UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 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 49,913,142 common shares of beneficial interest, par value $0.03 per share, of the registrant were outstanding as of November 5, 2012.

RAIT FINANCIAL TRUST

TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011		3
	Consolidated Statements of Operations for the Three-Month and Nine-Month Periods Ended September 30, 2012 and 2011		4
	Consolidated Statements of Comprehensive Income (Loss) for the Three-Month and Nine-Month Periods Ended September 30, 2012 and 2011		5
	Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2012 and 2011		6
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		50
Item 4.	Controls and Procedures		50
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings		50
Item 1A.	Risk Factors		51
Item 5.	Other Information		51
Item 6.	Exhibits		51
	Signatures		52

2

PART I—FINANCIAL INFORMATION

Item 1.        Financial Statements

RAIT Financial Trust

Consolidated Balance Sheets

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

	As of September 30, 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	$	1,046,442		$	996,363
Allowance for losses		(32,738	)		(46,082	)
Total investments in mortgages and loans		1,013,704			950,281
Investments in real estate, net of accumulated depreciation of $90,149 and $69,372, respectively		906,487			891,502
Investments in securities and security-related receivables, at fair value		655,017			647,461
Cash and cash equivalents		40,719			29,720
Restricted cash		114,804			278,607
Accrued interest receivable		43,751			39,455
Other assets		45,863			39,771
Deferred financing costs, net of accumulated amortization of $14,753 and $11,613, respectively		19,988			23,178
Intangible assets, net of accumulated amortization of $2,757 and $2,337, respectively		2,209			2,629
Total assets	$	2,842,542		$	2,902,604
Liabilities and Equity
Indebtedness (including $196,870 and $144,956 at fair value, respectively)	$	1,773,204		$	1,748,274
Accrued interest payable		25,156			22,541
Accounts payable and accrued expenses		26,850			20,825
Derivative liabilities		162,341			181,499
Deferred taxes, borrowers’ escrows and other liabilities		21,360			15,371
Total liabilities		2,008,911			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, 4,760,000 shares authorized, 2,796,000 and 2,760,000 shares issued and outstanding		28			28
8.375% Series B cumulative redeemable preferred shares, liquidation preference $25.00 per share, 4,300,000 shares authorized, 2,282,300 and 2,258,000 shares issued and outstanding		23			23
8.875% Series C cumulative redeemable preferred shares, liquidation preference $25.00 per share, 3,600,000 shares authorized, 1,640,000 and 1,600,000 shares issued and outstanding		16			16
Common shares, $0.03 par value per share, 200,000,000 shares authorized, 49,910,683 and 41,289,566 issued and outstanding		1,490			1,236
Additional paid in capital		1,780,929			1,735,969
Accumulated other comprehensive income (loss)		(103,510	)		(118,294	)
Retained earnings (deficit)		(849,124	)		(708,671	)
Total shareholders’ equity		829,852			910,307
Noncontrolling interests		3,779			3,787
Total equity		833,631			914,094
Total liabilities and equity	$	2,842,542		$	2,902,604

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

3

RAIT Financial Trust

Consolidated Statements of Operations

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

	For the Three-Month Periods Ended September 30						For the Nine-Month Periods Ended September 30
	2012			2011			2012			2011
Revenue:
Interest income	$	30,358		$	33,549		$	87,059		$	101,590
Rental income		26,412			23,635			76,783			67,063
Fee and other income		3,557			2,905			7,077			8,578
Total revenue		60,327			60,089			170,919			177,231
Expenses:
Interest expense		18,367			22,689			56,953			68,384
Real estate operating expense		14,254			14,563			41,538			40,971
Compensation expense		6,031			6,898			17,015			19,179
General and administrative expense		3,790			4,042			11,398			13,441
Provision for losses		500			500			1,500			3,400
Depreciation and amortization expense		7,939			7,300			23,233			21,668
Total expenses		50,881			55,992			151,637			167,043
Operating Income		9,446			4,097			19,282			10,188
Other income (expense)		52			145			(1,386	)		295
Gains (losses) on assets		0			1,455			2,529			3,434
Gains (losses) on extinguishment of debt		0			11,371			1,574			14,540
Change in fair value of financial instruments		(24,177	)		(34,997	)		(144,269	)		(55,113	)
Income (loss) before taxes and discontinued operations		(14,679	)		(17,929	)		(122,270	)		(26,656	)
Income tax benefit (provision)		(292	)		158			65			468
Income (loss) from continuing operations		(14,971	)		(17,771	)		(122,205	)		(26,188	)
Income (loss) from discontinued operations		0			(50	)		0			747
Net income (loss)		(14,971	)		(17,821	)		(122,205	)		(25,441	)
(Income) loss allocated to preferred shares		(3,476	)		(3,407	)		(10,305	)		(10,235	)
(Income) loss allocated to noncontrolling interests		61			59			154			176
Net income (loss) allocable to common shares	$	(18,386	)	$	(21,169	)	$	(132,356	)	$	(35,500	)
Earnings (loss) per share—Basic:
Continuing operations	$	(0.37	)	$	(0.55	)	$	(2.76	)	$	(0.96	)
Discontinued operations		0.00			0.00			0.00			0.02
Total earnings (loss) per share—Basic	$	(0.37	)	$	(0.55	)	$	(2.76	)	$	(0.94	)
Weighted-average shares outstanding—Basic		49,908,051			38,771,022			47,994,085			37,822,750
Earnings (loss) per share—Diluted:
Continuing operations	$	(0.37	)	$	(0.55	)	$	(2.76	)	$	(0.96	)
Discontinued operations		0.00			0.00			0.00			0.02
Total earnings (loss) per share—Diluted	$	(0.37	)	$	(0.55	)	$	(2.76	)	$	(0.94	)
Weighted-average shares outstanding—Diluted		49,908,051			38,771,022			47,994,085			37,822,750
Distributions declared per common share	$	0.09		$	0.06		$	0.25		$	0.21

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

4

RAIT Financial Trust

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited and dollars in thousands)

	For the Three-Month Periods Ended September 30						For the Nine-Month Periods Ended September 30
	2012			2011			2012			2011
Net income (loss)	$	(14,971	)	$	(17,821	)	$	(122,205	)	$	(25,441	)
Other comprehensive income (loss):
Change in fair value of interest rate hedges		(3,420	)		(18,332	)		(11,600	)		(31,526	)
Reclassification adjustments associated with unrealized losses (gains) from interest rate hedges included in net income (loss)		8,645			0			26,495			(8	)
Realized (gains) losses on interest rate hedges reclassified to earnings		(14	)		10,748			(111	)		32,884
Change in fair value of available-for-sale securities		0			(12	)		0			171
Total other comprehensive income (loss)		5,211			(7,596	)		14,784			1,521
Comprehensive income (loss) before allocation to noncontrolling interests		(9,760	)		(25,417	)		(107,421	)		(23,920	)
Allocation to noncontrolling interests		61			59			154			176
Comprehensive income (loss)	$	(9,699	)	$	(25,358	)	$	(107,267	)	$	(23,744	)

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

5

RAIT Financial Trust

Consolidated Statements of Cash Flows

(Unaudited and dollars in thousands)

	For the Nine-Month Periods Ended September 30
	2012			2011
Operating activities:
Net income (loss)	$	(122,205	)	$	(25,441	)
Adjustments to reconcile net income (loss) to cash flow from operating activities:
Provision for losses		1,500			3,400
Share-based compensation expense		1,656			395
Depreciation and amortization		23,233			21,668
Amortization of deferred financing costs and debt discounts		5,249			3,582
Accretion of discounts on investments		(1,289	)		(1,940	)
(Gains) losses on assets		(2,529	)		(3,434	)
(Gains) losses on extinguishment of debt		(1,574	)		(14,540	)
Change in fair value of financial instruments		144,269			55,113
Other items		0			(8	)
Changes in assets and liabilities:
Accrued interest receivable		(4,697	)		(4,300	)
Other assets		(7,028	)		(5,828	)
Accrued interest payable		(27,618	)		(28,814	)
Accounts payable and accrued expenses		5,801			487
Deferred taxes, borrowers’ escrows and other liabilities		(2,360	)		(1,619	)
Cash flow from operating activities		12,408			(1,279	)
Investing activities:
Proceeds from sales of other securities		15,243			12,793
Purchase and origination of loans for investment		(264,410	)		(79,632	)
Principal repayments on loans		175,999			128,709
Investments in real estate		(10,073	)		(22,546	)
Proceeds from the dispositions of real estate		0			65,750
Business acquisition		0			(2,578	)
(Increase) Decrease in restricted cash		173,722			(62,976	)
Cash flow from investing activities		90,481			39,520
Financing activities:
Repayments on secured credit facility and loans payable on real estate		(2,347	)		(46,266	)
Proceeds from loans payable on real estate		0			37,400
Repayments and repurchase of CDO notes payable		(108,689	)		(28,758	)
Proceeds from issuance of 7.0% convertible senior notes		0			115,000
Repayments and repurchase of 6.875% convertible senior notes		(3,582	)		(119,320	)
Proceeds from repurchase agreements		22,291			0
Repayments of repurchase agreements		(22,291	)		0
Issuance (acquisition) of noncontrolling interests		146			3,581
Payments for deferred costs		(240	)		(7,080	)
Preferred share issuance, net of costs incurred		1,997			0
Common share issuance, net of costs incurred		41,550			25,413
Distributions paid to preferred shareholders		(10,242	)		(10,235	)
Distributions paid to common shareholders		(10,483	)		(5,513	)
Cash flow from financing activities		(91,890	)		(35,778	)
Net change in cash and cash equivalents		10,999			2,463
Cash and cash equivalents at the beginning of the period		29,720			27,230
Cash and cash equivalents at the end of the period	$	40,719		$	29,693
Supplemental cash flow information:
Cash paid for interest	$	18,109		$	24,771
Cash paid (refunds received) for taxes		(422	)		63
Non-cash increase in investments in real estate from the conversion of loans		27,400			78,300
Non-cash decrease in indebtedness from conversion to shares or debt extinguishments		(1,574	)		(16,246	)

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

6

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 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. RAIT is a self-managed and self-advised Maryland real estate investment trust, or REIT.

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

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles, or GAAP. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the included disclosures are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements should be read in conjunction with our audited financial statements as of and for the year ended December 31, 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.

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.

7

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

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.

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.

8

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

h. Revenue Recognition

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

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

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

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

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

3) Fee and other income—We generate fee and other income through our various subsidiaries by (a) providing ongoing asset management services to investment portfolios under cancelable management agreements, (b) providing or arranging to provide financing to our borrowers, (c) providing property management services to third parties, (d) providing securities brokerage services or other broker-dealer related services, and (e) funding CMBS eligible loans for sale into unaffiliated CMBS securitizations. We recognize revenue for these activities when the fees are fixed or determinable, are evidenced by an arrangement, collection is reasonably assured and the services under the arrangement have been provided. While we may receive asset management fees when they are earned, we eliminate earned asset management fee income from securitizations while such securitizations are consolidated.

During the three-month periods ended September 30, 2012 and 2011, we received $1,232 and $1,308, respectively, of earned asset management fees associated with consolidated CDOs, of which we eliminated $897 and $919, respectively, of management fee income.

