UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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Date of Report (Date of Earliest Event Reported):
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February 24, 2015
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RAIT Financial Trust
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(Exact name of registrant as specified in its charter)
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Maryland
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1-14760
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23-2919819
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(State or other jurisdiction
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_____________
(Commission
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(I.R.S. Employer
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of incorporation)
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File Number)
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Identification No.)
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2929 Arch St., 17th Floor, Philadelphia, Pennsylvania
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19104
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code:
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(215) 243-9000
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Not Applicable
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Former name or former address, if changed since last report
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any
of the following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 7.01 Regulation FD Disclosure.
On February 24, 2015, RAIT Financial Trust held its earnings conference call for the three months and year ended December 31, 2014, a transcript of which is furnished with this report as an exhibit to Form 8-K. The information in this Current Report, including the exhibit hereto, is being furnished and shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. The information in this Current Report shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits.
The exhibit furnished as part of this Current Report on Form 8-K is identified in the Exhibit Index immediately following the signature page of this report. Such Exhibit Index is incorporated herein by reference.
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 hereunto duly authorized.
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RAIT Financial Trust
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March 3, 2015
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By:
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/s/ James J. Sebra
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Name: James J. Sebra
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Title: Chief Financial Officer and Treasurer
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Exhibit Index
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Exhibit No.
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Description
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99.1
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Transcript
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The following is a transcript of the earnings conference call of RAIT Financial Trust, or
RAIT, held on February 24, 2015.
DISCLAIMER
The information contained in this transcript is a textual representation of RAITs conference call
and while efforts were made to provide an accurate transcription, there may be material errors,
omissions or inaccuracies in the reporting of the substance of the conference calls. In no way does
RAIT assume any responsibility for any investment or other decisions made based upon the
information provided on in this event transcript. Users are advised to review RAITs conference
call itself and RAITs SEC filings before making any investment or other decisions.
CORPORATE PARTICIPANTS
Andres Viroslav RAIT Financial Trust Senior Managing Director-Corporate Communications
Scott Schaeffer RAIT Financial Trust CEO
Jim Sebra RAIT Financial Trust CFO
CONFERENCE CALL PARTICIPANTS
Steven DeLaney JMP Securities Analyst
Jason Stewart Compass Point Research & Trading Analyst
Jade Rahmani Keefe, Bruyette & Woods, Inc. Analyst
Rich Eckert MLV & Co. Analyst
Matthew Stolzer Pyrrho Capital Management Analyst
PRESENTATION
Operator
Good day ladies and gentlemen and welcome to the fourth quarter 2014 RAIT Financial Trust
earnings conference call. My name is Katina and I will be you coordinator for today.
(Operator Instructions)
As a reminder, this conference is being recorded for replay purposes. I would now like to turn the
presentation over to your host for todays call Mr. Andres Viroslav, please proceed.
Andres Viroslav - RAIT Financial Trust VP & Director of Corporate Communications
Thank you, Katina and good morning to everyone. Thank you for joining us today to review RAIT
Financial Trust fourth-quarter and FY 2014 financial results. On the call with me today is Scott
Schaeffer, Chief Executive Officer and Jim Sebra, RAITs Chief Financial Officer.
This mornings call is being webcast on our website www.RAIT.com. There will be a replay of the
call available via webcast on our website and telephonically beginning at approximately 1 PM
Eastern Time today. The dial in for the replay is 888-286-8010 with a confirmation code of
14817520.
Before I turn the call over to Scott, I would like to remind everyone that there may be forward
looking statements made in this call. These forward looking statements reflect RAITs current views
with respect to future events and financial performance. Actual results could differ substantially
and materially from what RAIT has projected. Such statements are made in good faith pursuant to the
Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Please refer to
RAITs press release and filings with the SEC for factors that could affect accuracy of our
expectations or cause our future results to differ materially from those expectations.
Participants may discuss Non-GAAP financial measures in this call. A copy of RAITs press release
containing financial information, other statistical information, and a reconciliation of Non-GAAP
financial measures to the most directly comparable GAAP financial measure is attached to RAITs
most recent current report on form 8-K available at RAITs website at www.rait.com under investor
relations. RAITs other SEC filings are also available through this link.
RAIT does not undertake to update forward looking statements on this call or with respect to
matters described herein except as may be required by law. Now I would like to turn the call over
to RAITs Chief Executive Officer, Scott Schaeffer. Scott?
Scott Schaeffer - RAIT Financial Trust CEO
Thank you Andres, good morning everyone. RAIT is a hybrid REIT with a multi-strategy approach
to investing based on commercial real estate lending along with direct ownership and management of
commercial real estate properties. This approach delivers diversification to the portfolio blending
the higher-yielding lending business with the stability and recurring income stream from owning and
managing properties. Our investing approach is supported by our platform which is now comprised of
over 725 employees managing over $4.3 billion of commercial real estate assets.
With most of the challenges faced in 2014 now behind us, we are looking forward to continued growth
in all aspects of our business in 2015. We have exited the remaining Taberna business line by
selling our collateral management contracts in the fourth quarter and our residual Taberna bond
holdings early in the first quarter of 2015. Due to the sale of these assets, we have
deconsolidated the two remaining Taberna CDOs from RAITs balance sheet. This deconsolidation was
the primary driver of the non-cash GAAP loss recorded in the fourth quarter and should result in a
more transparent and less volatile financial presentation going forward.
