-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TOMLwy+P8Uf764mL4mUeb7G+Vlr3Xr1JDgCfdJUPYeITFrhEPdP0vasPNombPMcv UIFm//5+1WC0Mj1Xnfn/8A== 0000950172-04-001154.txt : 20040510 0000950172-04-001154.hdr.sgml : 20040510 20040510172754 ACCESSION NUMBER: 0000950172-04-001154 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANTHRACITE CAPITAL INC CENTRAL INDEX KEY: 0001050112 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 133978906 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13937 FILM NUMBER: 04794312 BUSINESS ADDRESS: STREET 1: 40 EAST 52ND STREET CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2127545560 MAIL ADDRESS: STREET 1: 40 EAST 52ND STREET CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: ANTHRACITE MORTGAGE CAPITAL INC DATE OF NAME CHANGE: 19971121 10-Q 1 an10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 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 001-13937 ANTHRACITE CAPITAL, INC. ------------------------- (Exact name of registrant as specified in its charter) Maryland 13-3978906 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 40 East 52nd Street, New York, New York 10022 --------------------------------------- ----- (Address of principal executive offices) (Zip Code) (Registrant's telephone number including area code): (212) 409-3333 --------------- NOT APPLICABLE -------------- (Former name, former address, and for new fiscal year; if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes X No - - (2) Yes X No - - Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). (1) Yes X No - - As of May 7, 2004, 50,572,055 shares of common stock ($.001 par value per share) were outstanding. ANTHRACITE CAPITAL, INC. FORM 10-Q INDEX
PART I - FINANCIAL INFORMATION Page ---- Item 1. Interim Financial Statements........................................................................4 Consolidated Statements of Financial Condition At March 31, 2004 (Unaudited) and December 31, 2003.................................................4 Consolidated Statements of Operations (Unaudited) For the Three Months Ended March 31, 2004 and 2003..................................................5 Consolidated Statement of Changes in Stockholders' Equity (Unaudited) For the Three Months Ended March 31, 2004...........................................................6 Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 2004 and 2003..................................................7 Notes to Consolidated Financial Statements (Unaudited)..............................................9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............................................................................19 Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................................35 Item 4. Controls and Procedures............................................................................40 Part II - OTHER INFORMATION Item 1. Legal Proceedings..................................................................................41 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities...................41 Item 3. Defaults Upon Senior Securities....................................................................41 Item 4. Submission of Matters to a Vote of Security Holders................................................41 Item 5. Other Information..................................................................................41 Item 6. Exhibits and Reports on Form 8-K...................................................................41 SIGNATURES ...................................................................................................43
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as "trend," "opportunity," "pipeline," "believe," "comfortable," "expect," "anticipate," "current," "intention," "estimate," "position," "assume," "potential," "outlook," "continue," "remain," "maintain," "sustain," "seek," "achieve" and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "may" or similar expressions. Anthracite Capital, Inc. (the "Company") cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and Anthracite assumes no duty to and does not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance. In addition to factors previously disclosed in the Company's Securities and Exchange Commission (the "SEC") reports and those identified elsewhere in this press release, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: (1) the introduction, withdrawal, success and timing of business initiatives and strategies; (2) changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of the Company's assets; (3) the relative and absolute investment performance and operations of the Company's manager; (4) the impact of increased competition; (5) the impact of capital improvement projects; (6) the impact of future acquisitions or divestitures; (7) the unfavorable resolution of legal proceedings; (8) the extent and timing of any share repurchases; (9) the impact, extent and timing of technological changes and the adequacy of intellectual property protection; (10) the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to the Company, BlackRock Financial Management, Inc. (the "Manager") or The PNC Financial Services Group, Inc. ("PNC Bank"); (11) terrorist activities, which may adversely affect the general economy, real estate, financial and capital markets, specific industries, and the Company and the Manager; (12) the ability of the Manager to attract and retain highly talented professionals; (13) fluctuations in foreign currency exchange rates; and (14) the impact of changes to tax legislation and, generally, the tax position of the Company. Forward-looking statements speak only as of the date they are made. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
Part I - FINANCIAL INFORMATION Item 1. Interim Financial Statements Anthracite Capital, Inc. and Subsidiaries Consolidated Statements of Financial Condition (in thousands, except per share data) - ------------------------------------------------------------------------------------------------------------------------------------ March 31, 2004 December 31, 2003 -------------- ----------------- (Unaudited) ASSETS Cash and cash equivalents $ 17,264 $ 20,805 Restricted cash equivalents 15,389 12,845 Securities available-for-sale, at fair value: Subordinated commercial mortgage-backed securities ("CMBS") $ 751,872 $ 703,443 Residential mortgage backed securities ("RMBS") 367,029 439,492 Investment grade securities 720,764 663,065 ------------- ------------- Total securities available-for-sale 1,839,665 1,806,000 Securities held-for-trading, at fair value 341,075 313,727 Commercial mortgage loan pools 1,222,103 - Commercial mortgage loans, net 81,292 61,668 Equity investment in Carbon Capital, Inc. 33,159 28,493 Investments in real estate joint ventures 7,813 7,823 Receivable for investments sold 100,662 99,056 Other assets 48,666 48,429 --------------- -------------- Total Assets $3,707,088 $2,398,846 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Borrowings: Collateralized debt obligations ("CDOs") $1,057,522 $684,970 Secured by pledge of subordinated CMBS 17,653 100,892 Secured by pledge of other securities available-for-sale and restricted cash equivalents 449,940 710,968 Secured by pledge of securities held-for-trading 315,399 304,001 Secured by pledge of investments in real estate joint ventures - 513 Secured by pledge of commercial mortgage loans 7,430 22,197 ------------- ------------- Total borrowings $1,847,944 $1,823,541 Obligation of REMIC Trust 1,199,034 - Securities sold, not yet settled 101,234 99,551 Payable for investments purchased 49,301 - Distributions payable 15,059 14,749 Other liabilities 48,451 43,575 --------------- -------------- Total Liabilities $3,261,023 $1,981,416 --------------- -------------- Commitments and Contingencies Stockholders' Equity: Common Stock, par value $0.001 per share; 400,000 shares authorized; 50,572 shares issued and outstanding in 2004; 49,464 shares issued and outstanding in 2003 51 49 10% Series B Preferred Stock, liquidation preference $43,931 in 2004 and $43,942 in 2003 33,422 33,431 9.375% Series C Preferred Stock, liquidation preference $57,500 in 2004 and 2003 55,435 55,435 Additional paid-in capital 549,199 536,333 Distributions in excess of earnings (105,952) (101,635) Accumulated other comprehensive loss (86,090) (106,183) --------------- -------------- Total Stockholders' Equity 446,065 417,430 --------------- -------------- Total Liabilities and Stockholders' Equity $3,707,088 $2,398,846 =============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
Anthracite Capital, Inc. Consolidated Statements of Operations (Unaudited) (in thousands, except per share data) For the Three For the Three Months Ended Months Ended March 31, 2004 March 31, 2003 ------------------------------------ Income: Interest from securities available-for-sale $32,726 $24,652 Interest from commercial mortgage loans 1,479 1,185 Interest from securities held-for-trading 3,177 15,831 Earnings from real estate joint ventures 222 236 Earnings from equity investment 1,372 743 Interest from cash and cash equivalents 88 176 ------------------------------------ Total income 39,064 42,823 ------------------------------------ Expenses: Interest 20,091 15,504 Interest - securities held-for-trading 782 4,201 Management fee 2,130 2,577 General and administrative expense 602 582 ------------------------------------ Total expenses 23,605 22,864 ------------------------------------ Other gain (losses): Gain on sale of securities available-for-sale 2,813 142 Loss on securities held-for-trading (5,983) (10,404) ------------------------------------ Total other loss (3,170) (10,262) ------------------------------------ Net income 12,289 9,697 ------------------------------------ Dividends on preferred stock 2,446 1,195 ------------------------------------ Net income available to common stockholders $ 9,843 $8,502 ==================================== Net income per common share, basic: $ 0.20 $0.18 ==================================== Net income per common share, diluted: $ 0.20 $0.18 ==================================== Weighted average number of shares outstanding: Basic 49,837 47,592 Diluted 49,846 47,622
The accompanying notes are an integral part of these consolidated financial statements.
Anthracite Capital, Inc. and Subsidiaries Consolidated Statement of Changes in Stockholders' Equity (Unaudited) For the Three Months Ended March 31, 2004 (in thousands) - ------------------------------------------------------------------------------------------------------------------------------------ Series Series Accumulated Common B C Additional Distributions Other Total Stock, PreferredPreferred Paid-In In Excess Comprehensive Comprehensive Stockholders' Par Value Stock Stock Capital Of Earnings Loss Income Equity Balance at January 1, 2004 $49 $33,431 $55,435 $536,333 $(101,635) $(106,183) $417,430 Net income 12,289 $12,289 12,289 Unrealized loss on cash flow hedges (25,211) (25,211) (25,211) Reclassification adjustments from cash flow hedges included in net income 1,183 1,183 1,183 Change in net unrealized gain (loss) on securities available-for-sale, net of reclassification adjustment 44,121 44,121 44,121 Other Comprehensive income 20,093 ----------- Comprehensive Income $32,402 =========== Dividends declared-common stock (14,160) (14,160) Dividends on preferred stock (2,446) (2,446) Conversion of Series B preferred stock to common stock - (9) 9 - Issuance of common stock 2 12,857 12,859 ------------------------------------------------------------------------------------------ Balance at March 31, 2004 $51 $33,422 $55,435 $549,199 $(105,952) $(86,090) $446,065 ========================================================================================== Disclosure of reclassification adjustment: Unrealized holding loss $41,308 Reclassification for realized gains previously recorded as unrealized 2,813 -------------- $44,121 ==============
The accompanying notes are an integral part of these consolidated financial statements.
Anthracite Capital, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) (in thousands) For the Three For the Three Months Ended Months Ended March 31, 2004 March 31, 2003 -------------- -------------- Cash flows from operating activities: Net income $12,289 $9,697 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Net (purchase) sale of trading securities (33,332) 387,278 Net loss on sale of securities 3,170 10,262 Discount accretion (961) (8,758) Equity in earnings in excess of distributions from Carbon Capital, Inc. (317) - Decrease in other assets 2,502 1,578 Increase in other liabilities 4,876 2,830 ----------------------- --------------------- Net cash (used in) provided by operating activities (11,773) 402,887 ----------------------- --------------------- Cash flows from investing activities: Purchase of securities available-for-sale (117,479) (447,774) Funding of commercial mortgage loans (19,961) - Repayments received from commercial mortgage loans 120 7,923 (Increase) decrease in restricted cash equivalents (2,544) 21,824 Principal payments received on securities available-for-sale 22,419 37,212 Distributions from joint ventures in excess of earnings 10 487 Investment in Carbon Capital, Inc. (4,349) (2,950) Proceeds from sales of securities available-for-sale 111,790 - Net payments under hedging securities (2,740) (262) ----------------------- --------------------- Net cash used in investing activities (12,734) (383,540) ----------------------- --------------------- Cash flows from financing activities: Net increase (decrease) in borrowings 24,403 (8,469) Proceeds from issuance of common stock, net of offering costs 12,860 3,418 Dividends paid on common stock (13,851) (16,589) Dividends paid on preferred stock (2,446) (1,195) ----------------------- --------------------- Net cash provided by (used in) financing activities 20,966 (22,835) ----------------------- --------------------- Net decrease in cash and cash equivalents (3,541) (3,488) Cash and cash equivalents, beginning of period 20,805 24,698 ----------------------- --------------------- Cash and cash equivalents, end of period $17,264 $21,210 ======================= ===================== Supplemental disclosure of cash flow information: Interest paid $20,661 $15,231 ----------------------- --------------------- Investments purchased not settled $49,301 $252,241 ======================= ===================== Investments sold not settled $(572) $356,859 ======================= ===================== Supplemental schedule of non-cash investing and financing activities: The Company purchased the Controlling Class securities of a REMIC trust during the Three months ended March 31, 2004: Carrying value of assets acquired $ 1,222,103 Liabilities assumed 1,199,034
The accompanying notes are an integral part of these consolidated financial statements. Anthracite Capital, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (In thousands, except per shares and share data) - ------------------------------------------------ Note 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Anthracite Capital, Inc. (the "Company"), a Maryland corporation, is a real estate finance company that generates income based on the spread between the interest income on its mortgage loans and securities investments and the interest expense from borrowings used to finance its investments. The Company seeks to earn high returns on a risk-adjusted basis to support a consistent quarterly dividend. The Company has elected to be taxed as a Real Estate Investment Trust ("REIT") under the Internal Revenue Code of 1986 and, therefore, its income is largely exempt from corporate taxation. The Company commenced operations on March 24, 1998. The Company's core investment activities focus on (i) investing in below investment grade CMBS where the Company has the right to control the foreclosure/workout process on the underlying loans, and (ii) originating high yield commercial real estate loans. The Company also manages excess liquidity with a portfolio of investment grade real estate related securities. This portfolio is being reduced over time. The accompanying March 31, 2004 unaudited consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP") for complete financial statements. These consolidated financial statements should be read in conjunction with the annual audited financial statements and notes thereto included in the Company's annual report on Form 10-K for 2003 filed with the Securities and Exchange Commission. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the statements of financial condition and revenues and expenses for the periods covered. Actual results could differ from those estimates and assumptions. Significant estimates in the financial statements include the valuation of certain of the Company's mortgage-backed securities and certain other investments. Note 2 NET INCOME PER SHARE Net income per share is computed in accordance with Statements of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic income per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income per share is calculated using the weighted average number of common shares outstanding during the period plus the additional dilutive effect, if any, of common stock equivalents. The dilutive effect of outstanding stock options is calculated using the treasury stock method, and the dilutive effect of preferred stock is calculated using the "if converted" method.
