Income) loss allocated to noncontrolling interests		55			50
Net income (loss) allocable to common shares	$	(107,019	)	$	5,767
Earnings (loss) per share—Basic:
Continuing operations	$	(2.42	)	$	0.14
Discontinued operations		0.00			0.02
Total earnings (loss) per share—Basic	$	(2.42	)	$	0.16
Weighted-average shares outstanding—Basic		44,150,924			36,618,910
Earnings (loss) per share—Diluted:
Continuing operations	$	(2.42	)	$	0.14
Discontinued operations		0.00			0.02
Total earnings (loss) per share—Diluted	$	(2.42	)	$	0.16
Weighted-average shares outstanding—Diluted		44,150,924			36,968,120
Distributions declared per common share	$	0.08		$	0.09

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 March 31
	2012			2011
Net income (loss)	$	(103,664	)	$	9,131
Other comprehensive income (loss):
Change in fair value of interest rate hedges		(2,950	)		2,052
Realized (gains) losses on interest rate hedges reclassified to earnings		8,910			10,889
Change in fair value of available-for-sale securities		50			147
Total other comprehensive income (loss)		6,010			13,088
Comprehensive income (loss) before allocation to noncontrolling interests		(97,654	)		22,219
Allocation to noncontrolling interests		55			50
Comprehensive income (loss)	$	(97,599	)	$	22,269

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

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RAIT Financial Trust

Consolidated Statements of Cash Flows

(Unaudited and dollars in thousands)

	For the  Three-Month Periods Ended March 31
	2012			2011
Operating activities:
Net income (loss)	$	(103,664	)	$	9,131
Adjustments to reconcile net income (loss) to cash flow from operating activities:
Provision for losses		500			1,950
Share-based compensation expense		557			259
Depreciation and amortization		7,663			7,119
Amortization of deferred financing costs and debt discounts		1,746			868
Accretion of discounts on investments		(394	)		(305	)
(Gains) losses on sales of assets		(11	)		(1,415	)
(Gains) losses on extinguishment of debt		(1,574	)		537
Change in fair value of financial instruments		108,923			(5,611	)
Changes in assets and liabilities:
Accrued interest receivable		(1,761	)		(748	)
Other assets		(2,957	)		(3,432	)
Accrued interest payable		(7,877	)		(10,810	)
Accounts payable and accrued expenses		(2,708	)		529
Deferred taxes, borrowers’ escrows and other liabilities		615			2,392
Cash flow from operating activities		(942	)		464
Investing activities:
Proceeds from sales of other securities		1			4,883
Purchase and origination of loans for investment		(72,215	)		(5,172	)
Principal repayments on loans		29,460			11,436
Investments in real estate		(3,009	)		(14,225	)
Business acquisition		0			(2,731	)
(Increase) Decrease in restricted cash		125,797			8,847
Cash flow from investing activities		80,034			3,038
Financing activities:
Repayments on secured credit facilities and loans payable on real estate		(806	)		(15,782	)
Repayments and repurchase of CDO notes payable		(93,164	)		(12,469	)
Proceeds from issuance of 7.0% convertible senior notes		0			115,000
Repayments and repurchase of 6.875% convertible senior notes		0			(86,336	)
Proceeds from repurchase agreements		3,471			0
Issuance (acquisition) of noncontrolling interests		0			3,582
Payments for deferred costs		(257	)		(6,369	)
Preferred share issuance, net of costs incurred		101			0
Common share issuance, net of costs incurred		41,601			17,738
Distributions paid to preferred shareholders		(3,414	)		(3,414	)
Distributions paid to common shareholders		(2,503	)		(3,219	)
Cash flow from financing activities		(54,971	)		8,731
Net change in cash and cash equivalents		24,121			12,233
Cash and cash equivalents at the beginning of the period		29,720			27,230
Cash and cash equivalents at the end of the period	$	53,841		$	39,463
Supplemental cash flow information:
Cash paid for interest	$	4,808		$	9,722
Cash paid (refunds received) for taxes		45			85
Non-cash increase in investments in real estate from the conversion of loans		0			20,300
Non-cash decrease in indebtedness from conversion to shares or debt extinguishments		(1,574	)		(6,914	)

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

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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of March 31, 2012

(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, 2011 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.

b. Principles of Consolidation

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

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

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c. Use of Estimates

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

d. Investments in Loans

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

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

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

f. Investments in Real Estate

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

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

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

g. Investments in Securities

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

6

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

h. Revenue Recognition

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

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

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

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

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

3) Fee and other income—We generate fee and other income through our various subsidiaries by (a) providing ongoing asset management services to investment portfolios under cancelable management agreements, (b) providing or arranging to provide financing to our borrowers, (c) providing property management services to third parties, 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 securitizations while such securitizations are consolidated. During the three-month periods ended March 31, 2012 and 2011, we received $1,285 and $1,298, respectively, of earned asset management fees associated with consolidated securitizations, of which we eliminated $969 and $959, respectively, of management fee income with consolidated securitizations.

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i. Fair Value of Financial Instruments

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

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

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

Fair value assets and liabilities that are generally included in this category are unsecured REIT note receivables, 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 buyers in the market are willing to pay for an asset. Ask prices represent the lowest price that sellers in the market are willing to accept for an asset. For financial instruments whose inputs are based on bid-ask prices, we do not require that fair value always be a predetermined point in the bid-ask range. Our policy is to allow for mid-market pricing and adjusting to the point within the bid-ask range that results in our best estimate of fair value.

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

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j. Income Taxes

RAIT 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 dividends to shareholders and as long as certain asset, income and share ownership tests are met. If we were to fail to meet these requirements, we would be subject to U.S. federal income tax, which could have a material adverse impact on our results of operations and amounts available for dividends to our shareholders. Management believes that all of the criteria to maintain RAIT’s 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 securitizations. Some of these fees paid to the TRS entities are capitalized as deferred financing costs by the securitizations. Certain securitizations may be consolidated in our financial statements pursuant to FASB ASC Topic 810, “Consolidation.” In consolidation, these fees are eliminated when the securitization is included in the consolidated group. Nonetheless, all income taxes are accrued by the TRSs in the year in which the taxable revenue is received. These income taxes are not eliminated when the related revenue is eliminated in consolidation.

Certain TRS entities are domiciled in the Cayman Islands and, 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 dividend 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, 2012, we adopted ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This accounting standard changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. These disclosures are effective for interim and annual periods beginning after December 15, 2011. The adoption of this standard did not have a material effect on our consolidated financial statements.

In December 2011, The FASB issued an accounting standard classified under FASB ASC Topic 360, “Property, Plant, and Equipment”. This accounting standard amends existing guidance to resolve the diversity in practice about whether the guidance for real estate sales applies to a parent that ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. This accounting standard is effective for fiscal years, and interim periods with those years, beginning on or after June 15, 2012. Management is currently evaluating the impact that these standards may have 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 March 31, 2012:

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	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	$	642,349		$	(3,874	)	$	638,475			42		6.4	%	May 2012 to Apr. 2022
Mezzanine loans		286,037			(5,282	)		280,755			88		9.3	%	May 2012 to Nov. 2038
Preferred equity interests		61,935			(1,092	)		60,843			21		9.5	%	May 2012 to Aug. 2025
Total CRE Loans		990,321			(10,248	)		980,073			151		7.4	%
Other loans		53,615			118			53,733			4		4.4	%	May 2012 to Oct. 2016
Total Loans	$	1,043,936		$	(10,130	)	$	1,033,806			155		7.3	%
Deferred fees		(962	)		0			(962	)
Total investments in loans	$	1,042,974		$	(10,130	)	$	1,032,844

(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 three-month period ended March 31, 2011, we completed the conversion of one commercial real estate loan with a carrying value of $22,078 to real estate owned property. We did not convert any commercial real estate loans to real estate owned property during the three-month period ended March 31, 2012. During the three-month periods ended March 31, 2011, we charged off $1,778 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 March 31, 2012 and December 31, 2011:

Delinquency Status	As of March 31, 2012		As of December 31, 2011
30 to 59 days	$	18,500	$	3,500
60 to 89 days		0		0
90 days or more		22,257		16,857
In foreclosure or bankruptcy proceedings		10,952		10,320
Total	$	51,709	$	30,677

As of March 31, 2012 and December 31, 2011, approximately $56,113 and $54,334, respectively, of our commercial real estate loans were on non-accrual status and had a weighted-average interest rate of 9.8%. As of March 31, 2012 and December 31, 2011, approximately $18,273 and $19,501 of one Other loan was on non-accrual status and had a weighted-average interest rate of 7.2%.