During the nine-month periods ended September 30, 2012 and 2011, we received $3,744 and $3,908, respectively, of earned asset management fees associated with consolidated CDOs, of which we eliminated $2,772 and $2,802, respectively, of management fee income.

9

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

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,

10

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

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.

j. Income Taxes

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

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

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

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

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

k. Recent Accounting Pronouncements

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. The adoption of this standard did not have a material effect on our consolidated financial statements.

11

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

NOTE 3: INVESTMENTS IN LOANS

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

The following table summarizes our investments in commercial mortgages, mezzanine loans, other loans and preferred equity interests as of September 30, 2012:

	Unpaid Principal Balance			Unamortized (Discounts) Premiums			Carrying Amount			Number of Loans		Weighted- Average Coupon (1)			Range of Maturity Dates
Commercial Real Estate (CRE) Loans
Commercial mortgages	$	699,683		$	(26,829	)	$	672,854			47		6.7	%		Nov. 2012 to Oct. 2022
Mezzanine loans		277,611			(4,813	)		272,798			86		9.3	%		Nov. 2012 to Nov. 2038
Preferred equity interests		64,753			(1,052	)		63,701			15		9.7	%		Mar. 2014 to Aug. 2025
Total CRE Loans		1,042,047			(32,694	)		1,009,353			148		7.5	%
Other loans		38,600			109			38,709			2		4.9	%		Nov. 2012 to Oct. 2016
Total Loans	$	1,080,647		$	(32,585	)	$	1,048,062			150		7.4	%
Deferred fees		(1,620	)		0			(1,620	)
Total investments in loans	$	1,079,027		$	(32,585	)	$	1,046,442

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

The following table summarizes our investments in commercial mortgages, mezzanine loans, other loans and preferred equity interests as of December 31, 2011:

	Unpaid Principal Balance			Unamortized (Discounts) Premiums			Carrying Amount			Number of Loans		Weighted- Average Coupon (1)			Range of Maturity Dates
Commercial Real Estate (CRE) Loans
Commercial mortgages	$	574,982		$	(3,911	)	$	571,071			36		6.3	%		Mar. 2012 to Dec 2020
Mezzanine loans		312,453			(4,755	)		307,698			91		8.9	%		Mar. 2012 to Nov. 2038
Preferred equity interests		65,562			(1,112	)		64,450			22		9.5	%		May 2012 to Aug. 2025
Total CRE Loans		952,997			(9,778	)		943,219			149		7.4	%
Other loans		54,842			(649	)		54,193			4		4.5	%		Mar. 2012 to Oct. 2016
Total Loans		1,007,839			(10,427	)		997,412			153		7.2	%
Deferred fees		(1,049	)		0			(1,049	)
Total investments in loans	$	1,006,790		$	(10,427	)	$	996,363

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

During the nine-month period ended September 30, 2012, we completed the conversion of two commercial real estate loans with a carrying value of $24,871 to real estate owned property and we recorded a gain on asset of $2,529 as the value of the real estate exceeded the carrying amount of the converted loans. During the nine-month period ended September 30, 2011, we completed the conversion of three commercial real estate loans with a carrying value of $85,114 to real estate owned property and we charged off $6,814 to the allowance for losses as the carrying amount exceeded the fair value of the real estate properties. See Note 5.

The following table summarizes the delinquency statistics of our commercial real estate loans as of September 30, 2012 and December 31, 2011:

Delinquency Status	As of September 30, 2012		As of December 31, 2011
30 to 59 days	$	200	$	3,500
60 to 89 days		0		0
90 days or more		54,280		16,857
In foreclosure or bankruptcy proceedings		12,225		10,320
Total	$	66,705	$	30,677

As of September 30, 2012 and December 31, 2011, approximately $70,419 and $54,334, respectively, of our commercial real estate loans were on non-accrual status and had a weighted-average interest rate of 8.4% and 9.8%. As of September 30, 2012 and December 31, 2011, one Other loan with a carrying amount of approximately $18,462 and $19,501, respectively, was on non-accrual status and had a weighted-average interest rate of 7.2%.

12

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

Allowance For Losses And Impaired Loans

The following table provides a roll-forward of our allowance for losses for our commercial mortgages, mezzanine loans, and other loans for the three-month periods ended September 30, 2012 and 2011:

	For the Three-Month Period Ended September 30, 2012			For the Three-Month Period Ended September 30, 2011
Beginning balance	$	39,877		$	57,866
Provision		500			500
Charge-offs, net of recoveries		(7,639	)		(2,240	)
Ending balance	$	32,738		$	56,126

The following table provides a roll-forward of our allowance for losses for our commercial mortgages, mezzanine loans, and other loans for the nine-month periods ended September 30, 2012 and 2011:

	For the Nine-Month Period Ended September 30, 2012			For the Nine-Month Period Ended September 30, 2011
Beginning balance	$	46,082		$	69,691
Provision		1,500			3,400
Charge-offs, net of recoveries		(14,844	)		(16,965	)
Ending balance	$	32,738		$	56,126

As of September 30, 2012 and December 31, 2011, we identified 15 and 19 commercial mortgages, mezzanine loans and other loans with unpaid principal balances of $50,506 and $87,977 as impaired.

The average unpaid principal balance of total impaired loans was $60,275 and $118,164 during the three-month periods ended September 30, 2012 and 2011 and $72,485 and $134,585 during the nine-month periods ended September 30, 2012 and 2011. We recorded interest income from impaired loans of $65 and $2 for the three-month periods ended September 30, 2012 and 2011. We recorded interest income from impaired loans of $127 and $526 for the nine-month periods ended September 30, 2012 and 2011.

We have evaluated modifications to our commercial real estate loans to determine if the modification constitutes a troubled debt restructuring, or TDR, under FASB ASC Topic 310, “Receivables”. During the nine-month period ended September 30, 2012, we have determined that there were no modifications to any commercial real estate loans that constituted a TDR. As of September 30, 2012, there were no TDRs that subsequently defaulted.

13

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

NOTE 4: INVESTMENTS IN SECURITIES

Our investments in securities and security-related receivables are accounted for at fair value. The following table summarizes our investments in securities as of September 30, 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	$	(146,475	)	$	490,901		4.2	%		21.8
Other securities		11,298		(11,298	)		0		4.9	%		40.1
Total trading securities		648,674		(157,773	)		490,901		4.2	%		22.1
Available-for-sale securities		3,600		(3,598	)		2		2.2	%		30.1
Security-related receivables
TruPS receivables		111,025		(23,668	)		87,358		6.5	%		10.2
Unsecured REIT note receivables		30,000		2,543			32,543		6.7	%		4.4
CMBS receivables (2)		84,077		(42,233	)		41,844		5.6	%		30.9
Other securities		38,453		(36,084	)		2,369		2.8	%		37.7
Total security-related receivables		263,555		(99,442	)		164,114		5.7	%		20.2
Total investments in securities	$	915,829	$	(260,813	)	$	655,017		4.6	%		21.7

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

(2) CMBS receivables include securities with a fair value totaling $8,159 that are rated between “AAA” and “A-” by Standard & Poor’s, securities with a fair value totaling $25,141 that are rated “BBB+” and “B-” by Standard & Poor’s, securities with a fair value totaling $7,706 that are rated “CCC” by Standard & Poor’s and securities with a fair value totaling $838 that are rated “D” by Standard & Poor’s.

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

The following table summarizes our investments in securities as of December 31, 2011:

Investment Description	Amortized Cost		Net Fair Value Adjustments			Estimated Fair Value		Weighted Average Coupon (1)			Weighted Average Years to Maturity
Trading securities
TruPS and subordinated debentures	$	637,376	$	(155,640	)	$	481,736		4.3	%		22.6
Other securities		11,020		(11,020	)		0		4.6	%		40.9
Total trading securities		648,396		(166,660	)		481,736		4.3	%		22.9
Available-for-sale securities		3,600		(3,598	)		2		2.2	%		30.9
Security-related receivables
TruPS and subordinated debenture receivables		111,199		(28,336	)		82,863		6.5	%		11.0
Unsecured REIT note receivables		30,000		66			30,066		6.7	%		5.1
CMBS receivables (2)		86,443		(51,326	)		35,117		5.6	%		31.7
Other securities		53,168		(35,491	)		17,677		4.0	%		28.9
Total security-related receivables		280,810		(115,087	)		165,723		5.8	%		20.1
Total investments in securities	$	932,806	$	(285,345	)	$	647,461		4.7	%		22.2

(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 $7,204 that are rated between “AAA” and “A-” by Standard & Poor’s, securities with a fair value totaling $21,414 that are rated between “BBB+” and “B-” by Standard & Poor’s, securities with a fair value totaling $5,517 that are rated “CCC” by Standard & Poor’s, and securities with a fair value totaling $982 that are rated “D” by Standard & Poor’s.

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

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

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

	As of September 30, 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	%	$	5,801	$	83,557		1.9	%	$	5,766
Other securities		34,739		3.3	%		2		34,240		3.3	%		2
CMBS receivables		31,373		5.9	%		839		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 September 30, 2012 and December 31, 2011, investment in securities of $748,401 and $748,575 in principal amount of TruPS and subordinated debentures, and $101,756 and $104,122, respectively, in principal amount of unsecured REIT note receivables and CMBS receivables, collateralized the consolidated CDO notes payable of such entities.

14

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

NOTE 5: INVESTMENTS IN REAL ESTATE

The table below summarizes our investments in real estate:

	As of September 30, 2012					As of December 31, 2011
	Book Value			Number of Properties		Book Value			Number of Properties
Multi-family real estate properties	$	596,394			33	$	591,915			33
Office real estate properties		271,034			11		251,303			10
Retail real estate properties		81,739			4		71,405			3
Parcels of land		47,469			10		46,251			10
Investment in real estate		996,636			58		960,874			56
Less: Accumulated depreciation and amortization		(90,149	)				(69,372	)
Investments in real estate, net	$	906,487				$	891,502

As of September 30, 2012, our investments in real estate of $996,636 are financed through $134,772 of mortgages held by third parties and $828,822 of mortgages held by our consolidated securitizations. Together, along with commercial real estate loans held by these securitizations, these mortgages serve as collateral for the CDO notes payable issued by our consolidated securitizations. All intercompany balances and interest charges are eliminated in consolidation.

Acquisitions:

During the nine-month period ended September 30, 2012, we converted two loans with a carrying value of $24,888, relating to one office property and one retail property, to owned real estate. Upon conversion, we recorded the investment in real estate acquired including any related working capital at fair value of $27,400.

The following table summarizes the aggregate estimated fair value of the assets and liabilities associated with the two properties acquired during the nine-month period ended September 30, 2012, on the respective date of each conversion, for the real estate accounted for under FASB ASC Topic 805.

Description	Estimated Fair Value
Assets acquired:
Investments in real estate	$	27,400
Cash and cash equivalents		524
Restricted cash		454
Other assets		1
Total assets acquired		28,379
Liabilities assumed:
Accounts payable and accrued expenses		317
Other liabilities		328
Total liabilities assumed		645
Estimated fair value of net assets acquired	$	27,734

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

Description	Estimated Fair Value
Fair value of consideration transferred:
Commercial real estate loans	$	27,400
Other considerations		334
Total fair value of consideration transferred	$	27,734

15

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

During the nine-month period ended September 30, 2012, these investments contributed revenue of $1,888 and a net income allocable to common shares of $789. During the nine-month period ended September 30, 2012, we did not incur any third-party acquisition-related costs.