For the Three For the Three Months Ended Months Ended March 31, 2004 March 31, 2003 Numerator: Net income available to common stockholders $ 9,843 $8,502 ------------------ ------------------- Numerator for basic earnings per share $ 9,843 $8,502 ------------------ ------------------- Numerator for diluted earnings per share $ 9,843 $8,502 ================== =================== Denominator: Denominator for basic earnings per share--weighted average common shares Outstanding 49,837 47,592 Dilutive effect of stock options 9 30 ------------------ ------------------- Denominator for diluted earnings per share--weighted average common shares outstanding and common share equivalents outstanding 49,846 47,622 ================== =================== Basic net income per weighted average common share: $ 0.20 $0.18 ------------------ ------------------- Diluted net income per weighted average common share and common share equivalents: $ 0.20 $0.18 ------------------ -------------------
Total anti-dilutive stock options and warrants excluded from the calculation of net income per share were 1,385,651 and 1,407,442 for the three months ended March 31, 2004 and 2003, respectively. Note 3 SECURITIES AVAILABLE-FOR-SALE The Company's securities available-for-sale are carried at estimated fair value. The amortized cost and estimated fair value of securities available-for-sale as of March 31, 2004 are summarized as follows:
Gross Gross Estimated Amortized Unrealized Gain Unrealized Fair Security Description Cost Loss Value - ------------------------------------------------------------ ---------------- ---------------- --------------- ----------------- CMBS: CMBS interest only securities ("IOs") $ 87,858 $ 3,956 $ (517) $ 91,297 Investment grade CMBS 330,823 13,818 (2,617) 342,024 Non-investment grade rated subordinated securities 765,914 32,866 (75,747) 723,033 Non-rated subordinated securities 27,250 5,002 (3,413) 28,840 Credit tenant lease 25,803 569 - 26,372 Investment grade REIT debt 238,436 22,635 (1) 261,070 ---------------- ---------------- --------------- ----------------- Total CMBS 1,476,084 78,846 (82,295) 1,472,636 ---------------- ---------------- --------------- ----------------- Single-family residential mortgage-backed securities (RMBS): Agency adjustable rate securities 150,760 618 - 151,378 Agency fixed rate securities 187,492 129 (2,161) 185,460 Residential CMOs 2,855 89 (34) 2,910 Hybrid adjustable rate mortgages ("ARMs") 6,050 - (51) 5,999 Project Loans 20,468 833 (19) 21,282 ---------------- ---------------- --------------- ----------------- Total RMBS 367,625 1,669 (2,265) 367,029 ---------------- ---------------- --------------- ----------------- ---------------- ---------------- --------------- ----------------- Total securities available-for-sale $ 1,843,709 $ 80,515 $ (84,560) $ 1,839,665 ================ ================ =============== =================
As of March 31, 2004, an aggregate of $1,742,364 in estimated fair value of the Company's securities available-for-sale was pledged to secure its collateralized borrowings. As of March 31, 2004, the anticipated weighted average yield to maturity based upon the amortized cost of the subordinated CMBS ("reported yield") was 9.6% per annum. The anticipated reported yield of the Company's investment grade securities available-for-sale was 5.3%. The Company's reported yields on its subordinated CMBS and investment grade securities available-for-sale are based upon a number of assumptions that are subject to certain business and economic uncertainties and contingencies. Examples of these include, among other things, the rate and timing of principal payments (including prepayments, repurchases, defaults, and liquidations), the pass-through or coupon rate, and interest rate fluctuations. Additional factors that may affect the Company's anticipated yields to maturity on its subordinated CMBS include interest payment shortfalls due to delinquencies on the underlying mortgage loans, and the timing and magnitude of credit losses on the mortgage loans underlying the subordinated CMBS that are a result of the general condition of the real estate market (including competition for tenants and their related credit quality) and changes in market rental rates. As these uncertainties and contingencies are difficult to predict and are subject to future events which may alter these assumptions, no assurance can be given that the anticipated yields to maturity, discussed above and elsewhere, will be achieved. The following table shows the Company's fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2004.
Less than 12 Months 12 Months or More Total ------------- ---------------- ------------- --------------- -------------- --------------- Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ------------- ---------------- ------------- --------------- -------------- --------------- Non-investment grade rated subordinated securities $280,591 $(16,715) $442,442 $(26,166) $723,033 $(42,881) Agency fixed rate securities $185,460 $(2,032) - - $185,460 $(2,032) Hybrid ARMS $5,999 $(51) - - $5,999 $(51) ------------- ---------------- ------------- --------------- -------------- --------------- Total temporarily impaired securities $472,050 $(18,798) $442,442 $(26,166) $914,492 $(44,964) ============= ================ ============= =============== ============== ===============
The temporary impairment of the available-for-sale securities results from the fair value of the securities falling below the amortized cost basis. Management possesses both the intent and the ability to hold the securities until maturity, allowing for the anticipated recovery in fair value of the securities held. As such, management does not believe any of the securities held are other-than-temporarily impaired at March 31, 2004. The following table sets forth certain information relating to the aggregate principal balance and payment status of delinquent mortgage loans underlying the subordinated CMBS held by the Company as of March 31, 2004:
----------------------------------------------------------------- ---------------------------------------------- March 31, 2004 ----------------------------------------------------------------- ---------------------------------------------- Number of Loans % of Principal Collateral ------------------------------------------ ---------------------- ---------------------- ----------------------- Past due 30 days to 60 days $6,057 3 0.05% ------------------------------------------ ---------------------- ---------------------- ----------------------- Past due 60 days to 90 days 9,909 4 0.08 ------------------------------------------ ---------------------- ---------------------- ----------------------- Past due 90 days or more 113,909 12 0.90 ------------------------------------------ ---------------------- ---------------------- ----------------------- Real estate owned ("REO") 6,237 2 0.05 ------------------------------------------ ---------------------- ---------------------- ----------------------- Total delinquent $136,112 21 1.08% ------------------------------------------ ---------------------- ---------------------- ----------------------- Total principal balance $12,556,284 2,251 ------------------------------------------ ---------------------- ---------------------- -----------------------
To the extent that the Company's expectation of realized losses on individual loans supporting the CMBS, if any, or such resolutions differ significantly from the Company's original loss estimates, it may be necessary to reduce the projected reported yield on the applicable CMBS investment to better reflect such investment's expected earnings net of expected losses, and write the investment down to its fair value. While realized losses on individual loans may be higher or lower than original estimates, the Company currently believes its aggregate loss estimates and reported yields are appropriate on all investments. Note 4 COMMERCIAL MORTGAGE LOAN POOLS As of March 31, 2004, the Company owns eleven different trusts where the Company through its investment in subordinated CMBS of such trusts is in the first loss position ("Controlling Class"). In March 2004, the Company committed to acquire $41,495 par value of the Controlling Class interests in a CMBS transaction. The securities that comprise the Controlling Class interests were acquired for a dollar price of 55.6% of par, or $23,069. The total par amount of underlying loans in this transaction is $1,234,613 which have a carrying value of $1,222,103. A CMBS real estate mortgage investment conduit ("REMIC") trust will typically issue securities with a par amount equal to the par value of the underlying loans. As noted, the Company acquired $41,495 of par value of these securities; other third party investors will acquire the remaining $1,193,118 of securities. During the negotiations for the purchase of these Controlling Class interests, the Company was able to obtain a greater degree of control for the special servicer in the process of disposing of or working out defaulted loans. As a result of this added discretion, FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46R") requires the Company to consolidate the net assets and results of operations of the issuing REMIC trust. Typically, the Company records securities purchased at their market price, and the securities appear as assets on the Company's consolidated statement of financial condition. For this CMBS transaction, the Company included on its consolidated statement of financial condition all of the underlying loans shown as commercial mortgage loan pools at cost. The CMBS securities to be issued to third parties by the REMIC trust are shown as an offsetting liability ("obligation of REMIC trust"). The net effect on the Company's consolidated statement of financial condition at March 31, 2004 from the consolidation of the net assets of the REMIC trust is equivalent to the cost of the Controlling Class interests acquired of $23,069. The liability resulting from this transaction is non-recourse to Anthracite, and is secured only by the commercial mortgage loan pools. This accounting treatment increases the Company's debt to capital ratio from 4.6:1 to 6.8:1. The Company received authorization from its lenders to permit debt to capital ratios in excess of existing covenants. For income recognition purposes, the loans will carry their own yields and the Company will establish a loss reserve consistent with the credit assumptions made in establishing loss adjusted yields for Controlling Class securities. Note 5 SECURITIES HELD-FOR-TRADING Securities held-for-trading reflect short-term trading strategies, which the Company employs from time to time, designed to generate economic and taxable gains based on short-term differences in pricing. As part of its trading strategies, the Company may acquire long or short positions in U.S. Treasury or agency securities, forward commitments to purchase such securities, financial futures contracts and other fixed income or fixed income derivative securities. The Company's securities held-for-trading are carried at estimated fair value. At March 31, 2004, the Company's securities held-for-trading consisted of FNMA Mortgage Pools with an estimated fair value of $341,075, and a forward commitment with an estimated fair value of $101,234. The FNMA Mortgage Pools, and the underlying mortgages, bear interest at fixed rates for specified periods, generally three to seven years, after which the rates are periodically reset to market. For the three months ended March 31, 2004, losses on securities held-for-trading in the consolidated statement of operations of $5,983 are largely attributable to the Company's continued repositioning and reduction of the RMBS portfolio and associated hedges. The Company's longstanding policy has been to maintain limits on the exposure of the Company's equity to changes in long-term rates as well as the exposure of earnings to changes in short-term funding rates. The Company's trading strategies are subject to the risk of unanticipated changes in the relative prices of long and short positions in trading securities, but are designed to be relatively unaffected by changes in the overall level of interest rates. Note 6 COMMON STOCK On March 11, 2004, the Company declared dividends to its common stockholders of $0.28 per share, payable on April 30, 2004 to stockholders of record on March 31, 2004. For U.S. Federal income tax purposes, the dividends are expected to be ordinary income to the Company's stockholders. For the three months ended March 31, 2004, the Company issued 1,077,102 shares of Common Stock under its Dividend Reinvestment and Stock Purchase Plan (the "Dividend Reinvestment Plan"). Net proceeds to the Company were approximately $12,606. For the three months ended March 31, 2003, the Company issued 333,328 shares of Common Stock under its Dividend Reinvestment Plan. Net proceeds to the Company were approximately $3,517. The Company suspended its Dividend Reinvestment Plan for all investments after March 26, 2004, and for all future investment dates. The Dividend Reinvestment Plan will remain in place and may be resumed by the Company at any time. Note 7 PREFERRED STOCK At the end of the first quarter of 2004, the Board of Directors approved the Company's decision to redeem its Series B Preferred Stock, $0.001 par value per share ("Series B Preferred Stock"). During the second quarter of 2004 the Company will incur a one-time charge to income available to common stockholders of $10,508, which represents the difference between the Series B Preferred Stock book value of $19 per share and its $25 redemption price. The Series B Preferred Stock was redeemed on May 6, 2004. Note 8 TRANSACTIONS WITH AFFILIATES The Company has a Management Agreement with the Manager, a majority owned indirect subsidiary of PNC Bank and the employer of certain directors and officers of the Company, under which the Manager manages the Company's day-to-day operations, subject to the direction and oversight of the Company's Board of Directors. On March 25, 2002, the Management Agreement was extended for one year through March 27, 2003, with the approval of the unaffiliated directors, on terms similar to the prior agreement with the following changes: (i) the incentive fee calculation would be based on GAAP earnings instead of funds from operations, (ii) the removal of the four-year period to value the Management Agreement in the event of termination and (iii) subsequent renewal periods of the Management Agreement would be for one year instead of two years. The Board of Directors of the Company was advised by Houlihan Lokey Howard & Zukin Financial Advisors, Inc., a national investment banking and financial advisory firm, in the renewal process. On March 6, 2003, the unaffiliated directors approved an extension of the Management Agreement from its expiration of March 27, 2003 for one year through March 31, 2004. The terms of the renewed agreement are similar to the prior agreement except for the incentive fee calculation which would provide for a rolling four-quarter high watermark rather than a quarterly calculation. In determining the rolling four-quarter high watermark, the Company would calculate the incentive fee based upon the current and prior three quarters' net income. The Manager would be paid an incentive fee in the current quarter if the Yearly Incentive Fee, as defined, is greater than what was paid to the Manager in the prior three quarters cumulatively. The Company will phase in the rolling four-quarter high watermark commencing with the second quarter of 2003. Calculation of the incentive fee will be based on GAAP and adjusted to exclude special one-time events pursuant to changes in GAAP accounting pronouncements after discussion between the Manager and the unaffiliated directors. The incentive fee threshold did not change. The high watermark provides for the Manager to be paid 25% of the amount of earnings (calculated in accordance with GAAP) per share that exceeds the product of the adjusted issue price of the Company's common stock per share ($11.36 as of March 31, 2004) and the greater of 9.5% or 350 basis points over the ten-year Treasury note. The Management Agreement was further extended for one year from March 31, 2004 through March 31, 2005. The base management fee was revised to equal 2% of the quarterly average total stockholders equity for the applicable quarter. The incentive fee was revised to be 25% of the amount of earnings (calculated in accordance with GAAP) per share that exceeds the product of the adjusted issue price of the Company's common stock per share and the greater of 8.5% or 400 basis points over the ten-year Treasury note. During the year ended December 31, 2003 and for the three months ended March 31, 2004, the Company paid the Manager an annual base management fee equal to a percentage of the average invested assets of the Company as defined in the Management Agreement. The base management fee was equal to 1% per annum of the average invested assets rated less than BB- or not rated, 0.75% of average invested assets rated BB- to BB+, and 