Allowance For Losses And Impaired Loans

The following table provides a roll-forward of our allowance for losses for our commercial mortgages, mezzanine loans, and other loans for the three-month periods ended March 31, 2012 and 2011:

	For the Three-Month Period Ended March 31, 2012			For the Three-Month Period Ended March 31, 2011
Beginning balance	$	46,082		$	69,691
Provision		500			1,950
Charge-offs, net of recoveries		(6,867	)		(4,872	)
Ending balance	$	39,715		$	66,769

As of March 31, 2012 and December 31, 2011, we identified 17 and 19 commercial mortgages, mezzanine loans and other loans with unpaid principal balances of $81,411 and $87,977 as impaired.

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The average unpaid principal balance of total impaired loans was $84,694 and $151,006 during the three-month periods ended March 31, 2012 and 2011. We recorded interest income from impaired loans of $63 and $506 for the three-month periods ended March 31, 2012 and 2011.

We have evaluated modifications to our commercial real estate loans to determine if the modification constitutes a troubled debt restructuring (TDR) under FASB ASC Topic 310, “Receivables”. During the three-month period ended March 31, 2012, we have determined that there were no modifications to any commercial real estate loans that constituted a TDR. As of March 31, 2012, there were no TDRs that subsequently defaulted.

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 March 31, 2012:

Investment Description	Amortized Cost		Net Fair Value Adjustments			Estimated Fair Value		Weighted Average Coupon (1)			Weighted Average Years to Maturity
Trading securities
TruPS	$	637,376	$	(154,632	)	$	482,744		4.2	%		22.3
Other securities		11,162		(11,162	)		0		5.0	%		40.6
Total trading securities		648,538		(165,794	)		482,744		4.3	%		22.6
Available-for-sale securities		3,600		(3,598	)		2		2.3	%		30.6
Security-related receivables
TruPS receivables		111,199		(26,479	)		84,720		6.5	%		10.7
Unsecured REIT note receivables		30,000		1,333			31,333		6.7	%		4.9
CMBS receivables (2)		86,443		(49,262	)		37,181		5.6	%		31.5
Other securities		53,238		(35,629	)		17,609		4.1	%		28.6
Total security-related receivables		280,880		(110,037	)		170,843		5.8	%		19.9
Total investments in securities	$	933,018	$	(279,429	)	$	653,589		4.7	%		22.0

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

(2) CMBS receivables include securities with a fair value totaling $7,828 that are rated between “AAA” and “A-” by Standard & Poor’s, securities with a fair value totaling $23,325 that are rated “BBB+” and “B-” by Standard & Poor’s, securities with a fair value totaling $5,470 that are rated “CCC” by Standard & Poor’s and securities with a fair value totaling $558 that are rated “D” by Standard & Poor’s.

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 March 31, 2012							As of December 31, 2011
	Principal /Par Amount on Non-accrual		Weighted Average Coupon			Fair Value		Principal /Par Amount on Non-accrual		Weighted Average Coupon			Fair Value
TruPS and TruPS receivables	$	83,557		1.9	%	$	5,705	$	83,557		1.9	%	$	5,766
Other securities		34,320		3.3	%		2		34,240		3.3	%		2
CMBS receivables		33,291		5.9	%		558		32,462		5.9	%		915

The assets of our consolidated CDOs collateralize the debt of such entities and are not available to our creditors. As of March 31, 2012 and December 31, 2011, investment in securities of $748,575 in principal amount of TruPS and subordinated debentures, and $103,674 and $104,122, respectively, in principal amount of unsecured REIT note receivables and CMBS receivables, collateralized the consolidated CDO notes payable of such entities.

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NOTE 5: INVESTMENTS IN REAL ESTATE

The table below summarizes our investments in real estate:

	As of March 31, 2012					As of December 31, 2011
	Book Value			Number of Properties		Book Value			Number of Properties
Multi-family real estate properties	$	592,937			33	$	591,915			33
Office real estate properties		251,663			10		251,303			10
Retail real estate properties		71,994			3		71,405			3
Parcels of land		46,658			10		46,251			10
Subtotal		963,252			56		960,874			56
Less: Accumulated depreciation and amortization		(76,122	)				(69,372	)
Investments in real estate	$	887,130				$	891,502

As of March 31, 2012, our investments in real estate of $887,130 are financed through $135,376 of mortgages held by third parties and $799,457 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.

During the three-month period ended March 31, 2012, we did not acquire or dispose of any real estate properties.

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 March 31, 2012:

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
7.0% convertible senior notes (1)	$	115,000	$	108,264		7.0	%	Apr. 2031
6.875% convertible senior notes (2)		3,582		3,741		6.9	%	Apr. 2027
Secured credit facilities		9,497		9,497		3.0	%	Dec. 2016
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
CMBS facilities		3,471		3,471		2.7	%	Nov. 2012 to Oct. 2013
Total recourse indebtedness (4)		194,702		172,523		6.5	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (5)(6)		1,309,528		1,307,648		0.7	%	2045 to 2046
CDO notes payable, at fair value (3)(5)(7)		1,022,664		149,390		1.2	%	2037 to 2038
Loans payable on real estate		135,410		135,410		5.6	%	Sept. 2015 to May 2021
Total non-recourse indebtedness		2,467,602		1,592,448		1.1	%
Total indebtedness	$	2,662,304	$	1,764,971		1.5	%

(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) In April 2012, we redeemed all of our outstanding 6.875% convertible senior notes for cash.

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

(4) Excludes senior secured notes issued by us with an aggregate principal amount equal to $100,000 with a weighted average coupon of 7.0%, which are eliminated in consolidation.

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

(6) Collateralized by $1,695,976 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.

(7) Collateralized by $1,157,562 principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of March 31, 2012 was $862,406. These obligations were issued by

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separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

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

The current status or activity in our financing arrangements occurring as of or during the three-month period ended March 31, 2012 is as follows:

Recourse Indebtedness

6.875% convertible senior notes. In April 2012, we redeemed all of our outstanding 6.875% convertible senior notes for cash.

7.0% convertible senior notes. The 7.0% Convertible Senior Notes due 2031, or the 7.0% convertible senior notes, are convertible at the option of the holder at a current conversion rate of 132.9506 common shares per $1,000 principal amount of 7.0% convertible senior notes (equivalent to a current conversion price of $7.52 per common share). Upon conversion of 7.0% convertible senior notes by a holder, the holder will receive cash, our common shares or a combination of cash and our common shares, at our election. We include the 7.0% convertible senior notes in earnings per share using the treasury stock method if the conversion value in excess of the par amount is considered in the money during the respective periods.

Secured credit facilities. As of March 31, 2012, we have $9,497 outstanding under our secured credit facility, which is payable in December 2016 under the current terms of this facility. Our secured credit facility is secured by designated commercial mortgages and mezzanine loans.