Our consolidated unaudited pro forma information, after including the acquisition of real estate properties, is presented below as if the acquisition occurred on January 1, 2011. These pro forma results are not necessarily indicative of the results which actually would have occurred if the acquisition had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods:

Description	For the Nine-Month Period Ended September 30, 2012			For the Nine-Month Period Ended September 30, 2011
Total revenue, as reported	$	170,919		$	177,231
Pro forma revenue		172,771			180,873
Net income (loss) allocable to common shares, as reported		(132,356	)		(35,500	)
Pro forma net income (loss) allocable to common shares		(131,663	)		(34,373	)

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

Subsequent to September 30, 2012, we completed the acquisition of one multi-family real estate property consisting of 192 units for a purchase price of $15,750. We obtained a first mortgage from a third party lender that has a principal balance of $10,238, matures in November 2022, and has a fixed interest rate of 3.59%. We are completing the process of estimating the fair value of the assets acquired.

Dispositions:

During the nine-month period ended September 30, 2012, we did not dispose of any real estate properties.

16

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

NOTE 6: INDEBTEDNESS

We maintain various forms of short-term and long-term financing arrangements. Generally, these financing agreements are collateralized by assets within securitizations. The following table summarizes our total recourse and non-recourse indebtedness as of September 30, 2012:

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average     Interest Rate			Contractual Maturity
Recourse indebtedness:
7.0% convertible senior notes (1)	$	115,000	$	109,229		7.0	%	Apr. 2031
Secured credit facility		8,564		8,564		3.0	%	Dec. 2016
Junior subordinated notes, at fair value (2)		38,052		22,450		5.2	%	Oct. 2015 to Mar. 2035
Junior subordinated notes, at amortized cost		25,100		25,100		2.9	%	Apr. 2037
Total recourse indebtedness (3)		186,716		165,343		5.9	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (4)(5)		1,300,382		1,298,640		0.6	%	2045 to 2046
CDO notes payable, at fair value (2)(4)(6)		1,016,287		174,422		1.1	%	2037 to 2038
Loans payable on real estate		134,799		134,799		5.6	%	Sept. 2015 to May 2021
Total non-recourse indebtedness		2,451,468		1,607,861		1.1	%
Total indebtedness	$	2,638,184	$	1,773,204		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) Relates to liabilities which we elected to record at fair value under FASB ASC Topic 825.

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

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

(5) Collateralized by $1,762,708 principal amount of commercial mortgages, mezzanine loans, other loans and preferred equity interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(6) Collateralized by $1,125,101 principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of September 30, 2012 was $854,525. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

The following table summarizes our total recourse and non-recourse indebtedness as of December 31, 2011:

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average     Interest Rate			Contractual Maturity
Recourse indebtedness:
7.0% convertible senior notes (1)	$	115,000	$	107,868		7.0	%	Apr. 2031
6.875% convertible senior notes (2)		3,582		3,735		6.9	%	Apr. 2027
Secured credit facilities		9,954		9,954		3.2	%	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
Total recourse indebtedness (4)		191,688		169,107		6.5	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (5)(6)		1,320,904		1,320,904		0.7	%	2045 to 2046
CDO notes payable, at fair value (3)(5)(7)		1,104,084		122,506		1.1	%	2037 to 2038
Loans payable on real estate		135,757		135,757		5.6	%	Sept. 2015 to May 2021
Total non-recourse indebtedness		2,560,745		1,579,167		1.1	%
Total indebtedness	$	2,752,433	$	1,748,274		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) Our 6.875% convertible senior notes are redeemable, at par at the option of the holder, in April 2012, April 2017, and April 2022.

(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 which are eliminated in consolidation.

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

(6) Collateralized by $1,669,207 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 $1,159,375 principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of December 31, 2011 was $855,316. 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 nine-month period ended September 30, 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 137.3460 common shares per $1 principal amount of 7.0% convertible senior notes (equivalent to a current conversion price of $7.28 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.

17

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

Secured credit facility. As of September 30, 2012, we have $8,564 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. We maintain CMBS facilities with two investment banks with total borrowing capacity of $250,000. The CMBS facilities are repurchase agreements that provide for margin calls in the event the CMBS eligible loans financed by the facilities change in value. As of September 30, 2012 we had no outstanding borrowings under the 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 over collateralization, or OC, and interest coverage, or IC, trigger tests as of September 30, 2012.

During the nine-month period ended September 30, 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 nine-month period ended September 30, 2012, $87,797 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 effective in offsetting interest rate fluctuations associated with the identified indebtedness. At designation, certain of these interest rate swaps had a fair value not equal to zero. However, we concluded, at designation, that these hedging arrangements were highly effective during their term using regression analysis and determined that the hypothetical derivative method would be used in measuring any ineffectiveness. At each reporting period, we update our regression analysis and, as of September 30, 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.

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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

The following table summarizes the aggregate notional amount and estimated net fair value of our derivative instruments as of September 30, 2012 and December 31, 2011:

	As of September 30, 2012					As of December 31, 2011
	Notional		Fair Value			Notional		Fair Value
Cash flow hedges:
Interest rate swaps	$	1,117,220	$	(162,341	)	$	1,570,787	$	(181,499	)
Interest rate caps		36,000		1,026			36,000		1,360
Net fair value	$	1,153,220	$	(161,315	)	$	1,606,787	$	(180,139	)

During the period October 1, 2012 through December 31, 2012, interest rate swap agreements relating to RAIT I and RAIT II with a notional amount of $15,000 and a weighted average strike rate of 5.25% as of September 30, 2012, will terminate in accordance with their terms. We expect the cash outflow that we will save associated with these derivatives and from the derivatives that terminated during the three-month period ended September 30, 2012 will be $250 during the remainder of 2012.

For interest rate swaps that are considered effective hedges, we reclassified realized losses of $8,645 and $10,748 to earnings for the three-month periods ended September 30, 2012 and 2011 and $26,495 and $32,884 for the nine-month periods ended September 30, 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 September 30, 2012, the notional value associated with these cash flow hedges where hedge accounting was discontinued was $561,151 and had a liability balance with a fair value of $86,532. See Note 8: “Fair Value of Financial Instruments” for the changes in value of these hedges during the three-month and nine-month periods ended September 30, 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.

19

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

NOTE 8: FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments” requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The fair value of investments in mortgages and loans, investments in securities, CDO notes payable, convertible senior notes, junior subordinated notes and derivative assets and liabilities is based on significant observable and unobservable inputs. The fair value of cash and cash equivalents, restricted cash, secured credit facility, CMBS facility 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 September 30, 2012:

Financial Instrument	Carrying Amount		Estimated Fair Value
Assets
Commercial mortgages, mezzanine loans and other loans	$	1,046,442	$	1,035,913
Investments in securities and security-related receivables		655,016		655,016
Cash and cash equivalents		40,719		40,719
Restricted cash		114,804		114,804
Derivative assets		1,026		1,026
Liabilities
Recourse indebtedness:
7.0% convertible senior notes		109,229		113,275
Secured credit facility		8,564		8,564
Junior subordinated notes, at fair value		22,450		22,450
Junior subordinated notes, at amortized cost		25,100		14,809
Non-recourse indebtedness:
CDO notes payable, at amortized cost		1,298,640		724,633
CDO notes payable, at fair value		174,422		174,422
Loans payable on real estate		134,799		148,384
Derivative liabilities		162,341		162,341

Fair Value Measurements

The following tables summarize information about our assets and liabilities measured at fair value on a recurring basis as of September 30, 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 September 30, 2012
Trading securities
TruPS	$	0	$	0	$	490,901	$	490,901
Other securities		0		0		0		0
Available-for-sale securities		0		2		0		2
Security-related receivables
TruPS receivables		0		0		87,358		87,358
Unsecured REIT note receivables		0		32,543		0		32,543
CMBS receivables		0		41,844		0		41,844
Other securities		0		2,369		0		2,369
Derivative assets		0		1,026		0		1,026
Total assets	$	0	$	77,784	$	578,259	$	656,043

20

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

Liabilities:	Quoted Prices in Active Markets for Identical Assets (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3) (a)		Balance as of September 30, 2012
Junior subordinated notes, at fair value	$	0	$	0	$	22,450	$	22,450
CDO notes payable, at fair value		0		0		174,422		174,422
Derivative liabilities		0		79,281		83,060		162,341
Total liabilities	$	0	$	79,281	$	279,932	$	359,213

(a) During the nine-month period ended September 30 2012, there were no transfers between Level 1 and Level 2, as well as, there were no transfers into and out of Level 3.

The following tables summarize information about our assets and liabilities measured at fair value on a recurring basis as of December 31, 2011, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:

Assets:	Quoted Prices in Active Markets for Identical Assets (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3) (a)		Balance as of December 31, 2011
Trading securities
TruPS	$	0	$	0	$	481,736	$	481,736
Other securities		0		0		0		0
Available-for-sale securities		0		2		0		2
Security-related receivables
TruPS receivables		0		0		82,863		82,863
Unsecured REIT note receivables		0		30,066		0		30,066
CMBS receivables		0		35,117		0		35,117
Other securities		0		17,677		0		17,677
Derivative assets		0		1,360		0		1,360
Total assets	$	0	$	84,222	$	564,599	$	648,821
Liabilities:	Quoted Prices in Active Markets for Identical Assets (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3) (a)		Balance as of December 31, 2011
Junior subordinated notes, at fair value	$	0	$	0	$	22,450	$	22,450
CDO notes payable, at fair value		0		0		122,506		122,506
Derivative liabilities		0		91,419		90,080		181,499
Total liabilities	$	0	$	91,419	$	235,036	$	326,455

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 September 30, 2012 is 77.

The following tables summarize additional information about assets and liabilities that are measured at fair value on a recurring basis for which we have utilized level 3 inputs to determine fair value for the nine-month period ended September 30, 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		9,165		4,669			13,834
Purchases		0		0			0
Sales		0		(174	)		(174	)
Balance, as of September 30, 2012	$	490,901	$	87,358		$	578,259

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		(7,020	)		139,713			0		132,693
Purchases		0			0			0		0
Sales		0			0			0		0
Principal repayments		0			(87,797	)		0		(87,797	)
Balance, as of September 30, 2012	$	83,060		$	174,422		$	22,450	$	279,932

21

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

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 facility, and CMBS facilities approximates cost due to the nature of these instruments and are not included in the table below.