0.20% of average invested assets rated above BB+. During the third quarter of 2003, the Manager agreed to reduce the management fees by 20% from its calculated amount for the third and fourth quarter of 2003 and the first quarter of 2004. This revision resulted in $1,046 in savings to the Company during 2003 and $532 for the three months ended March 31, 2004, respectively. The Company incurred $2,130 and $2,577 in base management fees in accordance with the terms of the Management Agreement for the three months ended March 31, 2004 and 2003, respectively. In accordance with the provisions of the Management Agreement, the Company recorded reimbursements to the Manager of $34 and $6 for certain expenses incurred on behalf of the Company for the three months ended March 31, 2004 and 2003, respectively, which are included in general and administration expense on the accompanying consolidated statements of operations. Pursuant to the March 25, 2002 one-year Management Agreement extension, the incentive fee was based on 25% of earnings (calculated in accordance with GAAP) of the Company. For purposes of calculating the incentive fee during 2002, the cumulative transition adjustment of $6,327 resulting from the Company's adoption of SFAS 142 was excluded from earnings in its entirety and included in the calculation of future incentive fees using an amortization period of three years. The Company did not incur incentive fees for the three months ended March 31, 2004 and 2003. The Company has an administration agreement with the Manager. Under the terms of the administration agreement, the Manager provides financial reporting, audit coordination and accounting oversight services to the Company. The agreement can be cancelled upon 60-day written notice by either party. The Company pays the Manager a monthly administrative fee at an annual rate of 0.06% of the first $125 million of average net assets, 0.04% of the next $125 million of average net assets and 0.03% of average net assets in excess of $250 million subject to a minimum annual fee of $120. For the three months ended March 31, 2004 and 2003, the Company paid administration fees of $44 and $43, respectively, which are included in general and administration expense on the accompanying consolidated statements of operations. The Company has entered into a $50 million commitment to acquire shares in Carbon Capital, Inc. ("Carbon"), a private commercial real estate income opportunity fund managed by the Manager. The period during which the Company may be required to purchase shares under the commitment, expires in July 2004. The Company does not incur any additional management or incentive fees to the Manager as a result of its investment in Carbon. On March 31, 2004, the Company owned 19.8% of the outstanding shares in Carbon. The Company's remaining commitment at March 31, 2004 and December 31, 2003 was $18,685 and $23,034, respectively. During 2000, the Company completed the acquisition of CORE Cap, Inc. At the time of the CORE Cap, Inc. acquisition, the Manager agreed to pay GMAC (CORE Cap, Inc.'s external advisor) $12,500 over a ten-year period ("Installment Payment") to purchase the right to manage the CORE Cap, Inc. assets under the existing management contract ("GMAC Contract"). The GMAC Contract had to be terminated in order to allow the Company to complete the merger, as the Company's management agreement with the Manager did not provide for multiple managers. As a result the Manager offered to buy-out the GMAC Contract as the Manager estimated it would receive incremental fees above and beyond the Installment Payment, and thus was willing to pay for, and separately negotiate, the termination of the GMAC Contract. Accordingly, the value of the Installment Payment was not considered in the Company's allocation of its purchase price to the net assets acquired in the acquisition of CORE Cap, Inc. The Company agreed that should the Management Agreement with its Manager be terminated, not renewed or not extended for any reason other than for cause, the Company would pay to the Manager an amount equal to the Installment Payment less the sum of all payments made by the Manager to GMAC. As of March 31, 2004, the Installment Payment would be $8,000 payable over seven years. The Company does not accrue for this contingent liability. Note 9 BORROWINGS Certain information with respect to the Company's collateralized borrowings at March 31, 2004 is summarized as follows:
Lines of Reverse Collateralized Total Credit and Repurchase Collateralized Term Loans Agreements Debt Obligations Borrowings ------------------ --------------------- ---------------------- --------------------------- Outstanding borrowings $25,083 $765,339 $1,057,522 $1,847,944 Weighted average borrowing rate 2.93% 1.10% 6.05% 3.96% Weighted average remaining maturity 469 days 23 days 3,082 days 1,779 days Estimated fair value of assets pledged $79,155 $824,112 $1,119,225 $2,022,492
As of March 31, 2004, the Company's collateralized borrowings had the following remaining maturities:
Lines of Reverse Total Credit and Term Repurchase Collateralized Debt Collateralized Loans Agreements Obligations Borrowings ------------------ --------------------- --------------------------- ---------------------- Within 30 days $ - $765,339 $ - $765,339 31 to 59 days - - - - Over 60 days 25,083 - 1,057,522 1,082,605 ================== ===================== =========================== ====================== $25,083 $765,339 $1,057,522 $1,847,944 ================== ===================== =========================== ======================
Under the lines of credit and the reverse repurchase agreements, the respective lender retains the right to mark the underlying collateral to estimated market value. A reduction in the value of its pledged assets will require the Company to provide additional collateral or fund margin calls. From time to time, the Company expects that it will be required to provide such additional collateral or fund margin calls. Note 10 DERIVATIVE INSTRUMENTS The Company accounts for its derivative investments under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of change in the fair value of the derivative are recorded in other comprehensive income ("OCI") and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. The Company uses interest rate swaps to manage exposure to variable cash flows on portions of its borrowings under reverse repurchase agreements and as trading derivatives intended to offset changes in fair value related to securities held as trading assets. On the date in which the derivative contract is entered, the Company designates the derivative as either a cash flow hedge or a trading derivative. As of March 31, 2004, the Company had interest rate swaps with notional amounts aggregating $1,040,295 that were designated as cash flow hedges of borrowings under reverse repurchase agreements. Cash flow hedges with a fair value of $741 are included in other assets on the consolidated statement of financial condition and cash flow hedges with a fair value of $(39,569) are included in other liabilities on the consolidated statement of financial condition. For the three months ended March 31, 2004, the net change in the fair value of the interest rate swaps was a decrease of $26,184, of which $973 was deemed ineffective and is included as an increase of interest expense and $25,211 was recorded as a reduction of OCI. As of March 31, 2004, the $1,040,295 notional of swaps that were designated as cash flow hedges had a weighted average remaining term of 8.2 years. As of March 31, 2004, the Company had interest rate swaps with notional amounts aggregating $479,445 designated as trading derivatives. Trading derivatives with a fair value of $104 are included in other assets on the consolidated statement of financial condition and trading derivatives with a fair value of $(1,148) are included in other liabilities on the consolidated statement of financial condition. For the three months ended March 31, 2004, the change in fair value for these trading derivatives was a decrease of $4,092 and is included as an addition to loss on securities held-for-trading in the consolidated statements of operations. As of March 31, 2004, the $479,445 notional of swaps that were designated as trading derivatives had a weighted average remaining term of 5.5 years. Occasionally, counterparties will require the Company or the Company will require counterparties to provide collateral for the interest rate swap agreements in the form of margin deposits. Net deposits are recorded as a component of either accounts receivable or other liabilities. Should the counterparty fail to return deposits paid, the Company would be at risk for the fair market value of that asset. At March 31, 2004 and December 31, 2003, the balance of such net margin deposits owed to counterparties as collateral under these agreements totaled $5,720 and $10,445, respectively. The contracts identified in the remaining portion of this note have been entered into to limit the Company's mark to market exposure to long-term interest rates. Additionally, the Company had a forward London Interbank Offered Rate ("LIBOR") cap with a notional amount of $85,000 and a fair value at March 31, 2004 of $963 which is included in other assets, and the change in fair value related to this derivative is included as a component of loss on securities held-for-trading in the consolidated statements of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All dollar figures expressed herein are expressed in thousands, except share or per share amounts or as otherwise noted. I. General Anthracite Capital, Inc. (the "Company"), a Maryland corporation, is a real estate finance company that generates income based on the spread between the interest income on its mortgage loans and securities investments and the interest expense from borrowings to finance its investments. The Company's primary activity is investing in high yielding commercial real estate debt. The Company combines traditional real estate underwriting and capital markets expertise to exploit the opportunities arising from the continuing integration of these two disciplines. The Company focuses on acquiring pools of performing loans in the form of commercial mortgage backed securities ("CMBS"), issuing secured debt backed by CMBS and providing strategic capital for the commercial real estate industry in the form of mezzanine loan financing. The Company commenced operations on March 24, 1998. The Company's common stock is traded on the New York Stock Exchange under the symbol "AHR". The Company's primary long-term objective is to distribute consistent dividends supported by earnings. The Company establishes its dividend by analyzing the long-term sustainability of earnings given existing market conditions and the current composition of its portfolio. This includes an analysis of the Company's credit loss assumptions, general level of interest rates and projected hedging costs. The Company is managed by BlackRock Financial Management, Inc. (the "Manager"), a subsidiary of BlackRock, Inc., a publicly traded (NYSE: BLK) asset management company with approximately $321,000,000 of assets under management as of March 31, 2004. The Manager provides an operating platform that incorporates significant asset origination, risk management, and operational capabilities. At the end of the first quarter of 2004, the Board of Directors approved the Company's decision to redeem its Series B Preferred Stock, $0.01 par value per share ("Series B Preferred Stock"). During the second quarter of 2004 the Company will incur a one time charge to income available to common stockholders of $10,508, which represents the difference between the Series B Preferred Stock book value of $19 per share and its $25 redemption price. The Series B Preferred Stock was redeemed on May 6, 2004. The Company continues to maintain a positive, though controlled, exposure to both long- and short-term interest rates through its active hedging strategies. See "Item 3 - Quantitative and Qualitative Disclosures about Market Risk" for a discussion of interest rates and their effect on earnings and book value. The following table illustrates the mix of the Company's asset types as of March 31, 2004 and December 31, 2003:
Carrying Value as of March 31, 2004 December 31, 2003 Amount % Amount % ------------------------------------------------- Commercial real estate securities $1,472,636 43.0% $1,366,508 64.5% Commercial mortgage loan pools 1,222,103 35.7 - - Commercial real estate loans(1) 122,263 3.6 97,984 4.6 Residential mortgage backed securities(2) 606,871 17.7 653,668 30.9 ------------------------------------------------- Total $3,423,873 100.0% $2,118,160 100.0% -------------------------------------------------
(1) Includes real estate joint ventures and equity investments. (2) Net of RMBS securities sold, not yet settled Commercial Mortgage Loans Pools and Commercial Real Estate Securities Portfolio Activity As of March 31, 2004, the Company owns eleven different trusts where the Company through its investment in subordinated CMBS of such trusts is in the first loss position ("Controlling Class"). In March 2004, the Company committed to acquire $41,495 par value of the Controlling Class interests in a CMBS transaction. The securities that comprise the Controlling Class interests were acquired for a dollar price of 55.6% of par, or $23,069. The total par amount of underlying loans in this transaction is $1,234,613 which have a carrying value of $1,222,103. A CMBS real estate mortgage investment conduit ("REMIC") trust will typically issue securities with a par amount equal to the par value of the underlying loans. As noted, the Company acquired $41,495 of par value of these securities; other third party investors will acquire the remaining $1,193,118 of securities. During the negotiations for the purchase of these Controlling Class interests, the Company was able to obtain a greater degree of control for the special servicer in the process of disposing of or working out defaulted loans. As a result of this added discretion, FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46R") requires the Company to consolidate the net assets and results of operations of the issuing REMIC trust. Typically, the Company records securities purchased at their market price, and the securities appear as assets on the Company's consolidated statement of financial condition. For this CMBS transaction, the Company included on its consolidated statement of financial condition all of the underlying loans shown as commercial mortgage loan pools. The CMBS securities to be issued to third parties by the REMIC trust are shown as an offsetting liability ("obligation of REMIC trust"). The net effect on the Company's consolidated statement of financial condition at March 31, 2004 from the consolidation of the net assets of the REMIC trust is equivalent to the cost of the Controlling Class interests acquired of $23,069. The liability resulting from this transaction is non-recourse to Anthracite, and is secured only by the commercial mortgage loan pools. This accounting treatment increases the Company's debt to capital ratio from 4.6:1 to 7.6:1. The Company received authorization from its lenders to permit debt to capital ratios in excess of existing covenants. For income recognition purposes, the loans will carry their own yields and the Company will establish a loss reserve consistent with the credit assumptions made in establishing loss adjusted yields for Controlling Class securities. The Company continues to increase its investments in commercial real estate securities. Commercial real estate securities include CMBS and investment grade REIT debt. During the three months ended March 31, 2004, the Company increased its commercial real estate securities portfolio by 7.8% from $1,366,508 to $1,472,636. This increase was primarily attributable to the purchase of CMBS and investment grade REIT debt which have market values as of March 31, 2004 of $85,303 and December 31, 2003 of $34,668. On March 30, 2004 the Company issued its third collateralized debt obligation ("CDO III") offering through Anthracite CDO 2004-1. The total par value of bonds sold was $372,456. The total cost of funds on a fully hedged basis was 5.0%. CDO III also includes a $50,000 ramp facility that will be used to finance future commercial real estate assets, thus eliminating financing risk for up to $50,000 of below investment grade CMBS investments to be acquired during the year. The Company's CDO offerings allow the Company to match fund its commercial real estate portfolio by issuing long-term debt to finance long-term assets. The CDO debt is non-recourse to the Company; therefore, the Company's losses are limited to its equity investment in the CDO. The CDO debt is also fully hedged to protect the Company from an increase in short-term interest rates. The Company considers all of its CMBS rated BB+ down to B to be financeable in a CDO transaction; and as of March 31, 2004, over 95% of the market value of these assets are match funded in the Company's CDOs in this manner.