CMBS Facilities. During the three-month period ended March 31, 2012, we financed $3,471 in aggregate principal amount of commercial mortgage loans pursuant to the $150,000 CMBS facility. As of March 31, 2012, $246,529 in aggregate principal amount remained available under the our CMBS facilities.

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 March 31, 2012.

During the three-month period ended March 31, 2012, we repurchased, from the market, a total of $2,500 in aggregate principal amount of CDO notes payable issued by our RAIT I CDO securitization. The aggregate purchase price was $926 and we recorded a gain on extinguishment of debt of $1,574.

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 three-month period ended March 31, 2012, $81,420 of restricted cash, including cash flow that was re-directed from our retained interests in these CDOs, was used to repay the most senior holders of our CDO notes payable.

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

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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 March 31, 2012, 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 March 31, 2012 and December 31, 2011:

	As of March 31, 2012					As of December 31, 2011
	Notional		Fair Value			Notional		Fair Value
Cash flow hedges:
Interest rate swaps	$	1,560,845	$	(170,947	)	$	1,570,787	$	(181,499	)
Interest rate caps		36,000		1,207			36,000		1,360
Net fair value	$	1,596,845	$	(169,740	)	$	1,606,787	$	(180,139	)

During 2012, interest rate swap agreements with a notional amount of $185,625 and a weighted average strike rate of 4.15% as of March 31, 2012, will terminate in accordance with their terms.

For interest rate swaps that are considered effective hedges, we reclassified realized losses of $8,910 and $10,889 to earnings for the three-month periods ended March 31, 2012 and 2011.

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 March 31, 2012, 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 $88,709. See Note 8: “Fair Value of Financial Instruments” for the changes in value of these hedges during the three-month periods ended March 31, 2012 and 2011. The change in value of these hedges was recorded as a component of the change in fair value of financial instruments in our consolidated statement of operations.

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

NOTE 8: FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments” requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The fair value of investments in mortgages and loans, investments in securities, CDO notes payable, convertible senior notes, junior subordinated notes and derivative assets and liabilities is based on significant observable and unobservable inputs. The fair value of cash and cash equivalents, restricted cash, secured credit facilities, CMBS facilities and loans payable on real estate 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 March 31, 2012:

Financial Instrument	Carrying Amount		Estimated Fair Value
Assets
Commercial mortgages, mezzanine loans and other loans	$	1,032,844	$	989,078
Investments in securities and security-related receivables		653,589		653,589
Cash and cash equivalents		53,841		53,841
Restricted cash		153,285		153,285
Derivative assets		1,257		1,257
Liabilities
Recourse indebtedness:
7.0% convertible senior notes		108,264		107,525
6.875% convertible senior notes		3,741		3,604
Secured credit facilities		9,497		9,497
Junior subordinated notes, at fair value		22,450		22,450
Junior subordinated notes, at amortized cost		25,100		14,809
CMBS facilities		3,471		3,471
Non-recourse indebtedness:
CDO notes payable, at amortized cost		1,307,648		800,627
CDO notes payable, at fair value		149,390		149,390
Loans payable on real estate		135,410		135,410
Derivative liabilities		170,997		170,997

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Fair Value Measurements

The following tables summarize information about our assets and liabilities measured at fair value on a recurring basis as of March 31, 2012, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:

Assets:	Quoted Prices in Active Markets for Identical Assets (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3) (a)		Balance as of March 31, 2012
Trading securities
TruPS	$	0	$	0	$	482,744	$	482,744
Other securities		0		0		0		0
Available-for-sale securities		0		2		0		2
Security-related receivables
TruPS receivables		0		0		84,720		84,720
Unsecured REIT note receivables		0		31,333		0		31,333
CMBS receivables		0		37,181		0		37,181
Other securities		0		17,609		0		17,609
Derivative assets		0		1,257		0		1,257
Total assets	$	0	$	87,382	$	567,464	$	654,846

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 March 31, 2012
Junior subordinated notes, at fair value	$	0	$	0	$	22,450	$	22,450
CDO notes payable, at fair value		0		0		149,390		149,390
Derivative liabilities		0		86,382		84,615		170,997
Total liabilities	$	0	$	86,382	$	256,455	$	342,837

(a) During the three-month period ended March 31, 2012, there were no transfers between Level 1 and Level 2, as well as, there were no transfers into and out of Level 3.

When estimating the fair value of our Level 3 financial instruments, management uses various observable and unobservable inputs. These inputs include yields, credit spreads, effective dollar prices and overall market conditions on not only the exact financial instrument for which management is estimating the fair value but also financial instruments that are similar or issued by the same issuer when such inputs are unavailable. Management uses these inputs to estimate the effective dollar price for our specific Level 3 financial instrument. Changes in these inputs over time cause changes in the fair value of our financial instruments. The weighted average effective dollar price of our TruPS and TruPS receivables as of March 31, 2012 is $75.81.

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 three-month period ended March 31, 2012:

Assets	Trading Securities—TruPS and Subordinated Debentures		Security-Related Receivables—TruPS and Subordinated Debenture Receivables		Total Level 3 Assets
Balance, as of December 31, 2011	$	481,736	$	82,863	$	564,599
Change in fair value of financial instruments		1,008		1,857		2,865
Purchases		0		0		0
Sales		0		0		0
Balance, as of March 31, 2012	$	482,744	$	84,720	$	567,464

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Liabilities	Derivative Liabilities			CDO Notes Payable, at Fair Value			Junior Subordinated Notes, at Fair Value		Total Level 3 Liabilities
Balance, as of December 31, 2011	$	90,080		$	122,506		$	22,450	$	235,036
Change in fair value of financial instruments		(5,465	)		108,304			0		102,839
Purchases		0			0			0		0
Sales		0			0			0		0
Principal repayments		0			(81,420	)		0		(81,420	)
Balance, as of March 31, 2012	$	84,615		$	149,390		$	22,450	$	256,455

The following table summarizes the valuation technique and the level of the fair value hierarchy for financial instruments that are not fair valued in the accompanying balance sheets but for which fair value is required to be disclosed. The fair value of cash and cash equivalents, restricted cash, secured credit facilities, CMBS facilities and loans payable on real estate approximates cost due to the nature of these instruments and are not included in the table below.

						Fair Value Measurement
	Carrying Amount as of March 31, 2012		Estimated Fair Value as of March 31, 2012		Valuation Technique	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Commercial mortgages, mezzanine loans and other loans	$	1,032,844	$	989,078	Discounted cash flows	$	0	$	0	$	989,078
7.0% convertible senior notes		108,264		107,525	Trading price		107,525		0		0
6.875% convertible senior notes		3,741		3,604	Trading price		3,604		0		0
Junior subordinated notes, at amortized cost		25,100		14,809	Discounted cash flows		0		0		14,809
CDO notes payable, at amortized cost		1,307,648		800,627	Discounted cash flows		0		0		800,627

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 March 31
Description	2012			2011
Change in fair value of trading securities and security-related receivables	$	6,132		$	16,554
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		(108,304	)		(7,031	)
Change in fair value of derivatives		(6,751	)		(3,912	)
Change in fair value of financial instruments	$	(108,923	)	$	5,611

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 periods ended March 31, 2012 and 2011 was primarily attributable to changes in instrument specific credit risks. The changes in the fair value of the CDO notes payable for which the fair value option was elected was due to repayments at par because of OC failures when the CDO notes have a fair value of less than par. The changes in the fair value of derivatives for which the fair value option was elected for the three-month periods ended March 31, 2012 and 2011 was mainly due to changes in interest rates.