						Fair Value Measurement
	Carrying Amount as of September 30, 2012		Estimated Fair Value as of September 30, 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	$	1,046,442	$	1,035,913	Discounted cash flows	$	0	$	0	$	1,035,913
7.0% convertible senior notes		109,229		113,275	Trading price		113,275		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		1,298,640		724,633	Discounted cash flows		0		0		724,633
Loans payable on real estate		134,799		148,384	Discounted cash flows		0		0		148,384

Change in Fair Value of Financial Instruments

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

	For the Three-Month Periods Ended September 30						For the Nine-Month Periods Ended September 30
Description	2012			2011			2012			2011
Change in fair value of trading securities and security-related receivables	$	4,956		$	2,924		$	22,800		$	21,559
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		(19,885	)		(11,406	)		(139,713	)		(25,268	)
Change in fair value of derivatives		(9,248	)		(26,515	)		(27,356	)		(51,404	)
Change in fair value of financial instruments	$	(24,177	)	$	(34,997	)	$	(144,269	)	$	(55,113	)

The changes in the fair value for the investment in securities, CDO notes payable, and other liabilities for which the fair value option was elected for the three-month and nine-month periods ended September 30, 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 and nine-month periods ended September 30, 2012 and 2011 was mainly due to changes in interest rates.

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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

NOTE 9: VARIABLE INTEREST ENTITIES

The following table presents the assets and liabilities of our consolidated VIEs as of each respective date. As of September 30, 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 September 30, 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	$	1,925,792		$	1,856,106
Allowance for losses		(21,970	)		(36,210	)
Total investments in mortgages and loans		1,903,822			1,819,896
Investments in real estate, net of accumulated depreciation of $1,746 and $1,196, respectively		20,721			20,910
Investments in securities and security-related receivables, at fair value		654,379			645,915
Cash and cash equivalents		208			201
Restricted cash		75,156			235,682
Accrued interest receivable		63,390			57,560
Deferred financing costs, net of accumulated amortization of $12,959 and $10,995, respectively		13,415			15,378
Total assets	$	2,731,091		$	2,795,542
Liabilities and Equity
Indebtedness (including $174,422 and $122,506 at fair value, respectively)	$	1,714,537		$	1,682,487
Accrued interest payable		56,455			48,417
Accounts payable and accrued expenses		3,244			1,537
Derivative liabilities		162,344			181,499
Deferred taxes, borrowers’ escrows and other liabilities		4,289			4,570
Total liabilities		1,940,869			1,918,510
Equity:
Shareholders’ equity:
Accumulated other comprehensive income (loss)		(99,292	)		(114,186	)
RAIT Investment		299,982			303,940
Retained earnings		589,532			687,278
Total shareholders’ equity		790,222			877,032
Total liabilities and equity	$	2,731,091		$	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 do not intend to provide financial support to these VIEs that we were not previously contractually required to provide.

23

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

NOTE 10: EQUITY

Preferred Shares

Dividends:

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 were paid on July 2, 2012 to holders of record on June 1, 2012 and totaled $3,406.

On July 24, 2012, our board of trustees declared a third 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 October 1, 2012 to holders of record on September 4, 2012 and totaled $3,459.

On October 23, 2012, our board of trustees declared a fourth 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, $0.5546875 per share on our 8.875% Series C Preferred Shares, and $0.3854167 per share on our Series D Preferred Shares issued on October 17, 2012 in connection with the purchase agreement described in Note 15. The dividends will be paid on December 31, 2012 to holders of record on December 3, 2012.

At Market Issuance Sales Agreement (ATM):

On May 21, 2012, we entered into an At Market Issuance Sales Agreement, or ATM, with MLV & Co. LLC, or MLV, providing that, from time to time during the term of the ATM, on the terms and subject to the conditions set forth therein, we may issue and sell through MLV, up to 2,000,000 shares of our 7.75% Series A Cumulative Redeemable Preferred Shares, par value $0.01 per share, or the Series A Preferred Shares, up to 2,000,000 shares of our 8.375% Series B Cumulative Redeemable Preferred Shares, par value $0.01 per share, or the Series B Preferred Shares, and up to 2,000,000 shares of our 8.875% Series C Cumulative Redeemable Preferred Shares, par value $0.01 per share, or the Series C Preferred Shares.

During the period from the effective date of the ATM through September 30, 2012, we issued a total of 36,000 Series A Preferred Shares pursuant to the ATM at a weighted-average price of $20.35 per share and we received $711 of net proceeds. During the period from the effective date of the ATM through September 30, 2012, we issued a total of 24,000 Series B Preferred Shares pursuant to the ATM at a weighted-average price of $21.33 per share and we received $496 of net proceeds. During the period from the effective date of the ATM through September 30, 2012, we issued a total of 40,000 Series C Preferred Shares pursuant to the ATM at a weighted-average price of $22.37 per share and we received $867 of net proceeds. As of September 30, 2012, 1,964,000, 1,976,000, and 1,960,000 of Series A Preferred Shares, Series B Preferred Shares, and Series C Preferred Shares, respectively, remain available for issuance under the ATM.

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.

On June 21, 2012, the board of trustees declared a $0.08 dividend on our common shares to holders of record as of July 11, 2012. The dividend was paid on July 31, 2012 and totaled $3,985.

On September 18, 2012, the board of trustees declared a $0.09 dividend on our common shares to holders of record as of October 11, 2012. The dividend was paid on October 31, 2012 and totaled $4,484.

24

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

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 nine-month period ended September 30, 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 nine-month period ended September 30, 2012, we issued a total of 1,501,643 common shares pursuant to the DRSPP at a weighted-average price of $5.10 per share and we received $7,618 of net proceeds. As of September 30, 2012, 7,785,939 common shares, in the aggregate, remain available for issuance under the DRSPP.

Common Share Public Offering:

During the nine-month period ended September 30, 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.

25

RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

NOTE 11: EARNINGS (LOSS) PER SHARE

The following table presents a reconciliation of basic and diluted earnings (loss) per share for the three-month and nine-month periods ended September 30, 2012 and 2011:

	For the Three-Month Periods Ended September 30						For the Nine-Month Periods Ended September 30
	2012			2011			2012			2011
Income (loss) from continuing operations	$	(14,971	)	$	(17,771	)	$	(122,205	)	$	(26,188	)
(Income) loss allocated to preferred shares		(3,476	)		(3,407	)		(10,305	)		(10,235	)
(Income) loss allocated to noncontrolling interests		61			59			154			176
Income (loss) from continuing operations allocable to common shares		(18,386	)		(21,119	)		(132,356	)		(36,247	)
Income (loss) from discontinued operations		0			(50	)		0			747
Net income (loss) allocable to common shares	$	(18,386	)	$	(21,169	)	$	(132,356	)	$	(35,500	)
Weighted-average shares outstanding—Basic		49,908,051			38,771,022			47,994,085			37,822,750
Dilutive securities under the treasury stock method		0			0			0			0
Weighted-average shares outstanding— Diluted		49,908,051			38,771,022			47,994,085			37,822,750
Earnings (loss) per share—Basic:
Continuing operations	$	(0.37	)	$	(0.55	)	$	(2.76	)	$	(0.96	)
Discontinued operations		0.00			0.00			0.00			0.02
Total earnings (loss) per share—Basic	$	(0.37	)	$	(0.55	)	$	(2.76	)	$	(0.94	)
Earnings (loss) per share—Diluted:
Continuing operations	$	(0.37	)	$	(0.55	)	$	(2.76	)	$	(0.96	)
Discontinued operations		0.00			0.00			0.00			0.02
Total earnings (loss) per share—Diluted	$	(0.37	)	$	(0.55	)	$	(2.76	)	$	(0.94	)

For the three-month and nine-month periods ended September 30, 2012, securities convertible into 15,328,251 common shares, respectively, were excluded from the earnings (loss) per share computations because their effect would have been anti-dilutive. For the three-month and nine-month periods ended September 30, 2011, securities convertible into 1,275,244 common shares, respectively, were excluded from the earnings (loss) per share computations because their effect would have been anti-dilutive.

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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

NOTE 12: RELATED PARTY TRANSACTIONS

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

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

a). Cash and Restricted Cash—We maintain checking and demand deposit accounts at Bancorp. As of September 30, 2012 and December 31, 2011, we had $145 and $515, respectively, of cash and cash equivalents and $258 and $447, respectively, of restricted cash on deposit at Bancorp. We did not receive any interest income from the Bancorp during the three-month and nine-month periods ended September 30, 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 $80 and $78 for the three-month periods ended September 30, 2012 and 2011, respectively, and was $246 and $240 for the nine-month periods ended September 30, 2012 and 2011. Rent received for our sublease was $44 and $42 for the three-month periods ended September 30, 2012 and 2011, respectively, and was $130 and $127 for the nine-month periods ended September 30, 2012 and 2011.

NOTE 13: DISCONTINUED OPERATIONS

For the three-month and nine-month periods ended September 30, 2011, income (loss) from discontinued operations relates to one real estate property sold since January 1, 2011. There was no income (loss) from discontinued operations during the three-month and nine-month periods ended September 30, 2012. The following table summarizes revenue and expense information for real estate properties classified as discontinued operations:

	For the Three-Month Periods Ended September 30, 2011			For the Nine-Month Periods Ended September 30, 2011
Revenue:
Rental income	$	0		$	2,072
Expenses:
Real estate operating expense		(3	)		1,205
General and administrative expense		0			1
Depreciation expense		0			0
Total expenses		(3	)		1,206
Income (loss) before interest and other income		3			866
Interest and other income		0			0
Income (loss) from discontinued operations		3			866
Gain (loss) on sale of assets		(53	)		(119	)
Total income (loss) from discontinued operations	$	(50	)	$	747

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.

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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

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.

NOTE 15: SUBSEQUENT EVENT

On October 1, 2012, we entered into a Securities Purchase Agreement, or the purchase agreement, with ARS VI Investor I, LLC, or the investor, an affiliate of Almanac Realty Investors, LLC, or Almanac. Under the purchase agreement, we are required to issue and sell to the investor on a private placement basis from time to time in a period up to two years, and the investor will be obligated to purchase from us, for an aggregate purchase price of $100.0 million, or the total commitment, the following securities, in the aggregate: (i) 4,000,000 Series D Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share, of RAIT, or the Series D Preferred Shares, (ii) common share purchase warrants, or the warrants, exercisable for 9,931,000 of our common shares, or the common shares, and (iii) common share appreciation rights, or the investor SARs with respect to up to 6,735,667 common shares. These securities will be issued on a pro rata basis based on the percentage of the total commitment drawn down at the relevant closing under the purchase agreement. We expect to use the proceeds received under the purchase agreement to fund our loan origination and investment activities, including CMBS and bridge lending.

The Series D Preferred Shares bear a cash coupon rate initially of 7.5%, increasing to 8.5% on October 1, 2015 and increasing on October 1, 2018 and each anniversary thereafter by 50 basis points. They rank on parity with our existing outstanding preferred shares. Their liquidation preference is equal to $26.25 per share for five years and $25.00 per share thereafter.

The warrants have a strike price of $6.00 per common share, subject to adjustment. The warrants expire on October 1, 2027. the investor has certain rights to put the warrants to us at a price of $1.23 per warrant beginning on October 1, 2017 or in defined circumstances, increasing to $1.60 on October 1, 2018 and further increasing to $1.99 on October 1, 2019 and thereafter.

The investor SARs have a strike price of $6.00, subject to adjustment. The investor SARs will be exercisable from October 1, 2014 until October 1, 2027 or in defined circumstances. From and after the earlier of October 1, 2017 or defined circumstances, the investor SARs may be put to us for $1.23 per investor SAR prior to October 1, 2018, increasing to $1.60 on October 1, 2018 and further increasing to $1.99 on October 1, 2019 and thereafter. The investor SARs are callable at our option beginning on October 1, 2014 at a price of $5.00 per investor SAR, increasing to $6.00 on October 1, 2018 and further increasing to $7.00 on October 1, 2019 and thereafter.