Collateral as of March 31, 2004 Debt as of March 31, 2004 ------------------------------------------------------------------------------------- Adjusted Purchase Loss Adjusted Adjusted Issue Weighted Average Price Yield Price Cost of Funds * Net Spread -------------------------------------------------------------------------------------- ------------ CDO I $442,740 8.89% $404,813 7.21% 1.68% CDO II 326,428 7.81% 280,256** 5.73% 2.08% CDO III 396,986 6.64% 372,453*** 5.03% 1.61% -------------------------------------------------------------------------------------- ------------ Total ** $1,166,154 7.82% $1,057,522 6.05% 1.77%
* Weighted Average Cost of Funds is the current cost of funds plus hedging expenses. ** The Company chose not to sell $22,850 of par of CDO II debt rated BBB- and BB. ***The Company chose not to sell $13,069 of par of CDO III debt rated BB. The following table details the par, fair market value, adjusted purchase price, and loss adjusted yield of the Company's commercial real estate securities outside of the CDOs as of March 31, 2004:
Fair Market Adjusted Loss Adjusted Par Value Dollar Price Purchase Price Dollar Price Yield ---------------------------------------------------------------------------------------- Investment grade CMBS $89,859 $86,033 95.74 $87,438 97.31 4.1% Investment grade REIT debt 11,000 11,202 101.84 11,223 102.02 4.9% CMBS rated BB+ to B 38,300 20,437 53.36 30,600 79.90 9.3% CMBS rated B- or lower 312,675 85,136 27.23 113,306 36.24 12.2% CMBS IOs 2,754,839 91,297 3.31 87,858 3.19 7.5% ---------------------------------------------------------------------------------------- Total $3,206,673 $294,105 9.17 $330,425 10.30 8.3%
The following table details the par, fair market value, adjusted purchase price and loss adjusted yield of the Company's commercial real estate securities outside of the CDOs as of December 31, 2003:
Fair Market Adjusted Loss Adjusted Par Value Dollar Price Purchase Price Dollar Price Yield ---------------------------------------------------------------------------------------- Investment grade CMBS $277,276 $268,593 96.87 $272,853 98.40 4.9% Investment grade REIT debt 29,000 29,567 101.95 30,210 104.17 5.0% CMBS rated BB+ to B 186,217 133,868 71.89 150,775 80.97 8.9% CMBS rated B- or lower 304,358 80,680 26.51 107,653 35.37 12.6% CMBS IOs 2,623,456 84,493 3.22 83,704 3.19 7.5% Other CMBS 20,266 20,142 99.39 20,264 99.99 5.7% ---------------------------------------------------------------------------------------- Total $3,440,573 $617,343 17.94 $665,459 19.34 7.4%
Below Investment Grade CMBS and Underlying Loan Performance The Company divides its below investment grade CMBS investment activity into two portfolios; Controlling Class CMBS and other below investment grade CMBS. The distinction between the two is in the controlling class rights the Company obtains with its investment in Controlling Class CMBS. Controlling Class rights allow the Company to control the workout and/or disposition of defaults that occur in the underlying loans. These securities absorb the first losses realized in the underlying loan pools. The Company's other below investment grade CMBS have no rights associated with its ownership to control the workout and/or disposition of underlying loan defaults; however, these investments are not the first to absorb losses in the underlying pools. The coupon payment on the non-rated security can also be reduced for special servicer fees charged to the trust. The next highest rated security in the structure will then generally be downgraded to non-rated and becomes the first to absorb losses and expenses from that point on. For the three months ended March 31, 2004, the Company acquired $11,686 of par of other below investment grade CMBS and $67,011 of par of new Controlling Class securities. The total par of the Company's other below investment grade CMBS at March 31, 2004 was $315,859; the average credit protection, or subordination level, of this portfolio is 5.9%. The total par of the Company's Controlling Class CMBS securities at March 31, 2004 was $833,209 and the total par of the loans underlying these securities was $12,556,284. The Company's investment in its Controlling Class CMBS securities by credit rating category at March 31, 2004 is as follows:
Fair Market Dollar Adjusted Dollar Subordination Par Value Price Purchase Price Price Level ------------------------------------------------------------------------------------ BB+ $86,139 $78,134 90.71 $73,806 85.68 7.15% BB 93,330 83,316 89.27 79,796 85.50 5.92% BB- 105,624 77,387 73.27 84,254 79.77 4.88% B+ 51,780 33,771 65.22 35,473 68.51 3.26% B 185,106 108,936 58.85 135,177 73.03 2.87% B- 86,284 34,722 40.24 53,159 61.61 1.98% CCC+ 11,924 5,780 48.47 7,166 60.09 1.56% CCC 70,272 12,945 18.42 22,999 32.73 1.10% C 8,940 2,797 31.28 2,692 30.11 0.63% NR 132,210 24,614 18.62 23,316 17.64 n/a ------------------------------------------------------------------------------------ Total $831,609 $462,402 55.60 $517,838 62.27
The Company's investment in its Controlling Class CMBS securities by credit rating category at December 31, 2003 is as follows:
Fair Market Dollar Adjusted Dollar Subordination Par Value Price Purchase Price Price Level ------------------------------------------------------------------------------------ BB+ $84,503 $73,766 87.29 $72,680 86.01 7.54% BB 89,945 75,349 83.77 76,842 85.43 6.04% BB- 101,393 71,285 70.31 81,036 79.92 5.12% B+ 44,314 28,904 65.22 31,179 70.36 3.43% B 182,119 105,061 57.69 133,718 73.42 3.06% B- 83,296 34,160 41.01 51,935 62.35 1.54% CCC+ 11,924 5,595 46.92 7,129 59.78 1.53% CCC 70,273 13,375 19.03 22,844 32.51 1.23% C 8,940 2,531 28.31 2,734 30.58 0.62% NR 129,925 25,003 19.24 23,011 17.71 n/a ------------------------------------------------------------------------------------ Total $806,632 $435,029 53.93 $503,108 62.37
For the three months ended March 31, 2004, the par amount of the Company's Controlling Class CMBS securities was reduced by the servicers in the amount of $15,526. Further delinquencies and losses may cause par reductions to continue and cause the Company to conclude that a change in loss-adjusted yield is required along with a write down of the adjusted purchase price through the consolidated statement of operations according to EITF 99-20. Also for the three months ended March 31, 2004, the underlying loan pools were paid down by $68,009. Pay down proceeds are distributed to the highest rated CMBS class first and reduce the percent of total underlying collateral represented by each rating category. For all of the Company's Controlling Class securities, the Company assumes that a total of 2.08% of the original loan balance will not be recoverable. This estimate was developed based on an analysis of individual loan characteristics and prevailing market conditions at the time of origination. This loss estimate equates to cumulative expected defaults of approximately 5.2% over the life of the portfolio and an average assumed loss severity of 40.0% of the defaulted loan balance. All estimated workout expenses including special servicer fees are included in these assumptions. Actual results could differ materially from these estimated results. See Item 3 -"Quantitative and Qualitative Disclosures About Market Risk" for a discussion of how differences between estimated and actual losses could affect Company earnings. The Company monitors credit performance on a monthly basis and debt service coverage ratios on a quarterly basis. Using these and other statistics, the Company maintains watch lists for loans that are delinquent thirty days or more and for loans that are not delinquent but have issues that the Company's management believes require close monitoring. As part of its ongoing credit monitoring the Company periodically performs a re-underwriting of a substantial number of the underlying loans supporting its Controlling Class CMBS. We are currently focusing on 1998 vintage transactions and expect to be completed with this vintage by the fourth quarter of 2004. As each transaction review is completed the Company may determine that its GAAP yields and book values need to be adjusted. The Company considers delinquency information from the Lehman Brothers Conduit Guide to be the most relevant benchmark to measure credit performance and market conditions applicable to its Controlling Class CMBS holdings. The year of issuance, or vintage year, is important, as older loan pools will tend to have more delinquencies than newly underwritten loans. The Company owns Controlling Class CMBS issued in 1998, 1999, 2001, 2003 and 2004. Comparable delinquency statistics referenced by vintage year as a percentage of current par as of March 31, 2004 are shown in the table below:
Underlying Delinquencies Lehman Brothers Vintage Year Collateral Outstanding Conduit Guide ---------------------------------------------------------------------------- 1998 $7,414,007 1.82% 2.45% 1999 711,544 0.17% 2.53% 2001 909,560 0.00% 1.13% 2003 2,193,990 0.00% 0.03% 2004 1,327,183 0.00% 0.00% ---------------------------------------------------------------- Total $12,556,284 1.08%* 1.68%*
* Weighted average based on current principal balance. Morgan Stanley also tracks CMBS loan delinquencies for the specific CMBS transactions with more than $200,000 of collateral and that have been seasoned for at least one year. This seasoning criterion will generally adjust for the lower delinquencies that occur in newly originated collateral. As of March 31, 2004, the Morgan Stanley index indicated that delinquencies on 253 securitizations were 2.36%, and as of December 31, 2003, this same index indicated that delinquencies on 243 securitizations were 2.47%. See Item 3 - "Quantitative and Qualitative Disclosures About Market Risks" for a detailed discussion of how delinquencies and loan losses affect the Company. Delinquencies on the Company's CMBS collateral as a percent of principal increased in line with expectations. The Company's aggregate delinquency experience is consistent with comparable data provided in the Lehman Brothers Conduit Guide. Of the 21 delinquent loans shown on the chart in Note 2 of the consolidated financial statements, 2 loans were real estate owned and being marketed for sale, 3 loans were in foreclosure, and the remaining 16 loans were in some form of workout negotiations. Aggregate losses of $88 were realized during quarter ended March 31, 2004, bringing cumulative net losses realized to $41,520 or 14.2% of total estimated losses. These losses include special servicer and other workout expenses. Experience to date is in line with the Company's loss expectations. Realized losses and special servicer expenses are expected to increase on the underlying loans as the portfolio ages. The Company manages its credit risk through disciplined underwriting, diversification, active monitoring of loan performance and exercise of its right to control the workout process for delinquent loans as early as possible. The Company maintains diversification of credit exposures through its underwriting process and can shift its focus in future investments by adjusting the mix of loans in subsequent acquisitions. The comparative profiles of the loans underlying the Company's CMBS by property type as of March 31, 2004 and December 31, 2003 are as follows:
3/31/04 Exposure 12/31/03 Exposure -------------------------------------------------------------------------------------- Property Type Loan Balance % of Total Loan Balance % of Total -------------------------------------------------------------------------------------- Multifamily $4,119,354 32.8% $3,770,944 33.2% Retail 3,820,594 30.4 3,446,371 30.4 Office 2,678,582 21.3 2,266,160 20.0 Lodging 786,895 6.3 786,920 7.0 Industrial 790,073 6.3 713,942 6.3 Healthcare 335,282 2.7 337,333 3.0 Parking 25,504 0.2 25,611 0.2 -------------------------------------------------------------------- Total $12,556,284 100% $11,347,281 100% ====================================================================
As of March 31, 2004, the fair market value of the Company's holdings of Controlling Class CMBS securities is $55,147 lower than the adjusted cost for these securities. The adjusted purchase price and market value of the Company's Controlling Class CMBS portfolio as of March 31, 2004 represents approximately 63% and 56%, respectively, of its par amount. As the portfolio matures, the Company expects to recoup the unrealized loss, provided that the credit losses experienced are not greater than the credit losses assumed in the purchase analysis. As of March 31, 2004, the Company believes there has been no material deterioration in the credit quality of its portfolio below current expectations. As the portfolio matures and expected losses occur, subordination levels of the lower rated classes of a CMBS investment will be reduced. This may cause the lower rated classes to be downgraded which would negatively affect their market value and therefore the Company's net asset value. Reduced market value will negatively affect the Company's ability to finance any such securities that are not financed through a CDO or similar matched funding vehicle. In some cases, securities held by the Company may be upgraded to reflect seasoning of the underlying collateral and thus would increase the market value of the securities. For the three months ended March 31, 2004, the Company experienced no ratings changes on its CMBS. The Company's generally accepted accounting principles in the United States of America ("GAAP") income for its CMBS securities is computed based upon a yield, which assumes credit losses will occur. The yield to compute the Company's taxable income does not assume there will be credit losses, as a loss can only be deducted for tax purposes when it has occurred. As a result, for the period beginning with the year ended December 31, 1998 through the three months ended March 31, 2004, the Company's GAAP income accrued on its CMBS assets was approximately $28,459 lower than the taxable income accrued on its CMBS assets. Commercial Real Estate Loan Activity The Company's commercial real estate loan portfolio generally emphasizes larger transactions located in metropolitan markets, as compared to the typical loan in the CMBS portfolio. The Company has never suffered a loss in this portfolio. Because the loan portfolio is relatively small and heterogeneous, the Company has determined it is not necessary to establish a loan loss reserve. The following table summarizes the Company's commercial real estate loan portfolio by property type as of March 31, 2004 and December 31, 2003:
Loan Outstanding Weighted Average Coupon --------------------------------------------- March 31, 2004 December 31, 2003 March 31, 2004 December 31, 2003 --------------------- ----------------------- -------------------- --------------------- Property Type Amount % Amount % - ----------------- ---------- ---------- ------------ ---------- -------------------- --------------------- Office $77,287 81.5% $57,381 76.4% 10.1% 9.4% Residential 2,722 2.9 2,794 3.7 3.9% 3.8% Retail - - - - -% -% Hotel 14,842 15.6 14,951 19.9 6.6% 6.6% ---------- ---------- ------------ ---------- -------------------- --------------------- Total $94,851 100.0% $75,126 100.0% 9.3% 8.6% ---------- ---------- ------------ ---------- -------------------- ---------------------
Recent Events At the end of the first quarter of 2004, the Board of Directors approved the Company's decision to redeem its Series B Preferred Stock. During the second quarter of 2004 the Company will incur a one time charge to income available to common stockholders of $10,508, which represents the difference between the Series B Preferred Stock book value of $19 per share and its $25 redemption price. The Series B Preferred Stock was redeemed on May 6, 2004. II. Results of Operations Net income for the three months ended March 31, 2004 was $9,843 or $0.20 per share (basic and diluted). Net income for the three months ended March 31, 2003 was $8,502 or $0.18 per share (basic and diluted). Net income increased to $0.20 per share for the three months ended March 31, 2004 as compared to $0.18 per share for the three months ended March 31, 2003. Interest Income: The following tables sets forth information regarding the total amount of income from certain of the Company's interest-earning assets.
For the Three Months Ended March 31, 2004 2003 -------------------------- ---------------------- Interest Interest Income Income -------------------------- ---------------------- Commercial real estate securities $29,185 $19,953 Commercial real estate loans 1,479 1,430 RMBS 6,717 20,285 Cash and cash equivalents 88 176 -------------------------- ---------------------- Total $37,469 $41,844 ========================== ======================
The following chart reconciles interest income and total income for the three months ended March 31, 2004 and 2003.
For the Three Months Ended March 31, 2004 2003 ------------------------------------------------ Interest Income $37,469 $41,844 Earnings from real estate joint ventures 223 236 Earnings from equity investment 1,372 743 ------------------------------------------------ Total Income $39,064 $42,823 ================================================
Interest Expense: The following table sets forth information regarding the total amount of interest expense from certain of the Company's collateralized borrowings. Information is based on daily average balances during the period.
For the Three Months Ended March 31, 2004 2003 ------------------------- ------------------------ Interest Interest Expense Expense ------------------------- ------------------------ Reverse repurchase agreements $3,147 $5,852 Lines of credit and term loan 955 136 CDO liabilities 11,167 6,405 ========================= ======================== Total $15,269 $12,393 ========================= ========================
The foregoing interest expense amounts for the three months ended March 31, 2004 do not include a $973 addition to interest expense related to hedge ineffectiveness, as well as a $4,631 addition to interest expense related to swaps. The foregoing interest expense amounts for the three months ended March 31, 2003 do not include a $262 addition to interest expense related to hedge ineffectiveness, as well as a $7,050 addition to interest expense related to swaps. See Note 10 of the consolidated financial statements, Derivative Instruments, for a further description of the Company's hedge ineffectiveness. Net Interest Margin and Net Interest Spread from the Portfolio: The Company considers its portfolio to consist of its securities available-for-sale, mortgage loan pools, commercial mortgage loans and cash and cash equivalents because these assets relate to its core strategy of acquiring and originating high yield loans and securities backed by commercial real estate, while at the same time maintaining a portfolio of investment grade securities to enhance the Company's liquidity. Net interest margin from the portfolio is annualized net interest income from the portfolio divided by the average market value of interest-earning assets in the portfolio. Net interest income from the portfolio is total interest income from the portfolio less interest expense relating to collateralized borrowings. Net interest spread from the portfolio equals the yield on average assets for the period less the average cost of funds for the period. The yield on average assets is interest income from the portfolio divided by average amortized cost of interest earning assets in the portfolio. The average cost of funds is interest expense from the portfolio divided by average outstanding collateralized borrowings. The following chart describes the interest income, interest expense, net interest margin and net interest spread for the Company's portfolio. The following interest income and interest expense amounts exclude income and expense related to real estate joint ventures, equity investment and hedge ineffectiveness. The decrease in net interest margin is primarily a result of lower leverage and the net interest spread decreased due to investment in more higher credit quality CMBS.