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NOTE 9: VARIABLE INTEREST ENTITIES

The following table presents the assets and liabilities of our consolidated VIEs as of each respective date. As of March 31, 2012 and December 31, 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 March 31, 2012			As of December 31, 2011
Assets
Investments in mortgages and loans, at amortized cost:
Commercial mortgages, mezzanine loans, other loans and preferred equity interests	$	1,878,442		$	1,856,106
Allowance for losses		(30,557	)		(36,210	)
Total investments in mortgages and loans		1,847,885			1,819,896
Investments in real estate		20,800			20,910
Investments in securities and security-related receivables, at fair value		652,724			645,915
Cash and cash equivalents		244			201
Restricted cash		123,077			235,682
Accrued interest receivable		59,850			57,560
Deferred financing costs, net of accumulated amortization of $11,640 and $10,995, respectively		14,733			15,378
Total assets	$	2,719,313		$	2,795,542
Liabilities and Equity
Indebtedness (including $149,390 and $122,506 at fair value, respectively)	$	1,698,594		$	1,682,487
Accrued interest payable		51,914			48,417
Accounts payable and accrued expenses		3,215			1,537
Derivative liabilities		170,997			181,499
Deferred taxes, borrowers’ escrows and other liabilities		2,654			4,570
Total liabilities		1,927,374			1,918,510
Equity:
Shareholders’ equity:
Accumulated other comprehensive income (loss)		(108,226	)		(114,186	)
RAIT Investment		20,008			31,004
Retained earnings		880,157			960,214
Total shareholders’ equity		791,939			877,032
Total liabilities and equity	$	2,719,313		$	2,795,542

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

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NOTE 10: EQUITY

Preferred Shares

On January 24, 2012, our board of trustees declared a first quarter 2012 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 April 2, 2012 to holders of record on March 1, 2012 and totaled $3,407.

On May 1, 2012, our board of trustees declared a second quarter 2012 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 July 2, 2012 to holders of record on June 1, 2012.

Common Shares

Dividends:

On February 29, 2012, the board of trustees declared a $0.08 dividend on our common shares to holders of record as of March 28, 2012. The dividend was paid on April 27, 2012 and totaled $3,992.

Share Repurchases:

On January 24, 2012, the compensation committee of our board of trustees approved a cash payment to the board’s seven non-management trustees intended to constitute a portion of their respective 2012 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 letter agreement documented the election of each trustee to 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 used by all of the non-management trustees to purchase common shares was $210 and was used to purchase 36,750 common shares, in the aggregate, in February 2012.

Equity Compensation:

During the three-month period ended March 31, 2012, 220,823 phantom unit awards were redeemed for common shares, a portion of which was withheld in order to satisfy the applicable withholding taxes. These phantom units were fully vested at the time of redemption.

On January 24, 2012, the compensation committee awarded 2,172,000 stock appreciation rights, or SARs, valued at $6,091 based on a Black-Scholes option pricing model at the date of grant, to our executive officers and non-executive officer employees. The SARs vest over a three-year period and may be exercised between the date of vesting and January 24, 2017, the expiration date of the SARs.

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, in the aggregate, 10,500,000 common shares. During the three-month period ended March 31, 2012, we issued a total of 1,491,160 common shares pursuant to the DRSPP at a weighted-average price of $5.10 per share and we received $7,570 of net proceeds. As of March 31, 2012, 7,796,422 common shares, in aggregate, remain available for issuance under the DRSPP.

Common Share Public Offering:

During the three-month period ended March 31, 2012, we issued 6,950,000 common shares in an underwritten public offering. The public offering price was $5.30 per share and we received $34,750 of net proceeds.

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NOTE 11: EARNINGS (LOSS) PER SHARE

The following table presents a reconciliation of basic and diluted earnings (loss) per share for the three-month periods ended March 31, 2012 and 2011:

	For the Three-Month Periods Ended March 31
	2012			2011
Income (loss) from continuing operations	$	(103,664	)	$	8,340
(Income) loss allocated to preferred shares		(3,410	)		(3,414	)
(Income) loss allocated to noncontrolling interests		55			50
Income (loss) from continuing operations allocable to common shares		(107,019	)		4,976
Income (loss) from discontinued operations		0			791
Net income (loss) allocable to common shares	$	(107,019	)	$	5,767
Weighted-average shares outstanding—Basic		44,150,924			36,618,910
Dilutive securities under the treasury stock method		0			349,210

	For the Three-Month Periods Ended March 31
	2012			2011
Weighted-average shares outstanding—Diluted		44,150,924			36,968,120
Earnings (loss) per share—Basic:
Continuing operations	$	(2.42	)	$	0.14
Discontinued operations		0.00			0.02
Total earnings (loss) per share—Basic	$	(2.42	)	$	0.16
Earnings (loss) per share—Diluted:
Continuing operations	$	(2.42	)	$	0.14
Discontinued operations		0.00			0.02
Total earnings (loss) per share—Diluted	$	(2.42	)	$	0.16

For the three-month periods ended March 31, 2012 and 2011, securities convertible into 15,431,009 and 2,079,869 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 March 31, 2012 and December 31, 2011, we had $5,479 and $515, respectively, of cash and cash equivalents and $497 and $447, respectively, of restricted cash on deposit at Bancorp. We did not receive any interest income from the Bancorp during the three-month periods ended March 31, 2012 and 2011. 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 $79 and $84 for the three-month periods ended March 31, 2012 and 2011, respectively. Rent received for our sublease was $43 and $42 for the three-month periods ended March 31, 2012 and 2011.

NOTE 13: DISCONTINUED OPERATIONS

For the three-month periods ended March 31, 2011, income (loss) from discontinued operations relates to one real estate property sold since January 1, 2011. There was no income (loss) from discontinued operations during the three-month period ended March 31, 2012. The following table summarizes revenue and expense information for real estate properties classified as discontinued operations:

	For the Three-Month Period Ended March 31, 2011
Revenue:
Rental income	$	1,777
Expenses:
Real estate operating expense		985
General and administrative expense		1
Total expenses		986
Total income (loss) from discontinued operations	$	791

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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

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.

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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, 2011, 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 with a commercial real estate focused platform capable of originating commercial real estate loans, CMBS eligible loans, acquiring commercial real estate properties and investing in, managing, servicing, trading and advising on commercial real estate-related assets. We offer a comprehensive set of debt financing options to the commercial real estate industry along with asset and property management services. We have recently expanded our platform to include sponsoring non-traded REITs. We also own and manage a portfolio of commercial real estate properties and manage real estate-related assets for third parties. We are positioning RAIT for future growth in the area of its historical core competency, commercial real estate lending and direct ownership of real estate, while diversifying the revenue generated from our commercial real estate loans and properties and reducing or removing other non-core assets and activities.

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

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

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

• raising capital by accessing capital through the independent broker-dealer networks for the offerings of the sponsored REITs and other sponsored companies and generating fee income by advising the sponsored companies and broker-dealer activities;

• reducing our leverage while developing new financing sources; and

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

We generated net loss allocable to common shares of $107.0 million, or $2.42 per common share-diluted, during the three-month period ended March 31, 2012. The primary items affecting our performance were the following:

• Change in fair value of financial instruments. For the three-month period ended March 31, 2012, the net change in fair value of financial instruments decreased net income by $108.9 million. The primary driver of this change in fair value of financial instruments was $115.1 million associated with an increase in the fair value of of non-recourse debt, CDO Notes payable, issued by Taberna VIII and Taberna IX and the associated interest rate hedges. This non-cash mark-to-market reduction to earnings was offset by $6.2 million of non-cash mark-to-market increases in the fair value of trading securities and security related receivables. We have had these non-cash mark-to-market adjustments in the past and expect to experience changes in the fair value of our financial instruments as market conditions change.