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RAIT Financial Trust

Notes to Consolidated Financial Statements

As of September 30, 2012

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

On October 17, 2012, the first sale of securities by us to the investor contemplated by the purchase agreement was consummated. At this first sale, we sold the following securities to the investor for an aggregate purchase price of $20.0 million: (i) 800,000 Series D Preferred Shares, (ii) warrants exercisable for 1,986,200 common shares; and (iii) investor SARs exercisable with respect to 1,347,133.4 common shares. On November 1, 2012, we delivered a notice to the investor that the second sale of a pro rata portion of the securities issuable under the purchase agreement for an aggregate purchase price of $20.0 million would occur on November 15, 2012, subject to the satisfaction of the conditions in the purchase agreement.

In addition, we agree in the purchase agreement that, commencing on with the first sale and for so long as the investor and its affiliates who are permitted transferees continue to meet ownership tests regarding the Series D Preferred Shares or warrants and common shares, our board of trustees will include one person designated by the investor. On October 17, 2012, the investor designated Andrew M. Silberstein to serve as this designee. Mr. Silberstein is an equity owner of Almanac and the president of the investor and holds indirect equity interests in the investor. Almanac receives fees in connection with its investments made pursuant to the purchase agreement. In addition, our subsidiary receives fees for managing a securitization collateralized, in part, by $25.0 million of trust preferred securities issued by Advance Realty Group and an affiliate of Almanac owns an interest in Advance Realty Group and Almanac receives fees in connection with this interest.

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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 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;

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

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

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

Our success to date in implementing these strategies is demonstrated by the significant asset growth and the asset performance we achieved in the nine-month period ended September 30, 2012. During the nine-month period ended September 30, 2012, we originated $285.2 million of commercial real estate loans, had payoffs totaling $176.0 million, resulting in net loan growth of $109.2 million, which includes CMBS eligible loans. Our business originating CMBS eligible loans continue to develop as indicated by the loan production of $51.0 million during the nine-month period ended September 30, 2012. These loans have either been securitized or are awaiting securitization later in 2012. With regards to our owned commercial real estate portfolios, we continue to see improvements in the key measures of their performance: occupancy and rental rates. As a result, the rental income at our owned properties increased to $76.8 million during the nine-month period ended September 30, 2012 while real estate operating expenses remained relatively consistent. Our asset growth and asset performance resulted in growth in our adjusted funds from operations to $36.6 million and growth in our operating income to $19.3 million during the nine-month period ended September 30, 2012.

While we generated a GAAP net loss allocable to common shares of $132.4 million, or $2.76 per common share-diluted, during the nine-month period ended September 30, 2012, we attribute this loss primarily to continued non-cash negative changes in the fair value of various financial instruments. For the nine-month period ended September 30, 2012, the net change in fair value of financial instruments decreased net income by $144.3 million. This is comprised of the change in fair value of financial instruments of $167.1 million associated with an increase in the fair value of non-recourse debt, CDO Notes payable, issued by Taberna VIII and Taberna IX and the associated interest rate hedges. This non-cash mark-to-market reduction to earnings was offset by $22.8 million of non-cash mark-to-market increases in the fair value of trading securities and security related receivables.

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Key Statistics

Set forth below are key statistics relating to our business through September 30, 2012 (dollars in thousands, except per share data):

	As of or For the Three-Month Periods Ended
	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011			September 30, 2011
Financial Statistics:
Assets under management	$	3,598,503		$	3,642,189		$	3,549,029		$	3,517,684		$	3,633,133
Debt to equity		2.4 x			2.4 x			2.3 x			2.2 x			2.3 x
Total revenue	$	60,327		$	56,347		$	54,245		$	56,923		$	60,089
Earnings per share, diluted	$	(0.37	)	$	(0.14	)	$	(2.42	)	$	(0.39	)	$	(0.55	)
Funds from operations per share, diluted	$	(0.21	)	$	0.01		$	(2.25	)	$	(0.20	)	$	(0.36	)
Adjusted funds from operations per share, diluted	$	0.30		$	0.25		$	0.21		$	0.30		$	0.23
Common dividend declared	$	0.09		$	0.08		$	0.08		$	0.06		$	0.06
Commercial Real Estate (“CRE”) Loan Portfolio (a):
Reported CRE Loans—unpaid principal	$	1,042,047		$	1,072,655		$	990,321		$	952,997		$	1,064,946
Non-accrual loans—unpaid principal	$	70,419		$	73,592		$	56,113		$	54,334		$	91,833
Non-accrual loans as a % of reported loans		6.8	%		6.9	%		5.7	%		5.7	%		8.6	%
Reserve for losses	$	32,738		$	35,426		$	35,527		$	40,565		$	50,609
Reserves as a % of non-accrual loans		46.5	%		48.1	%		63.3	%		74.7	%		55.1	%
Provision for losses	$	500		$	500		$	500		$	500		$	500
CRE Property Portfolio:
Reported investments in real estate, net	$	906,487		$	911,128		$	887,130		$	891,502		$	849,232
Number of properties owned		58			58			56			56			48
Multifamily units owned		8,014			8,014			8,014			8,014			8,014
Office square feet owned		2,015,524			2,015,524			1,786,860			1,786,860			1,786,860
Retail square feet owned		1,422,481			1,422,298			1,358,257			1,358,257			1,114,250
Acres of land owned		19.90			19.90			19.90			19.90			7.25
Average physical occupancy data:
Multifamily properties		90.2	%		91.2	%		90.4	%		88.5	%		89.8	%
Office properties		71.9	%		71.0	%		70.7	%		69.2	%		68.5	%
Retail properties		73.2	%		70.0	%		66.9	%		68.0	%		68.9	%
Total		84.6	%		85.2	%		85.0	%		83.6	%		84.5	%
Average effective rent per unit/square foot (b)
Multifamily (c)	$	699		$	695		$	691		$	681		$	671
Office (d)	$	19.08		$	19.07		$	21.53		$	20.85		$	20.50
Retail (d)	$	11.74		$	12.44		$	10.59		$	9.73		$	9.55

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

(b) Based on properties owned as of September 30, 2012.

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

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

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Investors should read Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 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.

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 September 30, 2012 (dollars in thousands):

	Book Value		Weighted- Average Coupon			Range of Maturities	Number of Loans
Commercial Real Estate (CRE) Loans
Commercial mortgages	$	672,854		6.7	%	Nov. 2012 to Oct. 2022		47
Mezzanine loans		272,856		9.3	%	Nov. 2012 to Nov. 2038		86
Preferred equity interests		63,701		9.7	%	Mar. 2014 to Aug. 2025		15
Total CRE Loans		1,009,411		7.5	%			148
Other loans		38,651		4.9	%	Nov. 2012 to Oct. 2016		2
Total investments in loans	$	1,048,062		7.4	%			150

During the nine-month period ended September 30, 2012, our portfolio of commercial real estate loans increased as we originated $285.2 million of new loans partially offset by $176.0 million of loan repayments.

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The charts below describe the property types and the geographic breakdown of our commercial mortgages, mezzanine loans, other loans, and preferred equity interests as of September 30, 2012:

(a) Based on book value.

Investments in real estate. We invest in real estate properties, primarily multi-family properties, throughout the United States. The table below describes certain characteristics of our investments in real estate as of September 30, 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)	$	544,517		90.2	%		8,014		33	$	695
Office real estate properties (c)		238,355		71.9	%		2,015,524		11		19.93
Retail real estate properties (c)		76,146		73.2	%		1,422,481		4		12.14
Parcels of land		47,469		0	%		19.9		10		N/A
Total	$	906,487		84.6	%				58

(a) Based on properties owned as of September 30, 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 may increase in size as we may find it desirable to protect or enhance our risk-adjusted returns by taking control of properties underlying our commercial real estate loans when restructuring or otherwise exercising our remedies regarding underperforming loans.

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

The table below describes our investment in TruPS and subordinated debentures as included in our consolidated financial statements as of September 30, 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	$	104,702		1.6	%		64.0	%		3.0x
Office		136,599		7.5	%		63.8	%		1.7x
Residential Mortgage		47,813		2.7	%		81.4	%		2.0x
Specialty Finance		84,375		5.1	%		84.8	%		1.8x
Homebuilders		68,689		7.8	%		63.3	%		1.2x
Retail		75,781		4.0	%		61.2	%		1.9x
Hospitality		34,050		6.4	%		103.2	%		2.8x
Storage		26,250		8.0	%		73.6	%		3.8x
Total	$	578,259		4.6	%		70.7	%		2.1x

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The chart below describes the equity capitalization of our investment in TruPS and subordinated debentures as included in our consolidated financial statements as of September 30, 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 September 30, 2012 (dollars in thousands):

Investment Description	Estimated     Fair Value		Weighted- Average     Coupon			Weighted- Average Years to     Maturity		Book Value
Unsecured REIT note receivables	$	32,543		6.7	%		4.4	$	30,000
CMBS receivables		41,844		5.6	%		30.9		84,077
Other securities		2,371		3.0	%		36.1		53,351
Total	$	76,758		4.8	%		28.4	$	167,428

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(a) S&P Ratings as of September 30, 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.

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.

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. 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.

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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 $991.9 million of total collateral, of which $23.5 million is defaulted. The current overcollateralization, or OC test is passing at 126.5% with an OC trigger of 116.2%. We currently own $43.7 million of the securities that were originally rated investment grade and $200.0 million of the non-investment grade securities issued by this securitization. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our collateral management fees. We pledged $43.7 million of the securities we own of RAIT I as collateral for a senior secured note we issued.

• RAIT II—RAIT II has $829.6 million of total collateral, of which $18.9 million is defaulted. The current OC test is passing at 118.0% with an OC trigger of 111.7%. We currently own $108.5 million of the securities that were originally rated investment grade and $140.7 million of the non-investment grade securities issued by this securitization. We are currently receiving all distributions required by the terms of our retained interests in this securitization and are receiving all of our collateral management fees. We pledged $104.0 million of the securities we own of RAIT II as collateral for a senior secured note we issued.

• Taberna VIII—Taberna VIII has $553.1 million of total collateral, of which $54.0 million is defaulted. The current OC test is failing at 81.8% with an OC trigger of 103.5%. We currently own $40.0 million of the securities that were originally rated investment grade and $93.0 million of the non-investment grade securities issued by this securitization. We do not expect to receive any distributions from this securitization other than our senior management fees for the foreseeable future.

• Taberna IX—Taberna IX has $568.8 million of total collateral, of which $124.6 million is defaulted. The current OC test is failing at 71.4% with an OC trigger of 105.4%. We currently own $89.0 million of the securities that were originally rated investment grade and $97.5 million of the non-investment grade securities issued by this securitization. We do not expect to receive any distributions from this securitization other than our senior management fees for the foreseeable future.