For the Three Months Ended March 31, 2004 2003 --------------------------------- --------------------------------- Interest income $37,470 $41,844 Interest expense $19,898 $19,433 Net interest margin 3.17% 3.62% Net interest spread 2.48% 3.30%
Other Expenses: Expenses other than interest expense consist primarily of management fees and general and administrative expenses. Management fees paid to the Manager of $2,130 and $2,577 for the three months ended March 31, 2004 and 2003, respectively, were solely base management fees and were lower as the Manager agreed to reduce the management fees by 20% for the quarter ended March 31, 2004. General and administrative expense of $602 and $582 for the three months ended March 31, 2004, and 2003, respectively, were comprised of accounting agent fees, custodial agent fees, directors' fees, fees for professional services, and insurance premiums. Other Gains (Losses): During the three months ended March 31, 2004, the Company sold a portion of its securities available-for-sale for total proceeds of $111,790, resulting in a realized gain of $2,813. No available-for-sale securities were sold during the three months ended March 31, 2003, although the Company did record a gain of $142 due to prepayment fees received in connection with the early maturity of a security. The losses on securities held-for-trading were $5,983 and $10,389 for the three months ended March 31, 2004 and 2003, respectively. Dividends Declared: On March 11, 2004, the Company declared distributions to its stockholders of $0.28 per share, which was paid on April 30, 2004 to stockholders of record on March 31, 2004. Changes in Financial Condition Securities Available-for-sale: The Company's securities available-for-sale, which are carried at estimated fair value, included the following at March 31, 2004 and December 31, 2003:
March 31, 2004 December 31, Estimated 2003 Estimated Fair Fair Security Description Value Percentage Value Percentage -------------------------------------------------- ---------------- --------------- ----------------- ---------------- Commercial mortgage-backed securities: CMBS IOs $ 91,297 5.0% $84,493 4.7% Investment grade CMBS 342,024 18.5 333,454 18.5 Non-investment grade rated subordinated securities 723,033 39.3 678,424 37.6 Non-rated subordinated securities 28,840 1.6 25,019 1.4 Credit tenant lease 26,372 1.4 25,696 1.4 Investment grade REIT debt 261,070 14.2 219,422 12.1 ---------------- --------------- ----------------- ---------------- Total CMBS 1,472,636 80.0 $1,366,508 75.7 ---------------- --------------- ----------------- ---------------- Single-family residential mortgage- backed securities: Agency adjustable rate securities 151,378 8.2 180,381 10.0 Agency fixed rate securities 185,460 10.1 226,999 12.5 Residential CMOs 2,910 0.2 3,464 0.2 Hybrid arms 5,999 0.3 6,645 0.4 Project Loans 21,282 1.2 22,003 1.2 ---------------- --------------- ----------------- ---------------- Total RMBS 367,029 20.0 439,492 24.3 ---------------- --------------- ----------------- ---------------- Total securities available-for-sale $1,839,665 100.0% $1,806,000 100.0% ================ =============== ================= ================
The Company's CMBS and investment grade REIT debt increased slightly from December 31, 2003 as the Company is continuing to purchase these types of assets. Borrowings: As of March 31, 2004 and December 31, 2003, the Company's debt consisted of collateralized debt obligations, line-of-credit borrowings, and reverse repurchase agreements, collateralized by a pledge of most of the Company's securities available-for-sale, securities held-for-trading, and its commercial mortgage loans. The Company's financial flexibility is affected by its ability to renew or replace on a continuous basis its maturing short-term borrowings. As of March 31, 2004 and December 31, 2003, the Company has obtained financing in amounts and at interest rates consistent with the Company's short-term financing objectives. Under the lines of credit, and the reverse repurchase agreements, the lender retains the right to mark the underlying collateral to market value. A reduction in the value of its pledged assets would require the Company to provide additional collateral or fund margin calls. From time to time, the Company expects that it will be required to provide such additional collateral or fund margin calls. The following table sets forth information regarding the Company's collateralized borrowings:
For the Three Months Ended March 31, 2004 ----------------------------------------------------------------- March 31, 2004 Maximum Range of Balance Balance Maturities --------------------- ---------------- -------------------------- Collateralized debt obligations $1,057,522 $1,057,522 7.7 to 9.8 years Reverse repurchase agreements 765,399 1,148,306 1 to 26 days Line of credit and term loan borrowings 25,083 391,511 463 to 471 days --------------------- ---------------- --------------------------
Hedging Instruments: From time to time, the Company may reduce its exposure to market interest rates by entering into various financial instruments that adjust portfolio duration. These financial instruments are intended to mitigate the effect of changes in interest rates on the value of certain assets in the Company's portfolio. At March 31, 2004, the Company had no outstanding U.S. Treasury Note future contracts. At December 31, 2003, the Company had outstanding short positions of 30 five-year and 73 ten-year U.S. Treasury Note future contracts. Interest rate swap agreements as of March 31, 2004 and December 31, 2003 consisted of the following:
March 31, 2004 Weighted Average Estimated Unamortized Remaining Notional Value Fair Value Cost Term ------------------------------------------------------- Interest rate swaps $565,000 $(6,095) $ - 4.27 years Interest rate swaps - CDO 954,740 (33,777) - 9.14 years ------------------------------------------------------- Total $1,519,740 $(39,872) $ - 7.33 years ======================================================= December 31, 2003 Weighted Average Estimated Unamortized Remaining Notional Value Fair Value Cost Term ------------------------------------------------------- Interest rate swaps $919,300 $(2,929) $23 5.46 years Interest rate swaps - CDO 626,323 (23,423) - 9.17 years ------------------------------------------------------- Total $1,545,623 $(26,352) $23 6.96 years =======================================================
As of March 31, 2004, the Company had designated $1,040,295 notional of the interest rate swap agreements as cash flow hedges. As of December 31, 2003, the Company had designated $1,066,078 notional of the interest rate swap agreements as cash flow hedges. Capital Resources and Liquidity Liquidity is a measurement of the Company's ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund investments, loan acquisition and lending activities and for other general business purposes. The primary sources of funds for liquidity consist of collateralized borrowings, principal and interest payments on and maturities of securities available-for-sale, securities held-for-trading and commercial mortgage loans, and proceeds from the maturity or sales thereof. To the extent that the Company may become unable to maintain its borrowings at their current level due to changes in the financing markets for the Company's assets, the Company may be required to sell assets in order to achieve lower borrowing levels. In this event, the Company's level of net income would decline. The Company's principal strategies for mitigating this risk are to maintain portfolio leverage at levels it believes are sustainable and to diversify the sources and types of available borrowing and capital. The Company has utilized committed bank facilities and preferred stock offerings, and will consider resecuritization or other achievable term funding of existing assets. At the end of the first quarter of 2004, the Board of Directors approved the Company's decision to redeem its Series B Preferred Stock. During the second quarter of 2004 the Company will incur a one-time charge to income available to common stockholders of $10,508, which represents the difference between the Series B Preferred Stock book value of $19 per share and its $25 redemption price. The Series B Preferred Stock was redeemed on May 6, 2004. For the three months ended March 31, 2004, the Company issued 1,077,102 shares of Common Stock under its Dividend Reinvestment and Stock Purchase Plan (the "Dividend Reinvestment Plan"). Net proceeds to the Company were approximately $12,606. The Company suspended its Dividend Reinvestment Plan for all investments after March 26, 2004, and for all future investment dates. The Dividend Reinvestment Plan will remain in place and may be resumed by the Company at any time. As of March 31, 2004, $167,347 of the Company's $185,000 committed credit facility with Deutsche Bank, AG was available for future borrowings and $67,570 of the Company's $75,000 committed credit facility with Greenwich Capital, Inc. was available. At March 31, 2004, the Company's collateralized borrowings had the following remaining maturities:
Total Lines of Reverse Repurchase Collateralized Collateralized Credit Agreements Debt Obligations Borrowings -------------- --------------------- ------------------- -------------------- Within 30 days $ - $765,339 $ - $765,339 31 to 59 days - - - - 60 days to less than 1 year - - - - 1 year to 2 years 25,083 - - 25,083 Over 5 years - - 1,057,522* 1,057,522 -------------- --------------------- ------------------- -------------------- $25,083 $765,339 $1,057,522 $1,847,944 ============== ===================== =================== ====================
* Comprised of $404,813 of CDO debt with a weighted average remaining maturity of 8.04 years as of March 31, 2004, $280,256 of CDO debt with a weighted average remaining maturity of 8.09 years as of March 31, 2004 and $372,453 of CDO debt with a weighted average remaining maturity of 9.14 years as of March 31, 2004. The Company has no off-balance sheet financing arrangements. On March 30, 2004 the Company issued CDO III through Anthracite CDO 2004-1. The total par value of bonds sold was $372,456. The total cost of funds on a fully hedged basis was 5.0%. CDO III also includes a $50,000 ramp facility that will be used to finance future commercial real estate assets, thus eliminating financing risk for up to $50,000 of below investment grade CMBS investments to be acquired during the year. The Company's operating activities (used) provided cash flows of $(11,773) and $402,887 during the three months ended March 31, 2004 and 2003, respectively, primarily through purchase of trading securities offset by net income in 2004 and through the purchases of trading securities in 2003. The Company's investing activities used cash flows of $12,734 and $383,540 during the three months ended March 31, 2004 and 2003, respectively, primarily to purchase securities available-for-sale and to fund commercial mortgage loans, offset by significant sales of securities. The Company's financing activities provided (used) $20,966 and $(22,835) during the three months ended March 31, 2004 and 2003, respectively, primarily from increase in borrowings, issuance of common stock on dividends paid in 2004 and decrease in borrowings and dividends paid in 2003. The Company is subject to various covenants in its lines of credit, including maintaining a minimum GAAP net worth of $305,000, a debt-to-equity ratio not to exceed 5.5 to 1, a minimum cash requirement based upon certain debt to equity ratios, a minimum debt service coverage ratio of 1.5, and a minimum liquidity reserve of $10,000. Due to the acquisition of the commercial mortgage loan pools (see Note 4 of the consolidated financial statements), the Company's debt to capital ratio increased from 4.4:1 at December 31, 2003 to 6.8:1 at March 31, 2004. The Company received authorization from its lenders to permit debt to capital ratios in excess of existing covenants. As of March 31, 2004, the Company was in compliance with all covenants. The Company's ability to execute its business strategy depends to a significant degree on its ability to obtain additional capital. Factors which could affect the Company's access to the capital markets, or the costs of such capital, include changes in interest rates, general economic conditions and perception in the capital markets of the Company's business, covenants under the Company's current and future credit facilities, results of operations, leverage, financial conditions and business prospects. Consequently, there can be no assurance that the Company will be able to effectively fund future growth. Except as discussed herein, management is not aware of any other trends, events, commitments or uncertainties that may have a significant effect on liquidity. Contingent Liability During 2000, the Company completed the acquisition of CORE Cap, Inc. At the time of the CORE Cap, Inc. acquisition, the Manager agreed to pay GMAC (CORE Cap, Inc.'s external advisor) $12,500 over a ten-year period ("Installment Payment") to purchase the right to manage the Core Cap, Inc. assets under the existing management contract ("GMAC Contract"). The GMAC Contract had to be terminated in order to allow the Company to complete the merger, as the Company's management agreement with the Manager did not provide for multiple managers. As a result the Manager offered to buy-out the GMAC Contract as the Manager estimated it would receive incremental fees above and beyond the Installment Payment, and thus was willing to pay for, and separately negotiate, the termination of the GMAC Contract. Accordingly, the value of the Installment Payment was not considered in the Company's allocation of its purchase price to the net assets acquired in the acquisition of CORE Cap, Inc. The Company agreed that should the Management Agreement with its Manager be terminated, not renewed or not extended for any reason other than for cause, the Company would pay to the Manager an amount equal to the Installment Payment less the sum of all payments made by the Manager to GMAC. As of March 31, 2004, the Installment Payment would be $8,000 payable over seven years. The Company does not accrue for this contingent liability. Transactions with Affiliates The Company has a Management Agreement with the Manager, a majority owned indirect subsidiary of The PNC Financial Services Group, Inc. and the employer of certain directors and officers of the Company, under which the Manager manages the Company's day-to-day operations, subject to the direction and oversight of the Company's Board of Directors. On March 25, 2002, the Management Agreement was extended for one year through March 27, 2003, with the approval of the unaffiliated directors, on terms similar to the prior agreement with the following changes: (i) the incentive fee calculation would be based on GAAP earnings instead of funds from operations, (ii) the removal of the four-year period to value the Management Agreement in the event of termination and (iii) subsequent renewal periods of the Management Agreement would be for one year instead of two years. The Board of Directors of the Company was advised by Houlihan Lokey Howard & Zukin Financial Advisors, Inc., a national investment banking and financial advisory firm, in the renewal process. On March 6, 2003, the unaffiliated directors approved an extension of the Management Agreement from its expiration of March 27, 2003 for one year through March 31, 2004. The terms of the renewed agreement are similar to the prior agreement except for the incentive fee calculation which would provide for a rolling four-quarter high watermark rather than a quarterly calculation. In determining the rolling four-quarter high watermark, the Company would calculate the incentive fee based upon the current and prior three quarters' net income. The Manager would be paid an incentive fee in the current quarter if the Yearly Incentive Fee, as defined, is greater than what was paid to the Manager in the prior three quarters cumulatively. The Company will phase in the rolling four-quarter high watermark commencing with the second quarter of 2003. Calculation of the incentive fee will be based on GAAP and adjusted to exclude special one-time events pursuant to changes in GAAP accounting pronouncements after discussion between the Manager and the unaffiliated directors. The incentive fee threshold did not change. The high watermark provides for the Manager to be paid 25% of the amount of earnings (calculated in accordance with GAAP) per share that exceeds the product of the adjusted issue price of the Company's common stock per share ($11.36 as of March 31, 2004) and the greater of 9.5% or 350 basis points over the ten-year Treasury note. The Management Agreement was further extended for one year from March 31, 2004 through March 31, 2005. The base management fee was revised to equal 2% of the quarterly average total stockholders equity for the applicable quarter. The incentive fee was revised to be 25% of the amount of earnings (calculated in accordance with GAAP) per share that exceeds the product of the adjusted issue price of the Company's common stock per share and the greater of 8.5% or 400 basis points over the ten-year Treasury note. During the years ended December 31, 2002 and 2003 and for the three months ended March 31, 2004, the Company paid the Manager an annual base management fee equal to a percentage of the average invested assets of the Company as defined in the Management Agreement. The base management fee was equal to 1% per annum of the average invested assets rated less than BB- or not rated, 0.75% of average invested assets rated BB- to BB+, and 0.20% of average invested assets rated above BB+. During the third quarter of 2003, the Manager agreed to reduce the management fees by 20% from its calculated amount for the third and fourth quarter of 2003 and the first quarter of 2004. This revision resulted in $1,046 in savings to the Company during 2003 and $532 for the three months ended March 31, 2004, respectively. The Company incurred $2,130 and $2,577 in base management fees in accordance with the terms of the Management Agreement for the three months ended March 31, 2004 and 2003, respectively. In accordance with the provisions of the Management Agreement, the Company recorded reimbursements to the Manager of $34 and $6 for certain expenses incurred on behalf of the Company for the three months ended March 31, 2004 and 2003, respectively, which are included in general and administration expense on the accompanying consolidated statements of operations. Pursuant to the March 25, 2002 one-year Management Agreement extension, the incentive fee was based on 25% of earnings (calculated in accordance with GAAP) of the Company. For purposes of calculating the incentive fee during 2002, the cumulative transition adjustment of $6,327 resulting from the Company's adoption of SFAS 142 was excluded from earnings in its entirety and included in the calculation of future incentive fees using an amortization period of three years. The Company did not incur incentive compensation fees for the three months ended March 31, 2004 and 2003. The Company has an administration agreement with the Manager. Under the terms of the administration agreement, the Manager provides financial reporting, audit coordination and accounting oversight services to the Company. The agreement can be cancelled upon 60-day written notice by either party. The Company pays the Manager a monthly administrative fee at an annual rate of 0.06% of the first $125 million of average net assets, 0.04% of the next $125 million of average net assets and 0.03% of average net assets in excess of $250 million subject to a minimum annual fee of $120. For the three months ended March 31, 2004 and 2003, the Company paid administration fees of $44 and $43, respectively, which are included in general and administration expense on the accompanying consolidated statements of operations. The Company has entered into a $50 million commitment to acquire shares in Carbon Capital, Inc. ("Carbon"), a private commercial real estate income opportunity fund managed by the Manager. The period during which the Company may be required to purchase shares under the commitment, expires in July 2004. The Company does not incur any additional management or incentive fees to the Manager as a result of its investment in Carbon. On March 31, 2004, the Company owned 19.8% of the outstanding shares in Carbon. The Company's remaining commitment at March 31, 2004 and December 31, 2003 was $18,685 and $23,034, respectively. REIT Status: The Company has elected to be taxed as a REIT and therefore must comply with the provisions of the Internal Revenue Code with respect thereto. Accordingly, the Company generally will not be subject to Federal income tax to the extent of its distributions to stockholders and as long as certain asset, income and stock ownership tests are met. The Company may, however, be subject to tax at corporate rates or at excise tax rates on net income or capital gains not distributed. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk: Market risk includes the exposure to loss resulting from changes in interest rates, credit curve spreads, foreign currency exchange rates, commodity prices and equity prices. The primary market risks to which the Company is exposed are interest rate risk and credit curve risk. Interest rate risk is highly sensitive to many factors, including governmental, monetary and tax policies, domestic and international economic and political considerations and other factors beyond the control of the Company. Credit curve risk is highly sensitive to the dynamics of the markets for commercial mortgage securities and other loans and securities held by the Company. Excessive supply of these assets combined with reduced demand will cause the market to require a higher yield. This demand for higher yield will cause the market to use a higher spread over the U.S. Treasury securities yield curve, or other benchmark interest rates, to value these assets. Changes in the general level of the U.S. Treasury yield curve can have significant effects on the market value of the Company's portfolio. The majority of the Company's assets are fixed rate securities valued based on a market credit spread to U.S. Treasuries. As U.S. Treasury securities are priced to a higher yield and/or the spread to U.S. Treasuries used to price the Company's assets is increased, the market value of the Company's portfolio may decline. Conversely, as U.S. Treasury securities are priced to a lower yield and/or the spread to U.S. Treasuries used to price the Company's assets is decreased, the market value of the Company's portfolio may increase. Changes in the market value of the Company's portfolio may affect the Company's net income or cash flow directly through their impact on unrealized gains or losses on securities held-for-trading or indirectly through their impact on the Company's ability to borrow. Changes in the level of the U.S. Treasury yield curve can also affect, among other things, the prepayment assumptions used to value certain of the Company's securities and the Company's ability to realize gains from the sale of such assets. In addition, changes in the general level of the London Interbank Offered Rate ("LIBOR") money market rates can affect the Company's net interest income. As of March 31, 2004, all of the Company's liabilities outside of the CDOs are floating rate based on a market spread to LIBOR. As the level of LIBOR increases or decreases, the Company's interest expense will move in the same direction. The Company may utilize a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts, in order to limit the effects of fluctuations in interest rates on its operations. The use of these types of derivatives to hedge interest-earning assets and/or interest-bearing liabilities carries certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of securities and that such losses may exceed the amount invested in such instruments. A hedge may not perform its intended purpose of offsetting losses or increased costs. Moreover, with respect to certain of the instruments used as hedges, the Company is exposed to the risk that the counterparties with which the Company trades may cease making markets and quoting prices in such instruments, which may render the Company unable to enter into an offsetting transaction with respect to an open position. If the Company anticipates that the income from any such hedging transaction will not be qualifying income for REIT income purposes, the Company may conduct part or all of its hedging activities through a to-be-formed corporate subsidiary that is fully subject to Federal corporate income taxation. The profitability of the Company may be adversely affected during any period as a result of changing interest rates. The Company monitors and manages interest rate risk based on a method that takes into consideration the interest rate sensitivity of the Company's assets and liabilities, including its preferred stock. The Company's objective is to acquire assets and match fund the purchase so that interest rate risk associated with financing these assets is reduced or eliminated. The primary risks associated with acquiring and financing these assets are mark to market risk and short-term rate risk. Examples of these financing types include 30-day repurchase agreements and committed borrowing facilities. Certain secured financing arrangements provide for an advance rate based upon a percentage of the market value of the asset being financed. Market movements that cause asset values to decline would require a margin call or a cash payment to maintain the relationship between asset value and amount borrowed. A cash flow based CDO is an example of a secured financing vehicle that does not require a mark to market to establish or maintain a level of financing. When financed assets are subject to a mark to market margin call, the Company carefully monitors the interest rate sensitivity of those assets. The duration of the assets financed which are subject to a mark to market margin call was 0.79 years based on reported GAAP book value as of March 31, 2004. The Company's reported book value incorporates the market value of the Company's interest bearing assets but it does not incorporate the market value of the Company's interest bearing liabilities. The fixed rate interest bearing liabilities and preferred stock will generally reduce the actual interest rate risk of the Company from a pure economic perspective even though changes in the value of these liabilities are not reflected in the Company's book value. The fixed rate liabilities issued in CDO I, CDO II and CDO III reduce the Company's economic duration by approximately 6.67 years. The Series C Preferred Stock reduces the Company's economic duration by approximately 0.87 year. The Company's reported book value is not reduced by these liabilities and therefore is approximately 7.63 years longer than the economic duration. The Company's duration management strategy focuses on the economic risk and maintains economic duration within a band of 3.0 to 5.0 years. At March 31, 2004, economic duration was 3.15 years. Earnings per share is analyzed using the assumptions that interest rates, as defined by the LIBOR curve, increase or decrease and that the yield curves of the LIBOR rate shocks will be parallel to each other. Market value in this scenario is calculated using the assumption that the U.S. Treasury yield curve remains constant even though changes in both long- and short-term interest rates can occur simultaneously. Regarding the table below, all changes in income and value are measured as percentage changes from the respective values calculated in the scenario labeled as "Base Case." The base interest rate scenario assumes interest rates as of March 31, 2004. Actual results could differ significantly from these estimates.
Projected Percentage Change In Earnings Per Share Given LIBOR Movements Change in LIBOR, Projected Change in +/- Basis Points Earnings per Share - ------------------------------- ------------------------- -100 $(0.019) -50 $(0.010) Base Case +50 $0.010 +100 $0.019 +200 $0.038
Credit Risk: The Company's portfolios of commercial real estate assets are subject to a high degree of credit risk. Credit risk is the exposure to loss from loan defaults. Default rates are subject to a wide variety of factors, including, but not limited to, property performance, property management, supply/demand factors, construction trends, consumer behavior, regional economics, interest rates, the strength of the U.S. economy, and other factors beyond the control of the Company. All loans are subject to a certain probability of default. Before acquiring a Controlling Class security, the Company will perform an analysis of the quality of all of the loans proposed. As a result of this analysis, loans with unacceptable risk profiles are either removed from the proposed pool or the Company receives a price adjustment. The Company underwrites its Controlling Class CMBS investments assuming the underlying loans will suffer a certain dollar amount of defaults and these defaults will lead to some level of realized losses. Loss adjusted yields are computed based on these assumptions and applied to each class of security supported by the cash flow on the underlying loans. The most significant variables affecting loss adjusted yields include, but are not limited to, the number of defaults, the severity of loss that occurs subsequent to a default and the timing of the actual loss. The different rating levels of CMBS will react differently to changes in these assumptions. The lowest rated securities (B- or lower) are generally more sensitive to changes in timing of actual losses. The higher rated securities (B or higher) are more sensitive to the severity of losses. The Company generally assumes that all of the principal of a non-rated security and a significant portion, if not all, of CCC and a portion of B- rated securities will not be recoverable over time. The loss adjusted yields of these classes reflect that assumption; therefore, the timing of when the total loss of principal occurs is the most important assumption in determining value. The interest coupon generated by a security will cease when there is a total loss of its principal regardless of whether that principal is paid. Therefore, timing is of paramount importance because the longer the principal balance remains outstanding, the more interest coupon the holder receives; which results in a larger economic return. Alternatively, if principal is lost faster than originally assumed, there is less opportunity to receive interest coupon; which results in a lower or possibly negative return. Additional losses which occur due to greater severity will not have a significant effect as all principal is already assumed to be non-recoverable. If actual principal losses on the underlying loans exceed assumptions, the higher rated securities will be affected more significantly as a loss of principal may not have been assumed. The Company generally assumes that all principal will be recovered by classes rated B or higher. The Company manages credit risk through the underwriting process, establishing loss assumptions and careful monitoring of loan performance. After the securities have been acquired, the Company monitors the performance of the loans, as well as external factors that may affect their value. Factors that indicate a higher loss severity or acceleration of the timing of an expected loss will cause a reduction in the expected yield and therefore reduce the earnings of the Company. Furthermore, the Company may be required to write down a portion of the adjusted purchase price of the affected assets through its consolidated statements of financial condition. For purposes of illustration, a doubling of the losses in the Company's Controlling Class CMBS, without a significant acceleration of those losses, would reduce GAAP income going forward by approximately $0.30 per share of Common Stock per year and cause a significant write down at the time the loss assumption is changed. The amount of the write down depends on several factors, including which securities are most affected at the time of the write down, but is estimated to be in the range of $1.00 to $1.30 per share based on a doubling of expected losses. A significant acceleration of the timing of these losses would cause the Company's net income to decrease. The increase in these estimates from December 31, 2003 is a result of the Company's purchase of the below investment grade portion of two additional Controlling Class CMBS trusts. The Company's exposure to a write down is mitigated by the fact that most of these assets are financed on a non-recourse basis in the Company's CDOs, where a significant portion of the risk of loss is transferred to the CDO bondholders. As of March 31, 2004, securities with a total market value of $1,166,411 are collateralizing the CDO borrowings of $1,057,522; therefore, the Company's residual interest in the three CDOs is $108,889 ($2.15 per share). In accordance with GAAP, The CDO borrowings are not marked to market even though their economic value will change in response to changes in interest rates and/or credit spreads. Interest rate swap agreements contain an element of risk in the event that the counterparties to the agreements do not perform their obligations under the agreements. The Company minimizes its risk exposure by entering into agreements with parties rated at least A or better by Standard & Poor's Rating Services. Furthermore, the Company has interest rate swap agreements established with several different counterparties in order to reduce the risk of credit exposure to any one counterparty. Management does not expect any counterparty to default on their obligations. Asset and Liability Management: Asset and liability management is concerned with the timing and magnitude of the repricing and/or maturing of assets and liabilities. It is the Company's objective to attempt to control risks associated with interest rate movements. In general, management's strategy is to match the term of the Company's liabilities as closely as possible with the expected holding period of the Company's assets. This is less important for those assets in the Company's portfolio considered liquid as there is a very stable market for the financing of these securities. Other methods for evaluating interest rate risk, such as interest rate sensitivity "gap" (defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period), are used but are considered of lesser significance in the daily management of the Company's portfolio. Management considers this relationship when reviewing the Company's hedging strategies. Because different types of assets and liabilities with the same or similar maturities react differently to changes in overall market rates or conditions, changes in interest rates may affect the Company's net interest income positively or negatively even if the Company were to be perfectly matched in each maturity category. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's reports filed or submitted under the Exchange Act. (b) Changes in Internal Controls. There has been no change in the Company's internal control over financial reporting during the quarter ended March 31, 2004 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting. Part II - OTHER INFORMATION Item 1. Legal Proceedings At March 31, 2004 there were no pending legal proceedings of which the Company was a defendant or of which any of its property was subject. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Total Number of Shares Purchased as Part of Maximum Number of Shares Total Number of Average Price Publicly Announced Plans that May Yet Be Purchased Shares Purchased Paid per Share or Programs Under the Plans or Programs ------------------------------------------------------------------------------------------- January 1, 2004 through - - - - January 31, 2004 February 1, 2004 through February 29, 2004 - - - - March 1, 2004 through March 31, 2004 1,757,257(1) 25.00 1,757,257 - ---------------------------------------------------------------- Total 1,757,257 25.00 1,757,257 ================================================================