• Gains (losses) on debt extinguishments. During the three-month period ended March 31, 2012, we repurchased, from the market, a total of $2.5 million in aggregate principal amount of CDO notes payable issued by our RAIT I CDO securitization. The aggregate purchase price was $0.9 million and we recorded a gain on extinguishment of debt of $1.6 million. 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. 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.

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

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estate loans which meet market standards for inclusion in securitizations. During the three-month period ended March 31, 2012, we originated $4.6 million of CMBS eligible loans and have financed them on our CMBS warehouse facilities.

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.

Key Statistics

Set forth below are key statistics relating to our business through March 31, 2012 (dollars in thousands, except per share data):

	As of or For the Three-Month Periods Ended
	March 31, 2012			December 31, 2011			September 30, 2011			June 30, 2011			March 31, 2011
Financial Statistics:
Assets under management	$	3,549,029		$	3,517,684		$	3,633,133		$	3,753,290		$	3,814,791
Debt to equity		2.3	x		2.2	x		2.3	x		2.2	x		2.1	x
Total revenue	$	54,245		$	56,923		$	60,089		$	58,863		$	58,279
Earnings per share, diluted	$	(2.42	)	$	(0.39	)	$	(0.55	)	$	(0.53	)	$	0.16
Common dividend declared	$	0.08		$	0.06		$	0.06		$	0.06		$	0.09	(a)
Commercial Real Estate (“CRE”) Loan Portfolio (b):
Reported CRE Loans—unpaid principal	$	990,321		$	952,997		$	1,064,946		$	1,122,898		$	1,149,169
Non-accrual loans—unpaid principal	$	56,113		$	54,334		$	91,833		$	94,117		$	121,054
Non-accrual loans as a % of reported loans		5.7	%		5.7	%		8.6	%		8.4	%		10.5	%
Reserve for losses	$	35,527		$	40,565		$	50,609		$	49,906		$	58,809
Reserves as a % of non-accrual loans		63.3	%		74.7	%		55.1	%		53.0	%		48.6	%
Provision for losses	$	500		$	500		$	500		$	950		$	1,950
CRE Property Portfolio:
Reported investments in real estate	$	887,130		$	891,502		$	849,232		$	851,916		$	859,983
Number of properties owned		56			56			48			48			48
Multifamily units owned		8,014			8,014			8,014			8,014			8,311
Office square feet owned		1,786,860			1,786,860			1,786,860			1,786,908			1,786,908
Retail square feet owned		1,358,257			1,358,257			1,114,250			1,116,171			1,116,063
Average physical occupancy data:
Multifamily properties		90.4	%		88.5	%		89.8	%		88.6	%		88.0	%
Office properties		70.7	%		69.2	%		68.5	%		68.8	%		70.7	%
Retail properties		66.9	%		68.0	%		68.9	%		62.0	%		56.3	%
Total		85.0	%		83.6	%		84.5	%		83.1	%		82.4	%

(a) 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.

(b) 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.

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, 2011, or the Annual Report, for a detailed discussion of the following items:

• Credit, capital markets and liquidity risk.

• Interest rate environment.

• Prepayment rates.

• Commercial real estate improved performance.

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Our Investment Portfolio

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

Commercial mortgages, mezzanine loans, other loans and preferred equity interests. We originate and own senior long-term mortgage loans, 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 March 31, 2012 (dollars in thousands):

	Book Value		Weighted- Average Coupon			Range of Maturities	Number of Loans
Commercial Real Estate (CRE) Loans
Commercial mortgages	$	638,475		6.4	%	May 2012 to Apr. 2022		42
Mezzanine loans		280,755		9.3	%	May 2012 to Nov. 2038		88
Preferred equity interests		60,843		9.5	%	May 2012 to Aug. 2025		21
Total CRE Loans		980,073		7.4	%			151
Other loans		53,733		4.4	%	May 2012 to Oct. 2016		4
Total investments in loans	$	1,033,806		7.3	%			155

During the three-month period ended March 31, 2012, our portfolio of commercial real estate loans increased as $72.2 million of new loan originations exceeded the amount of loan repayments.

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 March 31, 2012:

(a) Based on book value.

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Investments in real estate. We invest in real estate properties, primarily multi-family properties, throughout the United States. The table below describes certain characteristics of our investments in real estate as of March 31, 2012 (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)	$	549,346		90.4	%		8,014		33	$	691
Office real estate properties (c)		223,372		70.7	%		1,786,860		10		21.53
Retail real estate properties (c)		67,753		66.9	%		1,358,257		3		10.59
Parcels of land		46,659		0	%		19.9		10		N/A
Total	$	887,130		85.0	%				56

(a) Based on properties owned as of March 31, 2012.

(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.

The charts below describe the property types and the geographic breakdown of our investments in real estate as of March 31, 2012:

(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 March 31, 2012, we retained a controlling interest in two such securitizations—Taberna VIII and Taberna IX, which are consolidated entities. We present all of the collateral assets for the debt securities and the related non-recourse securitization financing obligations at fair value in our consolidated financial statements. During 2012, due to the credit performance of the underlying collateral, we received only our senior collateral management fees from these two securitizations. We do not expect to add investments in this asset category for the foreseeable future due to market conditions.

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The table below describes our investment in TruPS and subordinated debentures as included in our consolidated financial statements as of March 31, 2012 (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	$	103,693		1.5	%		83.2	%		2.4	x
Office		136,856		7.5	%		62.5	%		1.8	x
Residential Mortgage		45,662		2.7	%		84.1	%		1.8	x
Specialty Finance		87,424		5.1	%		85.9	%		5.4	x
Homebuilders		63,576		7.8	%		63.5	%		0.5	x
Retail		74,716		4.1	%		62.6	%		1.4	x
Hospitality		30,264		6.3	%		96.5	%		2.5	x
Storage		25,273		8.0	%		66.3	%		4.4	x
Total	$	567,464		4.6	%		73.7	%		2.4	x

The chart below describes the equity capitalization of our investment in TruPS and subordinated debentures as included in our consolidated financial statements as of March 31, 2012:

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

(b) Based on estimated fair value.

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

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

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

The table and the chart below describe certain characteristics of our real estate-related debt securities as of March 31, 2012 (dollars in thousands):

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Investment Description	Estimated Fair Value		Weighted- Average Coupon			Weighted- Average Years to Maturity		Book Value
Unsecured REIT note receivables	$	31,133		6.7	%		4.9	$	30,000
CMBS receivables		37,181		5.6	%		31.5		86,443
Other securities		17,611		3.8	%		30.7		68,000
Total	$	86,125		5.0	%		27.1	$	184,443

(a) S&P Ratings as of March 31, 2012.

Securitization Summary

Overview. We have used securitizations to match fund the interest rates and maturities of our assets with the interest rates and maturities of the related financing. This strategy has helped us reduce interest rate and funding risks on our portfolios for the long-term. A securitization is a structure in which multiple classes of debt and equity are issued by a special purpose entity to finance a portfolio of assets. Cash flow from the portfolio of assets is used to repay the securitization liabilities sequentially, in order of seniority. The most senior classes of debt typically have credit ratings of “AAA” through “BBB–” and therefore can be issued at yields that are lower than the average yield of the securities backing the securitization. The debt tranches are typically rated based on portfolio quality, diversification and structural subordination. The equity securities issued by the securitization are the “first loss” piece of the capital structure, but they are entitled to all residual amounts available for payment after the obligations to the debt holders have been satisfied. Unlike typical securitization structures, the underlying assets in our securitization pool may be sold or repaid, subject to certain limitations, without a corresponding pay-down of the securitization debt, provided the proceeds are reinvested in qualifying assets.