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 September 30, 2012 and December 31, 2011 (dollars in thousands):

	AUM as of     September 30, 2012		AUM as of     December 31, 2011
Commercial real estate portfolio (1)	$	1,955,365	$	1,850,390
U.S. TruPS portfolio (2)		1,643,138		1,667,294
Total	$	3,598,503	$	3,517,684

(1) As of September 30, 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, $906.5 million and $891.5 million, respectively, of investments in real estate and $53.2 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 changes in fair value of financial instruments, real estate depreciation, share-based compensation and various other items required by GAAP that may not necessarily be indicative of current operating performance and that may not accurately compare our operating performance between periods. Furthermore, although FFO, AFFO and other supplemental performance measures are defined in various ways throughout the REIT industry, we also believe that FFO and AFFO may provide us and our investors with an additional useful measure to compare our financial performance to certain other REITs.

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

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Set forth below is a reconciliation of FFO and AFFO to net income (loss) allocable to common shares for the three-month periods ended September 30, 2012 and 2011 (in thousands, except share information):

	For the Three-Month Period Ended September 30, 2012						For the Three-Month Period Ended September 30, 2011
	Amount			Per Share (1)			Amount			Per Share (2)
Funds From Operations:
Net income (loss) allocable to common shares	$	(18,386	)	$	(0.37	)	$	(21,169	)	$	(0.54	)
Adjustments:
Real estate depreciation and amortization		7,738			0.16			7,024			0.18
(Gains) losses on the sale of real estate		0			0.00			50			0.00
Funds From Operations	$	(10,648	)	$	(0.21	)	$	(14,095	)	$	(0.36	)
Adjusted Funds From Operations:
Funds From Operations	$	(10,648	)	$	(0.21	)	$	(14,095	)	$	(0.36	)
Adjustments:
Change in fair value of financial instruments		24,177			0.49			34,997			0.90
(Gains) losses on debt extinguishment		0			0.00			(11,371	)		(0.29	)
Capital expenditures, net of direct financing		(270	)		(0.01	)		(671	)		(0.02	)
Straight-line rental adjustments		(471	)		(0.01	)		(1,096	)		(0.03	)
Amortization of deferred items and intangible assets		1,555			0.03			1,046			0.03
Share-based compensation		550			0.01			79			0.00
Adjusted Funds From Operations	$	14,893		$	0.30		$	8,889		$	0.23

(1) Based on 49,908,051 weighted-average shares outstanding-diluted for the three-month period ended September 30, 2012.

(2) Based on 38,771,022 weighted-average shares outstanding-diluted for the three-month period ended September 30, 2011.

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Set forth below is a reconciliation of FFO and AFFO to net income (loss) allocable to common shares for the nine-month periods ended September 30, 2012 and 2011 (in thousands, except share information):

	For the Nine-Month Period Ended September 30, 2012						For the Nine-Month Period Ended September 30, 2011
	Amount			Per Share (1)			Amount			Per Share (2)
Funds From Operations:
Net income (loss) allocable to common shares	$	(132,356	)	$	(2.76	)	$	(35,500	)	$	(0.94	)
Adjustments:
Real estate depreciation and amortization		22,646			0.47			20,817			0.55
(Gains) losses on the sale of real estate		0			0.00			218			0.01
Funds From Operations	$	(109,710	)	$	(2.29	)	$	(14,465	)	$	(0.38	)
Adjusted Funds From Operations:
Funds From Operations	$	(109,710	)	$	(2.29	)	$	(14,465	)	$	(0.38	)
Adjustments:
Change in fair value of financial instruments		144,269			3.00			55,113			1.45
(Gains) losses on debt extinguishment		(1,574	)		(0.03	)		(14,540	)		(0.39	)
Capital expenditures, net of direct financing		(1,053	)		(0.02	)		(1,446	)		(0.04	)
Straight-line rental adjustments		(1,562	)		(0.03	)		(2,783	)		(0.07	)
Amortization of deferred items and intangible assets		4,597			0.10			2,482			0.07
Share-based compensation		1,656			0.03			396			0.01
Adjusted Funds From Operations	$	36,623		$	0.76		$	24,757		$	0.65

(1) Based on 47,994,085 weighted-average shares outstanding-diluted for the nine-month period ended September 30, 2012.

(2) Based on 37,822,750 weighted-average shares outstanding-diluted for the nine-month period ended September 30, 2011.

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Adjusted Book Value

Management views adjusted book value as a useful and appropriate supplement to shareholders’ equity and book value. The measure serves as an additional performance measure of our value because it facilitates evaluation of us without the effects of various items that we are required to record in accordance with GAAP but which have limited economic impact on our business. Those adjustments primarily reflect the effect of consolidated securitizations where we do not currently receive cash flows on our retained interests, accumulated depreciation and amortization, the valuation of long-term derivative instruments and a valuation of our recurring collateral and property management fees. Adjusted book value is a non-GAAP financial measurement, and does not purport to be an alternative to reported shareholders’ equity, determined in accordance with GAAP, as a measure of book value. Adjusted book value should be reviewed in connection with shareholders’ equity as set forth in our consolidated balance sheets, to help analyze our value to investors. Adjusted book value may be defined in various ways throughout the REIT industry. Investors should consider these differences when comparing our adjusted book value to that of other REITs.

Set forth below is a reconciliation of adjusted book value to shareholders’ equity as of September 30, 2012 (in thousands, except share information):

	As of September 30, 2012
	Amount			Per Share (1)
Total shareholders’ equity	$	829,852		$	16.63
Liquidation value of preferred shares (2)		(167,958	)		(3.37	)
Book value		661,894			13.26
Adjustments:
Taberna VIII and Taberna IX securitizations		(533,942	)		(10.70	)
RAIT I and RAIT II derivative liabilities		75,812			1.52
Accumulated depreciation and amortization		107,658			2.16
Valuation of recurring collateral and property management fees		20,590			0.41
Total adjustments		(329,882	)		(6.61	)
Adjusted book value	$	332,012		$	6.65

(1) Based on 49,910,863 common shares outstanding as of September 30, 2012.

(2) Based on 2,796,000 Series A preferred shares, 2,282,300 Series B preferred shares, and 1,640,000 Series C preferred shares outstanding as of September 30, 2012, all of which have a liquidation preference of $25.00 per share.

Results of Operations

Three-Month Period Ended September 30, 2012 Compared to the Three-Month Period Ended September 30, 2011

Interest income. Interest income decreased $3.1 million, or 9.3%, to $30.4 million for the three-month period ended September 30, 2012 from $33.5 million for the three-month period ended September 30, 2011. Generally, our interest income has declined, when compared to the three-month period ended September 30, 2011, as a result of a decrease in our average investments in loans and securities. Our average investments in loans and securities declined from $2.0 billion for the three-month period ended September 30, 2011 to $1.7 billion during the three-month period ended September 30, 2012. This decline was primarily caused by:

• principal repayments of $255.6 million on our investments in loans and $85.0 million from our investments in securities since September 30, 2011 and

• conversion of $81.4 million of loans to owned real estate since September 30, 2011.

This decline in our investments was offset by new investments totaling $309.7 million since September 30, 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 7.6% as of September 30, 2011 to 7.5% as of September 30, 2012. This is primarily due to prepayments from loans with higher interest rates since September 30, 2011.

Rental income. Rental income increased $2.8 million to $26.4 million for the three-month period ended September 30, 2012 from $23.6 million for the three-month period ended September 30, 2011. The increase is attributable to $1.8 million of rental income from five new properties acquired or consolidated since September 30, 2011 and $1.0 million from improved occupancy and rental rates in 2012 as compared to 2011.

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Fee and other income. Fee and other income increased $0.7 million, or 24.1%, to $3.6 million for the three-month period ended September 30, 2012 from $2.9 million for the three-month period ended September 30, 2011. The increase is due to $2.1 million of income from our sales of CMBS eligible loans to CMBS securitizations, net of decreases of $0.6 million in fee income due to reduced exchange activity in our consolidated Taberna securitizations, $0.6 million in property reimbursement income due to lower expenses at managed properties, and $0.2 million of other income.

Interest expense. Interest expense decreased $4.3 million, or 18.9%, to $18.4 million for the three-month period ended September 30, 2012 from $22.7 million for the three-month period ended September 30, 2011. The decrease is primarily attributable to the termination of interest rate swap agreements associated with our consolidated securitizations, repurchases of $35.2 million of our 6.875% convertible senior notes, and repayment of our $43.0 million senior secured convertible note.

Real estate operating expense. Real estate operating expense decreased $0.3 million to $14.3 million for the three-month period ended September 30, 2012 from $14.6 million for the three-month period ended September 30, 2011. Operating expenses increased by $0.9 million due to the five properties acquired or consolidated since September 30, 2011. This increase was offset by a reduction of $1.2 million at our other properties driven by lower repairs and maintenance and bad debt expenses.

Compensation expense. Compensation expense decreased $0.9 million, or 13.0%, to $6.0 million for the three-month period ended September 30, 2012 from $6.9 million for the three-month period ended September 30, 2011. The decrease in compensation expense was due to a severance payment of $1.2 million during the three-month period ended September 30, 2011 which is partially offset by an increase in salary and benefits to new employees in 2012.

General and administrative expense. General and administrative expense decreased $0.2 million, or 5.0%, to $3.8 million for the three-month period ended September 30, 2012 from $4.0 million for the three-month period ended September 30, 2011. This decrease was due to a reduction of information technology and other expenses.

Depreciation and amortization expense. Depreciation and amortization expense increased $0.6 million to $7.9 million for the three-month period ended September 30, 2012 from $7.3 million for the three-month period ended September 30, 2011. The increase is attributable to $0.3 million of depreciation expense from five new properties acquired or consolidated since September 30, 2011 and $0.4 million from our other consolidated properties. These increases were partially offset by a reduction in corporate depreciation of $0.1 million.

Change in fair value of financial instruments. During the three-months ended September 30, 2012, the change in fair value of financial instruments reduced our net income by $24.2 million. The fair value adjustments we recorded were as follows (dollars in thousands):

Description	For the Three-Month Period Ended September 30, 2012			For the Three-Month Period Ended September 30, 2011
Change in fair value of trading securities and security-related receivables	$	4,956		$	2,924
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		(19,885	)		(11,406	)
Change in fair value of derivatives		(9,248	)		(26,515	)
Change in fair value of financial instruments	$	(24,177	)	$	(34,997	)

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

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Nine-Month Period Ended September 30, 2012 Compared to the Nine-Month Period Ended September 30, 2011

Interest income. Interest income decreased $14.5 million, or 14.3%, to $87.1 million for the nine-month period ended September 30, 2012 from $101.6 million for the nine-month period ended September 30, 2011. Generally, our interest income has declined, when compared to the nine-month period ended September 30, 2011, as a result of a decrease in our average investments in loans and securities. Our average investments in loans and securities declined from $2.0 billion for the nine-month period ended September 30, 2011 to $1.8 billion during the nine-month period ended September 30, 2012. This decline was primarily caused by:

• principal repayments of $255.6 million on our investments in loans and $85.0 million from our investments in securities since September 30, 2011 and

• conversion of $81.4 million of loans to owned real estate since September 30, 2011.

This decline in our investments was offset by new investments totaling $309.7 million since September 30, 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 7.6% as of September 30, 2011 to 7.5% as of September 30, 2012. This is due to prepayments from loans with higher interest rates since September 30, 2011.