(1) At the end of the first quarter of 2004, the Board of Directors approved the Company's decision to redeem its Series B Preferred Stock. During the second quarter, the Company will incur a one-time charge to income available to common stockholders of $10,508, which represents the difference between the Series B Preferred Stock book value of $19 per share and its $25 redemption price. The Series B Preferred Stock was redeemed on May 6, 2004. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information On April 6, 2004, the Board of Directors approved the Company's decision to redeem its Series B Preferred Stock, $0.001 par value per share ("Series B Preferred Stock"), which redemption closed on May 6, 2004. The Company initially considered the decision to redeem as a recharacterization of the Series B Preferred Stock from conditionally redeemable to mandatorily redeemable, and recorded the cost to retire the Series B Preferred Stock in excess of its carrying value of $10,508,000, in the Consolidated Statements of Operations for the three months ended March 31, 2004, as included in the Company's Form 8-K dated May 7, 2004. At the time of the Company's May 7, 2004 8-K, the Company considered after consultation with its independent auditors Deloitte & Touche LLP ("D&T") the conversion option included in the Series B Preferred Stock to be nonsubstantive, as the redemption price of the Series B Preferred Stock of $25 per share was substantially higher than the approximately $16.24 per share shareholders would receive if the Series B Preferred Stock were converted into Common Stock of the Company on the date of redemption. Subsequent to May 7, 2004, the Company in consultation with D&T determined that the conversion option should be evaluated only at the original issuance of the Series B Preferred Stock, at which time the conversion feature was substantive. Therefore, the cost to retire the Series B Preferred Stock will be recorded in the second quarter of 2004 instead of the first quarter of 2004, as previously reported. As a result for the three months ended March 31, 2004 the Company's net income available to common stockholders per share is $9,843 ($0.20 per share) versus a net loss to common stockholders of $665 ($0.01 per share) as previously reported. Item 6. Exhibits and Reports on Form 8-K Exhibits 10.1 Amended and Restated Investment Advisory Agreement, dated as of March 11, 2004, between the Registrant and BlackRock Financial Management, Inc. 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32.1 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer Reports on Form 8-K On February 4, 2004, the Company filed a Current Report on Form 8-K to report under Item 5 the Company's earnings for the quarter and full year ended December 31, 2003. On March 18, 2004, the Company filed a Current Report on Form 8-K to report under Item 5 the pricing of $372,456,000 of non-recourse debt offered through Anthracite CDO III Ltd. and Anthracite CDO III Corp. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ANTHRACITE CAPITAL, INC. Dated: May 10, 2004 By: /s/ Christopher A. Milner -------------------------------------------- Name: Christopher A. Milner Title: President and Chief Executive Officer (duly authorized representative) Dated: May 10, 2004 By: /s/ Richard M. Shea ------------------------------------------- Name: Richard M. Shea Title: Chief Operating Officer and Chief Financial Officer EX-10 2 anth_10.txt EXHIBIT 10.1 Exhibit 10.1 AMENDED AND RESTATED INVESTMENT ADVISORY AGREEMENT AGREEMENT, dated as of March 11, 2004, between Anthracite Capital, Inc. (the "Company"), a Maryland corporation, and BlackRock Financial Management, Inc. (the "Manager"), a Delaware corporation. WHEREAS, the Company is a real estate finance company that generates income based on the spread between the interest income on its mortgage loans and securities investments and the interest expense from borrowings used to finance its investments. The Company seeks to earn high returns on a risk-adjusted basis to support a consistent quarterly dividend. The Company expects to qualify for the tax benefits accorded by Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, the Company desires to retain the Manager to acquire, sell and otherwise manage the investments of the Company and to perform certain supervisory services for the Company in the manner and on the terms set forth herein; WHEREAS, the Company and the Manager entered into that certain Amended and Restated Investment Advisory Agreement, dated as of March 27, 2003 (the "Prior Agreement"); WHEREAS, the Manager and the Company desire to amend and restate the Prior Agreement in its entirety as set forth below; and WHEREAS, this Agreement amends and restates the Prior Agreement in all respects. NOW THEREFORE, in consideration of the mutual promises and agreements herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, it is agreed by and between the parties hereto as follows: 1. Certain Definitions (a) "Affiliate" means, when used with reference to a specified person, (i) any person that directly or indirectly controls or is controlled by or is under common control with the specified person, (ii) any person that is an officer of, partner in or trustee of, or serves in a similar capacity with respect to, the specified person or of which the specified person is an officer, partner or trustee, or with respect to which the specified person serves in a similar capacity and (iii) any person that, directly or indirectly, is the beneficial owner of 5% or more of any class of equity securities of the specified person or of which the specified person is directly or indirectly the owner of 5% or more of any class of equity securities; provided, however, that neither the Company nor any of its controlled Affiliates will be treated as an Affiliate of the Manager or any of its Affiliates. (b) "Agreement" means this Amended and Restated Investment Advisory Agreement, as amended from time to time. (c) "Board of Directors" means the Board of Directors of the Company. (d) "GAAP" means accounting principles generally accepted in the United States of America. (e) "Mortgage-Backed Securities" means debt obligations (bonds) that are secured by Mortgage Loans or mortgage certificates. (f) "Mortgage Loans" means multifamily, residential and commercial term loans secured by real property. (g) "Quarterly Average Total Stockholders' Equity" means the average of (i) the Total Stockholders' Equity at the end of the quarter preceding the applicable quarter and (ii) the Total Stockholders' Equity at the end of the applicable quarter, as reported in the Company's publicly filed financial statements. (h) "REIT Provisions of the Code" means Sections 856 through 860 of the Code. (i) "Ten-Year U.S. Treasury Rate" means the arithmetic average of the weekly average yield to maturity for actively traded current coupon U.S. Treasury fixed interest rate securities (adjusted to constant maturities of ten years) published by the Federal Reserve Board during a quarter, or if such rate is not published by the Federal Reserve Board, any Federal Reserve Bank or agency or department of the federal government selected by the Company. If the Company determines in good faith that the Ten-Year U.S. Treasury Rate cannot be calculated as provided above, then the rate shall be the arithmetic average of the per annum average yields to maturities, based upon closing asked prices on each business day during a quarter, for each actively traded marketable U.S. Treasury fixed interest rate security with a final maturity date not less than eight nor more than twelve years from the date of the closing asked prices as chosen and quoted for each business day in each such quarter in New York City by at least three recognized dealers in U.S. government securities selected by the Company. (j) "Unaffiliated Directors" shall mean those directors serving on the Board of Directors who (a) do not own greater than a de minimis interest in the Manager or any of its Affiliates or (b) within the last two years, have not directly or indirectly (i) been an officer of or employed by the Company or the Manager or any of their respective Affiliates, (ii) been a director of the Manager or any of its Affiliates, (iii) performed more than a de minimis amount of services for the Manager or any of its Affiliates or (iv) had any material business or professional relationship with the Manager or any of its Affiliates. 2. In General The Manager agrees, as more fully set forth herein, to act as investment adviser to the Company with respect to the investment of the Company's assets and to supervise and arrange the purchase of securities and loans for and the sale of securities and loans held in the investment portfolio of the Company. The Manager shall manage the business affairs of the Company in conformity with the policies that are approved and monitored by the Board of Directors. The Manager shall prepare regular reports for the Board of Directors that will review the Company's acquisitions of assets, portfolio composition and characteristics, credit quality, performance and compliance with the policies approved by the Board of Directors. The Manager shall allocate investment and disposition opportunities in accordance with policies and procedures the Manager considers fair and equitable, including, without limitation, such considerations as investment objectives, restrictions and time horizons, availability of cash and the amount of existing holdings. 3. Duties and Obligations of the Manager with Respect to Investment of Assets of the Company (a) Subject to the succeeding provisions of this Section and subject to the direction and control of the Board of Directors, the Manager will be responsible for the day-to-day operations of the Company and will perform (or cause to be performed) such services and activities relating to the assets and operations of the Company as may be appropriate, including, but not limited to: (i) providing a complete program of investing and reinvesting the capital and assets of the Company in pursuit of the Company's investment objectives and in accordance with the policies adopted by the Board of Directors from time to time; (ii) serving as the Company's consultant with respect to formulation of investment criteria and preparation of policy guidelines by the Board of Directors; (iii) assisting the Company in developing criteria for mortgage asset purchase commitments that are specifically tailored to the Company's investment objectives and making available to the Company the Company's knowledge and experience with respect to mortgage assets and other real estate related assets; (iv) counseling the Company in connection with policy decisions made by the Board of Directors; (v) evaluating and recommending hedging strategies to the Board of Directors in accordance with hedging guidelines and policies adopted by the Board of Directors, and engaging in hedging activities on behalf of the Company, consistent with the Company's status as a REIT; (vi) maintaining the Company's exemption from regulation as an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"); (vii) representing the Company in connection with the purchase and commitment to purchase or sell mortgage assets, including the accumulation of Mortgage Loans for securitization and the incurrence of debt; (viii) arranging for the issuance of Mortgage-Backed Securities from pools of Mortgage Loans owned by the Company; (ix) furnishing reports and statistical and economic research to the Company regarding the Company's activities and the services performed for the Company by the Manager; (x) monitoring and providing to the Board of Directors on an ongoing basis price information and other data, obtained from certain nationally recognized dealers that maintain markets in mortgage assets identified by the Board of Directors from time to time, and providing data and advice to the Board of Directors in connection with the identification of such dealers; (xi) administering the day-to-day operations of the Company and performing and supervising the performance of such other administrative functions necessary in the management of the Company as may be agreed upon by the Manager and the Board of Directors; (xii) contracting, as necessary, with third parties for master servicing and special servicing of assets acquired by the Company; (xiii) communicating on behalf of the Company with the holders of the equity and debt securities of the Company as required to satisfy the reporting and other requirements of any governmental bodies or agencies and to maintain effective relations with such holders; (xiv) causing the Company to qualify to do business in all applicable jurisdictions; (xv) causing the Company to retain qualified accountants and legal counsel to assist in developing appropriate accounting procedures, compliance procedures and testing systems and to conduct quarterly compliance reviews; (xvi) assisting the Company in complying with all regulatory requirements applicable to the Company in respect of its business activities, including preparing or causing to be prepared all financial statements required under applicable regulations and contractual undertakings and all reports and documents, if any, required under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (xvii) assisting the Company in making all required tax filings and reports and maintaining its status as a REIT, including soliciting stockholders for required information to the extent provided in the REIT Provisions of the Code; (xviii) performing such other services as may be required from time to time for management and other activities relating to the assets of the Company as the Board of Directors shall reasonably request or the Manager shall deem appropriate under the particular circumstances; and (xix) using all reasonable efforts to cause the Company to comply with all applicable laws. (b) In the performance of its duties under this Agreement, the Manager shall at all times use all reasonable efforts to conform to and act in accordance with any requirements imposed by (i) the status of the Company as a REIT as defined in the REIT Provisions of the Code; (ii) the Company's status as an entity exempt from regulation under the Investment Company Act; (iii) any other applicable provision of law; (iv) the provisions of the Articles of Incorporation and By-Laws of the Company, as such documents are amended from time to time; (v) the investment objectives and policies of the Company as set forth in its Registration Statement on Form S-11; and (vi) any policies and determinations of the Board of Directors. (c) The Manager will bear all costs and expenses of the Manager's officers and employees and any overhead incurred in connection with the Manager's duties hereunder, the cost of office space and equipment required for performance of the Manager's duties and shall bear the costs of any salaries or directors' fees of any officers or directors of the Company who are Affiliates of the Manager, except that the Board of Directors may approve reimbursement to the Manager of the Company's pro rata portion of the salaries, bonuses, health insurance, retirement benefits and all similar employment costs for the time spent on Company operations and administration (other than the provision of services covered by Section 3(a) above) of all personnel employed by the Manager who devote substantial time to Company operations and administration or the operations and administration of other companies advised by the Manager; provided that the Manager shall not be expected to bear the following expenses: issuance and transaction costs incident to the acquisition, disposition and financing of investments, legal, accounting and auditing fees and expenses, the compensation and expenses of the Company's Unaffiliated Directors, the costs of printing and mailing proxies and reports to stockholders, costs incurred by employees of the Manager for travel on behalf of the Company, costs associated with any computer software or hardware that is used solely for the Company, costs to obtain liability insurance to indemnify the Company's directors and officers, the Manager and its employees and directors and any underwriters, and the compensation and expenses of the Company's custodian and transfer agent, if any. The Company will also be required to pay all expenses incurred in connection with due diligence, the accumulation of Mortgage Loans, the master and special servicing of Mortgage Loans, the issuance and administration of Mortgage-Backed Securities from pools of Mortgage Loans or otherwise, the raising of capital, the incurrence of debt, the acquisition of assets, interest expenses, taxes and license fees, non-cash costs, litigation, the base and incentive management fee and extraordinary or non-recurring expenses. (d) The Manager shall give the Company the benefit of its best judgment and effort in rendering services hereunder. (e) Nothing in this Agreement shall prevent the Manager or any partner, officer, employee or other Affiliate of the Manager from acting as investment adviser for any other person, firm or corporation, or from engaging in any other lawful activity, and shall not in any way limit or restrict the Manager or any of its shareholders, officers, employees or agents from buying, selling or trading any securities for its or their own accounts or for the accounts of others for whom it or they may be acting; provided, however that the Manager will not undertake activities which, in its judgment, will substantially and adversely affect the performance of its obligations under this Agreement. (f) The Manager shall maintain an appropriate books of accounts and records relating to services performed under this Agreement, and such books of accounts and records shall be accessible for inspection by representatives of the Company or any of its subsidiaries at any time during normal business hours. The Manager shall keep confidential any and all information obtained in connection with the services rendered under this Agreement and shall not disclose any such information to nonaffiliated third parties except with the prior written consent of the Board of Directors or as may be required by law or order of a court or other tribunal having requisite jurisdiction. (g) The Manager shall require each seller or transferor of assets to be acquired by the Company to make such representations and warranties regarding such assets as may be directed by the Board of Directors, or, if no such directions are given, as may, in the judgment of the Manager, be necessary and appropriate. In addition, the Manager shall take such other action as may be directed by the Board of Directors, or, if no such directions are given, as it deems necessary or appropriate with regard to the protection of the Company's assets. 4. Portfolio Transactions and Brokerage The Manager is authorized, for the purchase and sale of the Company's assets, to employ such securities dealers as may, in the judgment of the Manager, implement the policy of the Company to obtain the best net results taking into account such factors as price, including dealer spread, the size, type and difficulty of the transaction involved, the firm's general execution and operational facilities and the firm's risk in positioning the securities involved. Consistent with this policy, the Manager is authorized to direct the execution of the Company's portfolio transactions to dealers and brokers furnishing statistical information or research deemed by the Manager to be useful or valuable to the performance of the Manager's investment advisory functions for the Company. 