We manage five securitizations with varying amounts of retained or residual interests held by us. Four of these securitizations are consolidated in our financial statements as follows: RAIT I, RAIT II, Taberna VIII and Taberna IX. The assets and liabilities of RAIT I and RAIT II are presented at amortized cost in our consolidated financial statements. The assets and liabilities of Taberna VIII and Taberna IX are presented at fair value in our consolidated financial statements pursuant to the fair value option. We manage the fifth securitization, Taberna I, but do not consolidate it in our financial statements because we are not the primary beneficiary of the securitization.

Securitization Performance. Our securitizations 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 securitization indenture.

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As of the most recent payment information, the Taberna I, Taberna VIII and Taberna IX securitizations that we manage were not passing all of their required interest coverage or OC triggers and we received only senior asset management fees. While events of default do not currently exist in the securitizations that we manage, we are unable to predict with certainty which securitizations, 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 securitizations, RAIT I and RAIT II, and we continue to receive all of our management fees, interest and residual returns from these securitizations.

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

• RAIT I—RAIT I has $1.0 billion of total collateral, of which $29.9 million is defaulted. The current overcollateralization (O/C) test is passing at 126.3% with an O/C trigger of 116.2%. We currently own $43.7 million of the securities that were originally rated investment grade and $200.0 million of the non-investment grade securities issued by this securitization. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our collateral management fees. We pledged $43.7 million of the securities we own of RAIT I as collateral for a senior secured note we issued.

• RAIT II—RAIT II has $816.8 million of total collateral, of which $18.9 million is defaulted. The current O/C test is passing at 116.1% with an O/C trigger of 111.7%. We currently own $108.5 million of the securities that were originally rated investment grade and $140.7 million of the non-investment grade securities issued by this securitization. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our collateral management fees. We pledged $104.0 million of the securities we own of RAIT II as collateral for a senior secured note we issued.

• Taberna VIII—Taberna VIII has $548.0 million of total collateral, of which $53.8 million is defaulted. The current overcollateralization (O/C) test is failing at 81.8% with an O/C trigger of 103.5%. We currently own $40.0 million of the securities that were originally rated investment grade and $93.0 million of the non-investment grade securities issued by this securitization. We do not expect to receive any distributions from this securitization other than our senior management fees for the foreseeable future.

• Taberna IX—Taberna IX has $595.1 million of total collateral, of which $127.2 million is defaulted. The current O/C test is failing at 71.7% with an O/C trigger of 105.4%. We currently own $89.0 million of the securities that were originally rated investment grade and $97.5 million of the non-investment grade securities issued by this securitization. We do not expect to receive any distributions from this securitization other than our senior management fees for the foreseeable future.

As of March 31, 2012, we have repurchased, in aggregate, a total of $111.7 million of RAIT I and RAIT II CDO notes payable for a cumulative cost of $23.7 million and have a total investment in RAIT I and RAIT II of $492.9 million.

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

Assets Under Management

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

The table below summarizes our AUM as of March 31, 2012 and December 31, 2011 (dollars in thousands):

	AUM as of March 31, 2012		AUM as of December 31, 2011
Commercial real estate portfolio (1)	$	1,883,763	$	1,850,390
U.S. TruPS portfolio (2)		1,665,266		1,667,294
Total	$	3,549,029	$	3,517,684

(1) As of March 31, 2012 and December 31, 2011, our commercial real estate portfolio was comprised of $1.0 billion and $0.9 billion of assets collateralizing RAIT I and RAIT II, $887.1 million and $891.5 million, respectively, of investments in real estate and $38.3 million and $23.9 million, respectively, of commercial mortgages, mezzanine loans and preferred equity interests that were not securitized.

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

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

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

Set forth below is a reconciliation of FFO and AFFO to net income (loss) allocable to common shares for the three-month periods ended March 31, 2012 and 2011 (in thousands, except share information):

	For the  Three-Month Periods Ended March 31
	2012			2011
Funds From Operations:
Net income (loss) allocable to common shares	$	(107,019	)	$	5,767
Adjustments:
Real estate depreciation and amortization		7,459			6,570
Funds From Operations	$	(99,560	)	$	12,337
Weighted-average shares—diluted		44,150,924			36,968,120
Adjusted Funds From Operations:
Funds From Operations	$	(99,560	)	$	12,337
Adjustments:
Change in fair value of financial instruments		108,923			(5,611	)
(Gains) losses on debt extinguishment		(1,574	)		537
Capital expenditures, net of direct financing		(248	)		(362	)
Straight-line rental adjustments		(306	)		(919	)
Amortization of deferred items and intangible assets		1,526			673
Share-based compensation		557			259
Adjusted Funds From Operations	$	9,318		$	6,914
Weighted-average shares—diluted		44,150,924			36,968,120

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Results of Operations

Three-Month Period Ended March 31, 2012 Compared to the Three-Month Period Ended March 31, 2011

Interest income. Interest income decreased $5.6 million, or 16.7%, to $28.0 million for the three-month period ended March 31, 2012 from $33.6 million for the three-month period ended March 31, 2011. Generally, our interest income has declined, when compared to the three-month period ended March 31, 2011, as a result of a decrease in our average investments in loans and securities. Our average investments in loans and securities declined from $1.6 billion for the three-month period ended March 31, 2011 to $1.4 billion during the three-month period ended March 31, 2012. This decline was primarily caused by:

• principal repayments of $225.1 million on our investments in loans and $74.2 million from our investments in securities since March 31, 2011 and

• conversion of $93.1 million of loans to owned real estate since March 31, 2011.

This decline in our investments was offset by new investments totaling $171.2 million since March 31, 2011.

Furthermore, the reduction in interest income is also due to a decrease in the weighted-average interest rates on our investments in loans from 7.7% as of March 31, 2011 to 7.3% as of March 31, 2012. This is due to a broad decrease in interest rates since March 31, 2011 as well as prepayments from loans with higher interest rates since March 31, 2011.

Rental income. Rental income increased $3.5 million to $24.8 million for the three-month period ended March 31, 2012 from $21.3 million for the three-month period ended March 31, 2011. The increase is attributable to $2.1 million of rental income from 10 new properties acquired or consolidated since March 31, 2011, $0.1 million from one property acquired during the three-months ended March 31, 2011 present for a full quarter of operations, and $1.3 million from improved occupancy and rental rates in 2012 as compared to 2011.

Fee and other income. Fee and other income decreased $1.9 million, or 55.9%, to $1.5 million for the three-month period ended March 31, 2012 from $3.4 million for the three-month period ended March 31, 2011. This reduction is attributable to decreases of $1.1 million in consulting fee income due to reduced exchange activity in our consolidated Taberna CDOs, and $0.7 million in property reimbursement income due to lower expenses at managed properties.

Expenses

Interest expense. Interest expense decreased $4.1 million, or 17.5%, to $19.3 million for the three-month period ended March 31, 2012 from $23.4 million for the three-month period ended March 31, 2011. The decrease is primarily attributable to repurchases of $52.0 million of our 6.875% convertible senior notes, $26.2 million of our CDO notes payable, and repayment of our $43.0 million senior secured convertible note, offset by additional interest and discount amortization expenses incurred for the issuance of new debt instruments since March 31, 2011.

Real estate operating expense. Real estate operating expense increased $1.2 million to $13.8 million for the three-month period ended March 31, 2012 from $12.6 million for the three-month period ended March 31, 2011. The increase is attributable to $1.1 million of operating expenses from 10 new properties acquired or consolidated since March 31, 2011 and $0.1 million of operating expenses from our owned properties acquired prior to January 1, 2011.

Compensation expense. Compensation expense decreased $0.8 million, or 12.3%, to $5.7 million for the three-month period ended March 31, 2012 from $6.5 million for the three-month period ended March 31, 2011. This decrease was due to a reduction of salary and benefits of $1.1 million which was partially offset by increased stock compensation expense of $0.3 million.