Rental income. Rental income increased $9.7 million to $76.8 million for the nine-month period ended September 30, 2012 from $67.1 million for the nine-month period ended September 30, 2011. The increase is attributable to $3.6 million of rental income from five new properties acquired or consolidated since September 30, 2011, $2.7 million from three properties acquired during the nine-months ended September 30, 2011 present for a full three quarters of operations, and $3.4 million from improved occupancy and rental rates in 2012 as compared to 2011.

Fee and other income. Fee and other income decreased $1.5 million, or 17.4%, to $7.1 million for the nine-month period ended September 30, 2012 from $8.6 million for the nine-month period ended September 30, 2011. This reduction is attributable to decreases of $1.9 million in fee income due to reduced exchange activity in our consolidated Taberna securitizations, $1.6 million in property reimbursement income due to lower expenses at managed properties, and $0.5 in trading commissions and other income. The decreases in fee income were partially offset by $2.5 million of CMBS conduit fee income.

Interest expense. Interest expense decreased $11.4 million, or 16.7%, to $57.0 million for the nine-month period ended September 30, 2012 from $68.4 million for the nine-month period ended September 30, 2011. The decrease is primarily attributable to the termination of interest rate swap agreements associated with our consolidated securitizations, repurchases of $35.2 million of our 6.875% convertible senior notes, and repayment of our $43.0 million senior secured convertible note.

Real estate operating expense. Real estate operating expense increased $0.5 million to $41.5 million for the nine-month period ended September 30, 2012 from $41.0 million for the nine-month period ended September 30, 2011. Operating expenses increased by $1.6 million due to the five properties acquired or consolidated since September 30, 2011 and by $1.5 million due to the three properties acquired during the nine-months ended September 30, 2011 present for a full three quarters of operations in 2012. These increases were offset by a reduction of $2.6 million at our other properties driven by lower repairs and maintenance and bad debt expenses.

Compensation expense. Compensation expense decreased $2.2 million, or 11.5%, to $17.0 million for the nine-month period ended September 30, 2012 from $19.2 million for the nine-month period ended September 30, 2011. This decrease was due to a reduction of salary and benefits of $3.4 million which was partially offset by increased stock compensation expense of $1.2 million.

General and administrative expense. General and administrative expense decreased $2.0 million, or 14.9%, to $11.4 million for the nine-month period ended September 30, 2012 from $13.4 million for the nine-month period ended September 30, 2011. During the nine-month period ended September 30, 2012 we incurred minimal acquisition expenses which contributed $0.7 million to the decrease. Additionally, subscription and license expenses declined $0.5 million, rent and insurance expenses decreased by $0.6 million and other general and administrative expenses decreased by $0.2 million.

Provision for losses. The provision for losses relates to our investments in our commercial mortgage loan portfolios. The provision for losses decreased by $1.9 million for the nine-month period ended September 30, 2012 to $1.5 million as compared to $3.4 million for the nine-month period ended September 30, 2011. The decrease is attributable to the improved performance of our investment in loans portfolio during 2012 as compared to 2011. As of September 30, 2012 we had $88.9 million of investment in loans on non-accrual, down from $108.5 million of investment in loans on non-accrual as of September 30, 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 $1.5 million to $23.2 million for the nine-month period ended September 30, 2012 from $21.7 million for the nine-month period ended September 30, 2011. The increase is attributable to $0.7 million of depreciation expense from five new properties acquired or consolidated since September 30, 2011,

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$0.9 million from three properties acquired during the nine-months ended September 30, 2011 present for a full three quarters of operations, and $0.4 million from our other consolidated properties. These increases were partially offset by a reduction in corporate depreciation of $0.5 million.

Other income (expense). During the nine-months ended September 30, 2012, other income (expense) included a one-time accrual of a $1.5 million loss associated with a sublease on our New York office space. Based upon the sublease market in New York, we expect to incur a loss on the sublease of our New York office space as our current rental payments will exceed any sublease income we earn.

Gain on assets. During the nine-months ended September 30, 2012, gain on assets included a $2.5 million gain on the conversion of two loans to real estate owned property. The fair value of the real estate acquired was $27.4 million and exceeded the $24.9 million carrying amount of our loans.

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

Change in fair value of financial instruments. During the nine-months ended September 30, 2012, the change in fair value of financial instruments reduced our net income by $144.3 million. The fair value adjustments we recorded were as follows (dollars in thousands):

Description	For the Nine-Month Period Ended September 30, 2012			For the Nine-Month Period Ended September 30, 2011
Change in fair value of trading securities and security-related receivables	$	22,800		$	21,559
Change in fair value of CDO notes payable, trust preferred obligations and other liabilities		(139,713	)		(25,268	)
Change in fair value of derivatives		(27,356	)		(51,404	)
Change in fair value of financial instruments	$	(144,269	)	$	(55,113	)

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. 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.

We believe our available cash and restricted cash balances, other financing arrangements, and cash flows from operations will be sufficient to fund our liquidity requirements for the next 12 months.

Our primary cash requirements are as follows:

• to make investments and fund the associated costs;

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

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

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

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

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

• the use of our cash and cash equivalent balances of $40.7 million as of September 30, 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, including our CMBS facilities and loan participations; and

• proceeds from future offerings of our common and preferred shares, including pursuant to the DRSPP and ATM.

During the period October 1, 2012 through December 31, 2012, interest rate swap agreements relating to RAIT I and RAIT II with a notional amount of $15.0 million and a weighted average strike rate of 5.25% as of September 30, 2012, will terminate in accordance with their terms. We expect the cash outflow that we will save associated with these derivatives and from the derivatives that terminated during the three-month period ended September 30, 2012 will be $0.3 million during the remainder of 2012.

Cash Flows

As of September 30, 2012 and 2011, we maintained cash and cash equivalents of approximately $40.7 million and $29.7 million, respectively. Our cash and cash equivalents were generated from the following activities (dollars in thousands):

	For the Nine-Month Periods Ended September 30
	2012			2011
Cash flow from operating activities	$	12,408		$	(1,279	)
Cash flow from investing activities		90,481			39,520
Cash flow from financing activities		(91,890	)		(35,778	)
Net change in cash and cash equivalents		10,999			2,463
Cash and cash equivalents at beginning of period		29,720			27,230
Cash and cash equivalents at end of period	$	40,719		$	29,693

Our principal source of net cash inflow historically has been our investing activities. The increase in cash inflows during the nine-month period ended September 30, 2012 as compared to the same period in 2011 was substantially due to the use of 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 $285.2 million exceeded loan repayments of $176.0 million for the nine-month period ended September 30, 2012. During the nine-month period ended September 30, 2011, proceeds from loan repayments of $128.7 million outpaced new investment in loans of $79.6 million.

Cash flow from operating activities for the nine-month period ended September 30, 2012, as compared to the same period in 2011, has increased due to reduced interest expense and the timing of payments for various accounts payable and accrued liabilities. This was partially offset by an increase in other assets, including prepaid expenses for insurance and real estate taxes, as the size of our portfolio of real estate properties has grown.

The cash outflow from our financing activities during the nine-month period ended September 30, 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 nine-month period ended September 30, 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 September 30, 2012 (dollars in thousands):

Description	Unpaid Principal Balance		Carrying Amount		Weighted- Average Interest Rate			Contractual Maturity
Recourse indebtedness:
7.0% convertible senior notes (1)	$	115,000	$	109,229		7.0	%	Apr. 2031
Secured credit facility		8,564		8,564		3.0	%	Dec. 2016
Junior subordinated notes, at fair value (2)		38,052		22,450		5.2	%	Oct. 2015 to Mar. 2035
Junior subordinated notes, at amortized cost		25,100		25,100		2.9	%	Apr. 2037
Total recourse indebtedness (3)		186,716		165,343		5.9	%
Non-recourse indebtedness:
CDO notes payable, at amortized cost (4)(5)		1,300,382		1,298,640		0.6	%	2045 to 2046
CDO notes payable, at fair value (2)(4)(6)		1,016,287		174,422		1.1	%	2037 to 2038
Loans payable on real estate		134,799		134,799		5.6	%	Sept. 2015 to May 2021
Total non-recourse indebtedness		2,451,468		1,607,861		1.1	%
Total indebtedness	$	2,638,184	$	1,773,204		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) Relates to liabilities which we elected to record at fair value under FASB ASC Topic 825.

(3) Excludes senior secured notes issued by us with an aggregate principal amount equal to $100.0 million with a weighted average coupon of 7.0%, which are eliminated in consolidation.

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

(5) Collateralized by $1.8 billion principal amount of commercial mortgages, mezzanine loans, other loans and preferred equity interests. These obligations were issued by separate legal entities and consequently the assets of the special purpose entities that collateralize these obligations are not available to our creditors.

(6) Collateralized by $1.1 billion principal amount of investments in securities and security-related receivables and loans, before fair value adjustments. The fair value of these investments as of September 30, 2012 was $854.5 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 nine-month period ended September 30, 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 137.3460 common shares per $1,000 million principal amount of 7.0% convertible senior notes (equivalent to a current conversion price of $7.28 per common share). Upon conversion of 7.0% convertible senior notes by a holder, the holder will receive cash, our common shares or a combination of cash and our common shares, at our election. We include the 7.0% convertible senior notes in earnings per share using the treasury stock method if the conversion value in excess of the par amount is considered in the money during the respective periods.

Secured credit facility. As of September 30, 2012, we have $8.6 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.

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CMBS facilities. We maintain CMBS facilities with two investment banks with total borrowing capacity of $250.0 million. The CMBS facilities are repurchase agreements that provide for margin calls in the event the CMBS eligible loans financed by the facilities change in value. As of September 30, 2012 we had no outstanding borrowings under the 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 over collateralization, or OC, and interest coverage, or IC, trigger tests as of September 30, 2012.

During the nine-month period ended September 30, 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 nine-month period ended September 30, 2012, $87.8 million of restricted cash, including cash flow that was re-directed from our retained interests in these CDOs, was used to repay the most senior holders of our CDO notes payable.

Preferred Shares

Dividends:

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 were paid on July 2, 2012 to holders of record on June 1, 2012 and totaled $3.4 million.

On July 24, 2012, our board of trustees declared a third 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 October 1, 2012 to holders of record on September 4, 2012 and totaled $3.5 million.

On October 23, 2012, our board of trustees declared a fourth 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, $0.5546875 per share on our 8.875% Series C Preferred Shares, and $0.3854167 per share on our Series D Preferred Shares issued on October 17, 2012 in connection with the purchase agreement described below. The dividends will be paid on December 31, 2012 to holders of record on December 3, 2012.

At Market Issuance Sales Agreement (ATM):

On May 21, 2012, we entered into an At Market Issuance Sales Agreement, or ATM, with MLV & Co. LLC, or MLV, providing that, from time to time during the term of the ATM, on the terms and subject to the conditions set forth therein, we may issue and sell through MLV, up to 2,000,000 shares of our 7.75% Series A Cumulative Redeemable Preferred Shares, par value $0.01 per share, or the Series A Preferred Shares, up to 2,000,000 shares of our 8.375% Series B Cumulative Redeemable Preferred Shares, par value $0.01 per share, or the Series B Preferred Shares, and up to 2,000,000 shares of our 8.875% Series C Cumulative Redeemable Preferred Shares, par value $0.01 per share, or the Series C Preferred Shares.