5. Compensation of the Manager (a) The Company agrees to pay to the Manager and the Manager agrees to accept as full compensation for all services rendered by the Manager as such, (i) a quarterly base management fee calculated as 2% of the Quarterly Average Total Stockholders' Equity for the applicable quarter and (ii) incentive compensation in an amount equal to the product of 25% of the dollar amount by which: (1) net income of the Company (before incentive fee) determined in accordance with GAAP, plus $534,623.47 (the "Fixed Amount") for each fiscal quarter for which a calculation is made under this Section (provided, that, if this Agreement is not renewed pursuant to Section 7 hereof or, in the event this Agreement is so renewed, if the terms of this Section 5(a)(ii)(1) are amended to modify the Fixed Amount, then the Fixed Amounts which would have been payable through and including the quarter ended December 31, 2005 shall be included in the final calculation made pursuant to this Section 5(a)(ii)(1) prior to giving effect to any such non-renewal or modification; provided, further, that the Fixed Amount for the quarter ended December 31, 2005 shall be deemed to be $446,141.80) exceeds (2) an amount equal to (A) the weighted average of the price per share of the Common Stock in the initial public offering and the prices per share of Common Stock in any secondary offerings of Common Stock by the Company, including, without limitation, issuances of Common Stock pursuant to the Company's Dividend Reinvestment and Stock Purchase Plan, private placements, public offerings and exercises of options granted under the Company's 1998 Stock Option Plan, multiplied by (B) the greater of: (i) 8.5% or (ii) the Ten-Year U.S. Treasury Rate plus 4.0% per annum (expressed as a quarterly percentage) multiplied by (C) the weighted average number of shares of Common Stock outstanding during such quarter. Calculation of the incentive fee payable to the Manager shall be calculated using a rolling four-quarter high watermark (the "Watermark"). In determining the Watermark, the Manager shall calculate the incentive fee based upon the current and prior three quarters' net income (the "Yearly Incentive Fee"). The Company shall pay the Manager an incentive fee in the current quarter if the Yearly Incentive Fee is greater than the amount the Company paid to the Manager in the prior three quarters cumulatively. Calculation of the incentive fee shall be based on GAAP and adjusted to exclude special one-time events pursuant to changes in GAAP accounting pronouncements, or other one-time events, after discussion between the Manager and the Unaffiliated Directors. For any period less than a fiscal quarter during which this Agreement is in effect, the fee shall be prorated according to the proportion which such period bears to a full quarter of 90, 91 or 92 days, as the case may be. (c) The management fees earned under Section 5(a)(i) will be payable in arrears. The Manager shall compute the compensation payable under Section 5(a) of this Agreement within 45 days after the end of each calendar quarter. A copy of the computations made by the Manager to calculate its compensation shall thereafter promptly be delivered to the Board of Directors and, upon such delivery, payment of the compensation earned under Section 5(a) of this Agreement shown therein shall be due and payable within 60 days after the end of such fiscal quarter. If requested by the Manager, the Company will make advance payments of the base management fee in Section 5(a)(i) above as often as semi-monthly at the rate of 75% of such fee estimated by the Manager. (d) The base management fee is intended to compensate the Manager for its costs in providing management services to the Company. The Board of Directors may adjust the base management fee with the consent of the Manager in the future if necessary to align the fee more closely with the costs of such services. 6. Indemnity (a) The Company hereby agrees to indemnify the Manager and each of the Manager's shareholders, officers, employees, agents, associates and controlling persons and the shareholders, officers, employees and agents thereof (including any individual who serves at the Manager's request as director, officer, partner, trustee or the like of another corporation) (each such person being an "indemnitee") against any liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees (all as provided in accordance with applicable corporate law) reasonably incurred by such indemnitee in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which he may be or may have been involved as a party or otherwise or with which he may be or may have been threatened, while acting in any capacity set forth above in this Section 6 or thereafter by reason of his having acted in any such capacity, except with respect to any matter as to which he shall have been adjudicated not to have acted in good faith in the reasonable belief that his action was in the best interests of the Company and furthermore, in the case of any criminal proceeding, so long as he had no reasonable cause to believe that the conduct was unlawful; provided, however, that (1) no indemnitee shall be indemnified hereunder against any liability to the Company or its stockholders or any expense of such indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence or (iv) reckless disregard of the duties involved in the conduct of his position (the conduct referred to in such clauses (i) through (iv) being sometimes referred to herein as "disabling conduct"), (2) as to any matter disposed of by settlement or a compromise payment by such indemnitee, pursuant to a consent decree or otherwise, no indemnification either for such payment or for any other expenses shall be provided unless there has been a determination that such settlement or compromise is in the best interests of the Company and that such indemnitee appears to have acted in good faith in the reasonable belief that his action was in the best interests of the Company and did not involve disabling conduct by such indemnitee and (3) with respect to any action, suit or other proceeding voluntarily prosecuted by any indemnitee as plaintiff, indemnification shall be mandatory only if the prosecution of such action, suit or other proceeding by such indemnitee was authorized by a majority of the Board of Directors. (b) The Company shall make advance payments in connection with the expenses of defending any action with respect to which indemnification might be sought hereunder if the Company receives a written affirmation of the indemnitee's good faith belief that the standard of conduct necessary for indemnification has been met and a written undertaking to reimburse the Company unless it is subsequently determined that he is entitled to such indemnification and if a majority of the Board of Directors determine that the facts then known to them would not preclude indemnification. In addition, at least one of the following conditions must be met: (A) the indemnitee shall provide a security for his undertaking, (B) the Company shall be insured against losses arising by reason of any lawful advances or (C) a majority of a quorum consisting of directors of the Company who are neither affiliated persons of the Company nor parties to the proceeding ("Disinterested Non-Party Directors") or an independent legal counsel in a written opinion, shall determine, based on a review of readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the indemnitee ultimately will be found entitled to indemnification. (c) All determinations with respect to indemnification hereunder shall be made (1) by a final decision on the merits by a court or other body before whom the proceeding was brought that such indemnitee is not liable by reason of disabling conduct or (2) in the absence of such a decision, by (i) a majority vote of a quorum of the Disinterested Non-Party Directors of the Company or (ii) if a majority vote of such quorum so directs, independent legal counsel in a written opinion. All determinations that advance payments in connection with the expense of defending any proceeding shall be authorized shall be made in accordance with the immediately preceding clause (2). (d) The rights accruing to any indemnitee under these provisions shall not exclude any other right to which he may be lawfully entitled. 7. Duration and Termination This Agreement shall commence on the date hereof for an initial term expiring on March 31, 2005. Thereafter, successive extensions, each for a period not to exceed one year, may be made by agreement between the Company and the Manager, with the approval of a majority of the Unaffiliated Directors until terminated or assigned under the provisions of this Section 7 or Section 9, as the case may be, of this Agreement. Upon termination of this Agreement by the Company, the Company is obligated to pay the Manager a termination fee that will be determined by independent appraisal other than in the case of termination by the Company for cause (as described below). The Company may terminate, or decline to renew the term of, this Agreement without cause at any time upon 60 days' written notice by a majority vote of the Unaffiliated Directors; provided that the Company shall pay the Manager a termination fee determined by independent appraisal of the value of this Agreement. Such appraisal is to be conducted by a nationally recognized appraisal firm mutually agreed upon by the Company and the Manager. If the Company and the Manager are unable to agree upon an appraisal firm, then each of the Company and the Manager is to choose an independent appraisal firm to conduct an appraisal. In such event, (i) if the appraisals prepared by the two appraisers so selected are the same or differ by an amount that does not exceed 20% of the higher of the two appraisals, the termination fee is to be deemed to be the average of the appraisals as prepared by each party's chosen appraiser and (ii) if these two appraisals differ by more than 20% of such higher amount, the two appraisers together are to select a third appraisal firm to conduct an appraisal. If the two appraisers are unable to agree as to the identity of such third appraiser, either of the Manager and the Company may request that the American Arbitration Association ("AAA") select the third appraiser. The termination fee then is to be the amount determined by such third appraiser, but in no event shall the termination fee be less than the lower of the two initial appraisals or more than the higher of such two initial appraisals. Each party shall pay the costs of the appraisers chosen by it, and each party shall pay one half of the costs of the third appraiser. Any appraisal hereunder shall be performed no later than 45 days following selection of the appraiser or appraisers. At the option of the Company, this Agreement, or any extension hereof, shall be and become terminated with cause upon 60 days' prior written notice of termination from the Board of Directors to the Manager, without payment of any termination fee, if any of the following events occur: (i) if the Manager commits a material breach of any provision of this Agreement (including any material breach of the provisions contained in Section 3(a) and (b) herein) and, after notice of such violation, shall not cure such violation within 30 days; or (ii) there is entered an order for relief or similar decree or order with respect to the Manager by a court having competent jurisdiction in an involuntary case under the federal bankruptcy laws as now or hereafter constituted or under any applicable federal or state bankruptcy, insolvency or other similar laws; or the Manager (A) ceases, or admits in writing its inability, to pay its debts as they become due and payable, or makes a general assignment for the benefit of, or enters into any composition or arrangement with, creditors; (B) applies for, or consents (by admission of material allegations of a petition or otherwise) to the appointment of a receiver, trustee, assignee, custodian, liquidator or sequestrator (or other similar official) of the Manager or of any substantial part of its properties or assets, or authorizes such an application or consent, or proceedings seeking such appointment are commenced without such authorization, consent or application against the Manager and continue undismissed for 30 days; or (C) authorizes or files a voluntary petition in bankruptcy, or applies for or consents (by admission of material allegations of a petition or otherwise) to the application of any bankruptcy, reorganization, arrangement, readjustment of debt, insolvency, dissolution, liquidation or other similar law of any jurisdiction, or authorizes such application or consent, of proceedings to such end are instituted against application or consent, or proceedings to such end are instituted against the Manager without such authorization, application or consent and are approved as properly instituted and remain undismissed for 30 days or result in adjudication of bankruptcy or insolvency; or (D) permits or suffers all or any substantial part of its properties or assets to be sequestered or attached by court order and the order remains undismissed for 30 days. The Manager agrees that if any of the events specified above occur, it will give prompt written notice thereof to the Board of Directors after the occurrence of such event. Upon written request from the Company, the Manager shall prepare, execute and deliver to a successor manager any and all documents and other instruments, place in such successor manager's possession all files and do or cause to be done all other acts or things necessary or appropriate to effect the purposes of such notice of termination, to the successor manager at the Manager's sole expense; provided, however, that the Manager shall be entitled to retain copies of all such documents and other instruments as it may be required by federal or state law. The Manager agrees to cooperate with Company and such successor manager in effecting the termination of the Manager's responsibilities and rights under this Agreement. 8. Action Upon Termination. From and after the effective date of termination of this Agreement pursuant to Section 7 hereof, the Manager shall not be entitled to compensation for further services under this Agreement, but shall be paid all compensation accruing to the date of termination and, if such termination is not for cause, the termination fee determined pursuant to Section 7. The Manager shall forthwith upon such termination deliver to the Board of Directors all funds and property, documents, corporate records, reports and software of the Company or any subsidiary of the Company then in the custody of Manager; provided, however, that the Manager shall be entitled to retain copies of all such documents and other instruments as it may be required by federal or state law. 9. Assignment This Agreement may not be assigned without the prior written consent of all the parties to this Agreement. For the foregoing purposes, "assigned" shall have the meaning ascribed to it under the Investment Advisers Act of 1940, as amended and the rules promulgated thereunder. 10. Notices Any notice under this Agreement shall be in writing to the other party at such address as the other party may designate from time to time for the receipt of such notice and shall be deemed to be received on the earlier of the date actually received or on the fourth day after the postmark if such notice is mailed first class postage prepaid. 11. Governing Law This Agreement shall be construed in accordance with the laws of the State of New York for contracts to be performed entirely therein without reference to choice of law principles thereof. 12. Amendments This Agreement shall not be amended, changed, modified, terminated or discharged in whole or in part except by an instrument in writing signed by all parties hereto, or their respective successors or assigns, or otherwise as provided herein. 13. Severability The invalidity or unenforceability of any provision of this Agreement shall not affect the validity of any other provision, and all other provisions shall remain in full force and effect. 14. Entire Agreement This instrument contains the entire agreement between the parties as to the rights granted and the obligations assumed in this instrument. 15. Counterparts This Agreement may be signed by the parties in counterparts which together shall constitute one and the same agreement among the parties. 16. Manager Brochure The Company hereby acknowledges that it has received from the Manager a copy of the Manager's Form ADV, Part II, at least forty-eight hours prior to entering into this Agreement. IN WITNESS WHEREOF, the parties hereto have caused the foregoing instrument to be executed by their duly authorized officers, all as of the date and the year first above written. ANTHRACITE CAPITAL, INC. By: ------------------------------- Name: Chris A. Milner Title: President and Chief Executive Officer BLACKROCK FINANCIAL MANAGEMENT, INC. By: ------------------------------- Name: Laurence D. Fink Title: Chairman and Chief Executive Officer EX-31 3 anthracite31-1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Christopher A. Milner, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Anthracite Capital, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Paragraph omitted in accordance with SEC Release Nos. 33-8238 and 34-47986]; and c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2004 /s/ Christopher A. Milner ------------------------- Name: Christopher A. Milner Title: President and Chief Executive Officer EX-31 4 anthracite31-2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Richard M. Shea, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Anthracite Capital, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Paragraph omitted in accordance with SEC Release Nos. 33-8238 and 34-47986]; and c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2004 /s/ Richard M. Shea ------------------------------------------ Name: Richard M. Shea Title: Chief Operating Officer and Chief Financial Officer EX-32 5 anthracite32_1.txt EXHIBIT 32.1 Exhibit 32.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report on Form 10-Q of Anthracite Capital, Inc. (the "Company") for the quarter ending March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Christopher A. Milner, as Chief Executive Officer of the Company, and Richard M. Shea, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Christopher A. Milner - -------------------------------- Name: Christopher A. Milner Title: Chief Executive Officer Date: May 10, 2004 /s/ Richard M. Shea - -------------------------------- Name: Richard M. Shea Title: Chief Financial Officer Date: May 10, 2004 This certification accompanies the Report pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss. 18 of the Securities Exchange Act of 1934, as amended. A signed original of this certification required by ss. 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----