General and administrative expense. General and administrative expense decreased $1.2 million, or 24.0%, to $3.8 million for the three-month period ended March 31, 2012 from $5.0 million for the three-month period ended March 31, 2011. This decrease was due to a reduction of professional fees for legal, tax, and audit services of $0.6 million, a decrease of $0.2 million in acquisition expenses, $0.3 million in insurance, office, and IT expenses, and $0.1 million in lower other expenses.

Provision for losses. The provision for losses relates to our investments in our commercial mortgage loan portfolios. The provision for losses decreased by $1.5 million for the three-month period ended March 31, 2012 to $0.5 million as compared to $2.0 million for the three-month period ended March 31, 2011. The decrease is attributable to the improved performance of our investment in loans portfolio during 2012 as compared to 2011. As of March 31, 2012 we had $74.4 million of investment in loans on non-accrual,

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down from $140.6 million of investment in loans on non-accrual as of March 31, 2011. 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 and amortization expense increased $0.6 million to $7.7 million for the three-month period ended March 31, 2012 from $7.1 million for the three-month period ended March 31, 2011. The increase is primarily attributable to 10 properties acquired or consolidated since March 31, 2011.

Interest and other income (expense)

Gains on extinguishment of debt. Gains on extinguishment of debt during the three-month period ended March 31, 2012 are attributable to the repurchase of $2.5 million principal amount of RAIT CRE CDO I debt notes from the market for $0.9 million of cash, resulting in gains on extinguishment of debt of $1.6 million.

Change in fair value of financial instruments. During the three-months ended March 31, 2012, the change in fair value of financial instruments reduced our net income by $108.9 million. The fair value adjustments we recorded were as follows (dollars in thousands):

Description	For the Three-Month Period  Ended March 31, 2012			For the Three-Month Period Ended March 31, 2011
Change in fair value of trading securities and security-related receivables	$	6,132		$	16,554
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		(108,304	)		(7,031	)
Change in fair value of derivatives		(6,751	)		(3,912	)
Change in fair value of financial instruments	$	(108,923	)	$	5,611

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

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, pay dividends and other general business needs. 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 and opportunities to sell CMBS eligible loans to CMBS issuers.

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 RAIT II from repayment of underlying loans and other sources can be used until June 2012 to make new investments held by RAIT II, including future funding commitments of existing investments. 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

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• 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 $53.8 million as of March 31, 2012;

• 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, and Dividend Reinvestment and Share Purchase Plan, or DRSPP.

Our restricted cash balance was $153.3 million as of March 31, 2012. We have $93.8 million of restricted cash in RAIT II available to invest in qualifying commercial loans as of March 31, 2012, subject to $11.5 million of future funding commitments, leaving $82.3 million available to lend. This $93.8 million of restricted cash is not available to RAIT’s creditors. As of March 31, 2012, $2.7 million of restricted cash was held by Taberna VIII and Taberna IX. The remaining balance of our restricted cash relates to escrows associated with loans to our borrowers for real estate taxes and insurance.

Cash Flows

As of March 31, 2012 and 2011, we maintained cash and cash equivalents of approximately $53.8 million and $39.5 million, respectively. Our cash and cash equivalents were generated from the following activities (dollars in thousands):

	For the Three-Month Periods Ended March 31
	2012			2011
Cash flow from operating activities	$	(942	)	$	464
Cash flow from investing activities		80,034			3,038
Cash flow from financing activities		(54,971	)		8,731
Net change in cash and cash equivalents		24,121			12,233
Cash and cash equivalents at beginning of period		29,720			27,230
Cash and cash equivalents at end of period	$	53,841		$	39,463

Our principal source of net cash inflow historically has been our investing activities. The increase in cash inflows during the three-month period ended March 31, 2012 as compared to the same period in 2011 was substantially due to the decrease in our restricted cash to repay the most senior note holders of a consolidated securitization. This was offset by cash outflows as new investments in loans of $72.2 million exceeded loan repayments of $29.5 million for the three-month period ended March 31, 2012. During the three-month period ended March 31, 2011, proceeds from loan repayments of $11.4 million outpaced new investment in loans of $5.2 million.

Cash flow from operating activities for the three-month period ended March 31, 2012, as compared to the same period in 2011, 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 three-month period ended March 31, 2012 is primarily due to the repayments and repurchases of our CDO notes payable. The cash outflows were partially offset by the inflows from the underwritten public offering of our common shares during the three-month period ended March 31, 2012.

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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 March 31, 2012:

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
7.0% convertible senior notes (1)	$	115,000	$	108,264		7.0	%	Apr. 2031
6.875% convertible senior notes (2)		3,582		3,741		6.9	%	Apr. 2027
Secured credit facilities		9,497		9,497		3.0	%	Dec. 2016
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
CMBS facilities		3,471		3,471		2.7	%	Nov. 2012 to Oct. 2013
Total recourse indebtedness (4)		194,702		172,523		6.5	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (5)(6)		1,309,528		1,307,648		0.7	%	2045 to 2046
CDO notes payable, at fair value (3)(5)(7)		1,022,664		149,390		1.2	%	2037 to 2038
Loans payable on real estate		135,410		135,410		5.6	%	Sept. 2015 to May 2021
Total non-recourse indebtedness		2,467,602		1,592,448		1.1	%
Total indebtedness	$	2,662,304	$	1,764,971		1.5	%

(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) In April 2012, we redeemed all of our outstanding 6.875% convertible senior notes for cash.

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

(4) Excludes senior secured notes issued by us with an aggregate principal amount equal to $100,000 with a weighted average coupon of 7.0%, which are eliminated in consolidation.

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

(6) 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.

(7) 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 March 31, 2012 was $862.4 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.

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

The current status or activity in our financing arrangements occurring as of or during the three-month period ended March 31, 2012 is as follows:

Recourse Indebtedness

6.875% convertible senior notes. In April 2012, we redeemed all of our outstanding 6.875% convertible senior notes for cash.

7.0% convertible senior notes. The 7.0% Convertible Senior Notes due 2031, or the 7.0% convertible senior notes, are convertible at the option of the holder at a current conversion rate of 132.9506 common shares per $1.0 million principal amount of 7.0% convertible senior notes (equivalent to a current conversion price of $7.52 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.

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Secured credit facilities. As of March 31, 2012, we have $9.5 million outstanding under our secured credit facility, which is payable in December 2016 under the current terms of this facility. Our secured credit facility is secured by designated commercial mortgages and mezzanine loans.

CMBS Facilities. During the three-month period ended March 31, 2012, we financed $3.5 million in aggregate principal amount of commercial mortgage loans pursuant to the $150.0 million CMBS facility. As of March 31, 2012, $246.5 million in aggregate principal amount remained available under our CMBS facilities.

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 March 31, 2012.

During the three-month period ended March 31, 2012, we repurchased, from the market, a total of $2.5 million in aggregate principal amount of CDO notes payable issued by our RAIT I CDO securitization. The aggregate purchase price was $0.9 million and we recorded a gain on extinguishment of debt of $1.6 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 three-month period ended March 31, 2012, $81.4 million of restricted cash, including cash flow that was re-directed from our retained interests in these CDOs, were used to repay the most senior holders of our CDO notes payable.

Preferred Shares

On January 24, 2012, our board of trustees declared a first quarter 2012 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 April 2, 2012 to holders of record on March 1, 2012 and totaled $3.4 million.

On May 1, 2012, our board of trustees declared a second quarter 2012 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 July 2, 2012 to holders of record on June 1, 2012.

Common Shares

Dividends:

On February 29, 2012, the board of trustees declared a $0.08 dividend on our common shares to holders of record as of March 28, 2012. The dividend was paid on April 27, 2012 and totaled $4.0 million.