During the period from the effective date of the ATM through September 30, 2012, we issued a total of 36,000 Series A Preferred Shares pursuant to the ATM at a weighted-average price of $20.35 per share and we received $0.7 million of net proceeds. During the period from the effective date of the ATM through September 30, 2012, we issued a total of 24,000 Series B Preferred Shares pursuant to the ATM at a weighted-average price of $21.33 per share and we received $0.5 million of net proceeds. During the period from the effective date of the ATM through September 30, 2012, we issued a total of 40,000 Series C Preferred Shares pursuant to the ATM at a weighted-average price of $22.37 per share and we received $0.9 million of net proceeds.

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As of September 30, 2012, 1,964,000, 1,976,000, and 1,960,000 of Series A Preferred Shares, Series B Preferred Shares, and Series C Preferred Shares, respectively, remain available for issuance under the ATM.

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.

On June 21, 2012, the board of trustees declared a $0.08 dividend on our common shares to holders of record as of July 11, 2012. The dividend was paid on July 31, 2012 and totaled $4.0 million.

On September 18, 2012, the board of trustees declared a $0.09 dividend on our common shares to holders of record as of October 11, 2012. The dividend was paid on October 31, 2012 and totaled $4.5 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 nine-month period ended September 30, 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 nine-month period ended September 30, 2012, we issued a total of 1,501,643 common shares pursuant to the DRSPP at a weighted-average price of $5.10 per share and we received $7.6 million of net proceeds. As of September 30, 2012, 7,785,939 common shares, in the aggregate, remain available for issuance under the DRSPP.

Common Share Public Offering:

During the nine-month period ended September 30, 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.

ARS VI Purchase Agreement

On October 1, 2012, we entered into the purchase agreement with the investor, an affiliate of Almanac. Under the purchase agreement, we are required to issue and sell to the investor on a private placement basis from time to time in a period up to two years, and the investor will be obligated to purchase from us, for an aggregate purchase price of $100.0 million, or the total commitment, the following securities, in the aggregate: (i) 4,000,000 Series D Preferred Shares, (ii) warrants exercisable for 9,931,000 common shares, and (iii) investor SARs with respect to up to 6,735,667 common shares. These securities will be issued on a pro rata basis based on the percentage of the total commitment drawn down at the relevant closing under the purchase agreement. We expect to use the proceeds received under the purchase agreement to fund our loan origination and investment activities, including CMBS and bridge lending.

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The Series D Preferred Shares bear a cash coupon rate initially of 7.5%, increasing to 8.5% on October 1, 2015 and increasing on October 1, 2018 and each anniversary thereafter by 50 basis points. They rank on parity with our existing outstanding preferred shares. Their liquidation preference is equal to $26.25 per share for five years and $25.00 per share thereafter.

The warrants have a strike price of $6.00 per common share, subject to adjustment. The warrants expire on October 1, 2027. the investor has certain rights to put the warrants to us at a price of $1.23 per warrant beginning on October 1, 2017 or in defined circumstances, increasing to $1.60 on October 1, 2018 and further increasing to $1.99 on October 1, 2019 and thereafter.

The investor SARs have a strike price of $6.00, subject to adjustment. The investor SARs will be exercisable from October 1, 2014 until October 1, 2027 or in defined circumstances. From and after the earlier of October 1, 2017 or defined circumstances, the investor SARs may be put to us for $1.23 per investor SAR prior to October 1, 2018, increasing to $1.60 on October 1, 2018 and further increasing to $1.99 on October 1, 2019 and thereafter. The investor SARs are callable at our option beginning on October 1, 2014 at a price of $5.00 per investor SAR, increasing to $6.00 on October 1, 2018 and further increasing to $7.00 on October 1, 2019 and thereafter.

On October 17, 2012, the first sale of securities by us to the investor contemplated by the purchase agreement was consummated. At this first sale, we sold the following securities to the investor for an aggregate purchase price of $20.0 million: (i) 800,000 Series D Preferred Shares, (ii) warrants exercisable for 1,986,200 common shares; and (iii) investor SARs exercisable with respect to 1,347,133.4 common shares. On November 1, 2012, we delivered a notice to the investor that the second sale of a pro rata portion of the securities issuable under the purchase agreement for an aggregate purchase price of $20.0 million would occur on November 15, 2012, subject to the satisfaction of the conditions in the purchase agreement.

In addition, we agree in the purchase agreement that, commencing on with the first sale and for so long as the investor and its affiliates who are permitted transferees continue to meet ownership tests regarding the Series D Preferred Shares or warrants and common shares, our board of trustees will include one person designated by the investor. On October 17, 2012, the investor designated Andrew M. Silberstein to serve as this designee. Mr. Silberstein is an equity owner of Almanac and the president of the investor and holds indirect equity interests in the investor. Almanac receives fees in connection with its investments made pursuant to the purchase agreement. In addition, our subsidiary receives fees for managing a securitization collateralized, in part, by $25.0 million of trust preferred securities issued by Advance Realty Group and an affiliate of Almanac owns an interest in Advance Realty Group and Almanac receives fees in connection with this interest.

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.

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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. The adoption of this standard did not have a material effect on our consolidated financial statements.

Item 3.        Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in quantitative and qualitative market risks during the nine-month period ended September 30, 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.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the three-month period ended September 30, 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.

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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 5.        Other Information

The disclosure below is intended to satisfy any obligation of ours to provide disclosure pursuant to clause (e) of Item 5.02 “Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers” of Form 8-K.

As of October 31, 2012, the compensation committee of our board of trustees approved an employment agreement, or the Salmon agreement, between RAIT Financial Trust and Jack E. Salmon, one of our named executive officers (as such term is defined in instruction 4 to Item 5.02 of Form 8-K), and Mr. Salmon and we entered into the Salmon agreement. The Salmon agreement supersedes all prior employment agreements between RAIT and Mr. Salmon with the effect of, among other things, removing the tax gross-up provision relating to “parachute payments,” as defined in Section 280G of the Internal Revenue Code of 1986, as amended, reflecting his new duties, modifying the calculation of termination payments to be made to Mr. Salmon in specified circumstances, and expanding the definition of a “competing business” subject to the non-compete covenant and reduce the term thereof and making changes necessary or advisable to comply with Section 409A of the Internal Revenue Code of 1986. The foregoing description of the Salmon agreement does not purport to be complete and is qualified in its entirety by reference to the full text of this agreement filed as Exhibit 10.8 hereto, and incorporated herein by reference.

Item 6.        Exhibits

(a) Exhibits

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

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SIGNATURES

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

	RAIT FINANCIAL TRUST (Registrant)
Date: November 6, 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: November 6, 2012	By:	/s/ James J. Sebra
		James J. Sebra, Chief Financial Officer and Treasurer
		(On behalf of the registrant and as its Principal Financial Officer and Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit Number	Description of Documents
3.1	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 (the “Series A Articles Supplementary”) relating to the 7.75% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series A Preferred Shares”). (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 (the “Series B Preferred Shares”). (8)
3.1.9	Articles Supplementary relating to the 8.875% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series C Preferred Shares”). (9)
3.1.10	Articles Supplementary, dated May 21, 2012 relating to Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares. (10)
3.1.11	Certificate of Correction, dated August 2, 2012 relating to Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares. (11)
3.1.12	Articles Supplementary relating to the Series D Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series D Preferred Shares”) (12)
3.2	By-laws. (13)
4.1	Form of Certificate for Common Shares of Beneficial Interest. (6)
4.2	Form of Certificate for Series A Preferred Shares. (14)
4.3	Form of Certificate for Series B Preferred Shares. (8)
4.4	Form of Certificate for Series C Preferred Shares. (9)
4.5	Form of Certificate for Series D Preferred Shares. (15)
4.6	Form of Certificate for Series E Cumulative Redeemable Preferred Shares of Beneficial Interest. (15)
4.7	Indenture dated as of April 18, 2007 among RAIT Financial Trust, as issuer (“RAIT”), RAIT Partnership, L.P. and RAIT Asset Holdings, LLC, as guarantors, and Wells Fargo Bank, N.A., as trustee. (16)
4.8	Registration Rights Agreement dated as of April 18, 2007 between RAIT and Bear, Stearns & Co. Inc. (16)
4.9	Registration Rights Agreement dated as of October 1, 2012 by and among RAIT and ARS VI Investor I, LLC (“ARS VI”). (12)
4.10	Base Indenture dated as of March 21, 2011 between RAIT, as issuer, and Wells Fargo Bank, National Association., as trustee. (17)
4.11	Supplemental Indenture dated as of March 21, 2011 between RAIT Financial Trust, as issuer, and Wells Fargo Bank, National Association., as trustee. (17)
4.12	Indenture dated as of October 5, 2011 between RAIT and Wilmington Trust, National Association, as trustee. (18)
4.13	Common Share Purchase Warrant No.1 dated October 17, 2012 issued by RAIT to ARS VI. (15)
4.14	Common Share Appreciation Right No.1 dated October 17, 2012 issued by RAIT to ARS VI. (15)

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Exhibit Number	Description of Documents
10.1	Form of Letter Agreement between RAIT and each of its Non-Management Trustees dated as of January 24, 2012. (19)
10.2	IAP Form of Share Appreciation Rights Award Agreement adopted January 24, 2012. (19)
10.3	RAIT Financial Trust 2012 Incentive Award Plan, as Amended and Restated May 22, 2012. (10)
10.4	Employment Agreement dated as of August 2, 2012 between RAIT and James J. Sebra. (11)
10.5	August, 2012 Amendment dated as of August 2, 2012 to First Amended and Restated Employment Agreement between RAIT and Ken R. Frappier. (11)
10.6	Securities Purchase Agreement dated as of October 1, 2012 by and among RAIT, RAIT Partnership, L.P., Taberna Realty Finance Trust, RAIT Asset Holdings IV, LLC and ARS VI. (12)
10.7	Indemnification Agreement dated as of October 17, 2012 by and among RAIT, RAIT General, Inc. RAIT Limited, Inc. and RAIT Partnership, L.P. as the indemnitors, and Andrew M. Silberstein, as the indemnitee. (15)
10.8	Employment Agreement dated as of October 31, 2012 between RAIT and Jack E. Salmon. *
12.1	Statements regarding computation of ratios as of September 30, 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. (20)
101	Pursuant to Rule 405 of Regulation S-T, the following financial information from RAIT’s Quarterly Report on Form 10-Q for the period ended September 30, 2012 is formatted in XBRL interactive data files: (i) Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2012 and 2011; (ii) Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011; (iii) Consolidated Statements of Comprehensive Income (Loss) for the three-month and nine-month periods ended September 30, 2012 and 2011; (iv) Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 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 May 25, 2012 (File No. 1-14760).

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

(12) Incorporated by reference to RAIT’s Form 8-K as filed with the SEC on October 24, 2012 (File No. 1-14760).

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

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

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

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

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

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

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

(20) Incorporated by reference to RAIT’s Form 10-Q for the quarterly period ended March 31, 2012 (File No. 1-14760).

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