Share Repurchases:

On January 24, 2012, the compensation committee of our board of trustees approved a cash payment to the board’s seven non-management trustees intended to constitute a portion of their respective 2012 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 letter agreement documented the election of each trustee to 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 used by all of the non-management trustees to purchase common shares was $0.2 million and was used to purchase 36,750 common shares, in the aggregate, in February 2012.

Equity Compensation:

During the three-month period ended March 31, 2012, 220,823 phantom unit awards were redeemed for common shares, a portion of which was withheld in order to satisfy the applicable withholding taxes. These phantom units were fully vested at the time of redemption.

On January 24, 2012, the compensation committee awarded 2,172,000 stock appreciation rights, or SARs, valued at $6.1 million based on a Black-Scholes option pricing model at the date of grant, to our executive officers and non-executive officer employees. The SARs vest over a three-year period and may be exercised between the date of vesting and January 24, 2017, the expiration date of the SARs.

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, in the aggregate, 10,500,000 common shares. During the three-month period ended March 31, 2012, we issued a total of 1,491,160 common shares pursuant to the DRSPP at a weighted-average price of

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$5.10 per share and we received $7.6 million of net proceeds. As of March 31, 2012, 7,796,422 common shares, in aggregate, remain available for issuance under the DRSPP.

Common Share Public Offering:

During the three-month period ended March 31, 2012, we issued 6,950,000 common shares in an underwritten public offering. The public offering price was $5.30 per share and we received $34.8 million of net proceeds.

Off-Balance Sheet Arrangements and Commitments

Not applicable.

Critical Accounting Estimates and Policies

Our Annual Report on Form 10-K for the year ended December 31, 2011 contains a discussion of our critical accounting policies. On January 1, 2012 we adopted a new accounting pronouncement and revised our accounting policies as described below. See Note 2 in our unaudited consolidated financial statements as set forth herein. Management discusses our critical accounting policies and management’s judgments and estimates with the audit committee of our board of trustees.

Recent Accounting Pronouncements

On January 1, 2012, we adopted ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This accounting standard changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. These disclosures are effective for interim and annual periods beginning after December 15, 2011. The adoption of this standard did not have a material effect on our consolidated financial statements.

In December 2011, The FASB issued an accounting standard classified under FASB ASC Topic 360, “Property, Plant, and Equipment”. This accounting standard amends existing guidance to resolve the diversity in practice about whether the guidance for real estate sales applies to a parent that ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. This accounting standard is effective for fiscal years, and interim periods with those years, beginning on or after June 15, 2012. Management is currently evaluating the impact that these standards may have on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in quantitative and qualitative market risks during the three-month period ended March 31, 2012 from the disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2011. Reference is made to Item 7A included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

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

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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 March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

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

On March 13, 2012, the staff of the SEC notified us that the SEC had initiated a non-public investigation concerning one of our investment advisor subsidiaries, Taberna Capital Management, LLC, or TCM. Based on the notice and other communications with SEC staff, we believe this matter concerns TCM’s compliance with securities laws in connection with transactions since January 1, 2009 involving various Taberna securitizations for which TCM served as collateral manager. The SEC staff has requested information and we are cooperating fully. Because this matter is ongoing, we cannot predict the outcome at this time and, as a result, no conclusion can be reached as to what impact, if any, this matter may have on TCM or us.

Item 1A. Risk Factors

There have not been any material changes from the risk factors previously disclosed in Item 1A— “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

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

The following table provides information regarding purchases made by or on behalf of RAIT or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, of shares or other units of any class of RAIT’s equity securities that is registered by RAIT pursuant to section 12 of the Exchange Act.

Issuer Purchases of Equity Securities

Period	Total Number of Shares (or Units) Purchased			Average Price Paid per Share (or Unit)			Total Number of Shares (or Units) Purchased as Part  of Publicly Announced Plans or Programs			Maximum Number (or Approximate Dollar Value) of Shares (or  Units) that May Yet Be Purchased Under the Plans or Programs
01/01/2012 to 01/31/2012		0			0			0			0
02/01/2012 to 02/29/2012		36,750	(1)	$	5.67	(2)		36,750	(1)		0
03/01/2012 to 03/31/2012		0			0			0			0
Total		36,750	(1)	$	5.67	(2)		36,750	(1)(3)		(1	)(3)

(1) On January 24, 2012, the compensation committee of the board of trustees of RAIT approved a cash payment to its seven non-management trustees intended to constitute a portion of their respective 2012 annual non-management trustee compensation. RAIT’s non-management trustees are Edward S. Brown, Frank A. Farnesi, S. Kristin Kim, Arthur Makadon, John F. Quigley III, Jon C. Sarkisian and Murray Stempel, III. 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 letter agreement documented the election of each trustee to 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 used by all of the non-management trustees to purchase common shares was $210,000. RAIT filed a current report on Form 8-K with the SEC disclosing these letter agreements on January 26, 2012. This entire amount was used by the trustees to make purchases in open-market transactions of common shares on February 14, 2012, which we refer to as the trustee purchases. With respect to these purchases, the trustees may be deemed to be affiliated purchasers and so the trustee purchases are reported in this table.

(2) The price reported is the weighted average price of the trustee purchases. These shares were purchased in multiple transactions at prices ranging from $5.63 to $5.72, inclusive.

(3) On July 24, 2007, our board of trustees adopted a share repurchase plan that authorizes us to purchase up to $75.0 million of RAIT common shares. Under the plan, we may make purchases, from time to time, through open market or privately negotiated transactions. We have not repurchased any common shares under this plan as of March 31, 2012. This share purchase plan was first disclosed in our quarterly report on Form 10-Q for the period ended June 30, 2007 filed with the SEC on August 8, 2007 and does not have an expiration date.

Item 5. Other Information

The disclosure below is intended to satisfy any obligation of ours to provide disclosure pursuant to Item 8.01- “Other Events” of Form 8-K.

The Exhibit 99.1 captioned “Material U.S. Federal Income Tax Considerations” filed with this report on Form 10-Q updates and replaces the Exhibit 99.1 captioned “Material U.S. Federal Income Tax Considerations” previously filed with our report on Form 10-K for the fiscal year ended December 31, 2011. Among other updates, the Exhibit previously filed is being updated to modify disclosure relating to whether any of our income could be considered excess inclusion income that would be treated as unrelated business taxable income, or UBTI, by tax-exempt shareholders or others. We are making these modifications because we have not previously generated, do not currently generate and do not expect in the future to generate, any UBTI. We do not intend to purchase UBTI producing assets in the future and intend to maintain an investment strategy that removes the exposure of UBTI to our shareholders.

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: May 10, 2012	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: May 10, 2012	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: May 10, 2012	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. (14)
10.1	Form of Letter Agreement between RAIT and each of its Non-Management Trustees dated as of January 24, 2012. (15)
10.2	IAP Form of Share Appreciation Rights Award Agreement adopted January 24, 2012. (15)
12.1	Statements regarding computation of ratios as of March 31, 2012.*
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.*
99.1	Material U.S. Federal Income Tax Considerations.*
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 March 31, 2012 is formatted in XBRL interactive data files: (i) Consolidated Statements of Operations for the three-month periods ended March 31, 2012 and 2011; (ii) Consolidated Balance Sheets as of March 31,

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Exhibit Number

Description of Documents

2012 and December 31, 2011; (iii) Consolidated Statements of Comprehensive Income (Loss) for the three-month ended March 31, 2012 and 2011; (iv) Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2012 and 2011; and (v) Notes to Unaudited Consolidated Financial Statements. The information in this exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

* Filed herewith

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

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

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

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

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

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

(7) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on March 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 10-Q for the quarterly period ended September 30, 2011 (File No. 1-14760).

(15) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on January 26, 2012 (File No. 1-14760).

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