Let me talk about the results. CAD for the fourth quarter was $0.26 per share and $0.71 for the
year, a 14% increase over 2013 CAD when adding back the one-time cost of the SEC settlement.
During 2014 we experienced progress in our core business lines. In our lending business, gross loan
originations were $983 million, a 63% increase over 2013 levels.
As we anticipated, competition increased in the fixed rate lending space which when combined with
market volatility resulted in lower spreads and lower gain on sale profits on an individual loan
basis. Loan volumes in this business line were up modestly over 2013 to $459 million. We expect
increased volume in 2015 which should mitigate the current lower spread environment. Even with the
increase in competition, yields within this business remain very attractive at more than 30% during
2014.
We made solid progress in our floating-rate bridge lending program in 2014. Originations increased
over 270% to $505 million when compared to 2013. Unlike the fixed rate originate and sell program,
these loans are held on our balance sheet and generate recurring monthly interest income. The new
floating-rate bridge loans are financed short-term on our warehouse facilities until we aggregate a
sufficient size pool of loans which are then financed with long-term, non-recourse match funded
liabilities. During 2014 RAIT sponsored two floating rate CMBS securitizations issuing $337 million
of investment grade notes collateralized by $415 million of loans. We retained a $78 million
subordinate investment in these 2 securitizations which we expect will deliver a high teens return
over the life of the collateral. We expect to increase the volume of our floating-rate lending
business in 2015 and are working to close our fourth floating rate securitization in the second
quarter.
In our property portfolio, increases in direct investments in real estate and properties under
management increased 70% to $1.7 billion when compared to 2013. The majority of the growth came
from $497 million of multifamily acquisitions made through Independence Realty Trust during the
year. We also made opportunistic purchases of two retail centers as we see an opportunity to invest
in retail property assets using the Urban Retail platform. We expect to generate strong recurring
risk adjusted returns and create another stable revenue stream for RAIT. Rental income grew during
the year through increased rental rates and property acquisitions. RAITs multifamily portfolio
experienced year-over-year same-store average rent growth of 4%.
At this time Id like to turn the call over to Jim for the financial report.
Jim Sebra - RAIT Financial Trust CFO
Thank you, Scott. As Scott mentioned 2014 was a transformative year for RAIT as we experienced
growth in our core business activities and exited the legacy Taberna business.
For the year, CAD was $57.5 million or $0.71 per common share. This included a $21.5 million charge
for the previously announced settlement with the SEC. The $21.5 million settlement charge is
recorded in the line item called other income (expense). From a GAAP perspective, we are reporting
an overall net loss of $319 million or $3.92 per share for the year ended December 31, 2014. This
loss is primarily comprised of a $216 million loss we incurred on the deconsolidation of Taberna
VIII and Taberna IX during December 2014. As discussed during our third quarter conference call, we
took steps to exit the Taberna business during the fourth quarter. This included selling the
collateral management contracts on Taberna I, VIII and IX. That sale closed on December 19 and we
deconsolidated Taberna VIII and Taberna IX on that day.
Through December 19, however, we continued to account for Taberna on a GAAP basis including the
accrual of income and expenses as well as the regular normal fair value accounting for its assets,
liabilities, and hedges. As it relates to the sale of the collateral management contracts, we
recorded income of $4.5 million net of severance and other costs associated with exiting the
Taberna business. Lastly, in January 2015 we sold the various bonds we held related to the Taberna
business for proceeds of $20.4 million. In summary, we generated $24.9 million of additional
capital from exiting the Taberna business.
In addition to the loss on deconsolidation of Taberna, our GAAP net loss for 2014 was also driven
by the $99 million of changes in the fair value of our various financial instruments. With the
deconsolidation of Taberna, this volatility will be removed from our future financial results.
Compared to 2013, our net interest margin was flat. There are several reasons for this as follows:
one, NIM from Taberna was down by $5.6 million in 2014; two, we had $164 million of loan payoffs in
2014 causing a reduction in NIM of $5.3 million; three, our new 2014 floating rate loan production
of $505 million and related financing costs provided or increased NIM by $7.2 million; and finally
during 2014 we had $3.7 million to reduced hedging cost associated with our loans when compared to
2013.
As weve discussed previously, the interest rate hedges in our RAIT I and RAIT II securitizations
are continuing to burn off. Based on the current one month LIBOR curve, we expect to see $8 million
of reduced hedging cost during 2015, when compared to 2014, as hedges continue to expire according
to their terms. Keep in mind that our CRE CDO notes and related hedges finance both third-party
loans and some of our owned real estate assets. As such, the total savings of $8 million expected
in 2015 will be seen through an improvement in NIM and reduced interest expense.
From a credit perspective our CRE non-accrual loans decreased to $25 million during 2014 and
represent about 1.8% of our loan portfolio at year-end. This decrease during 2014 was related to
two loans totaling $9 million that were charged off, one loan for $8 million that was
deconsolidated with Taberna and that was offset by $5.5 million of net additions to non-accrual
status. Our current loan loss reserves are $9.2 million or 37% of our non-accrual loans and we
believe that our reserves are adequate.
Rental income increased by 42% or $48.1 million in 2014 as compared to 2013. This increase is
primarily a result of $45.8 million of rental income associated with 32 properties acquired during
2014 and those present for a full year in 2014. The growth in new properties is primarily driven by
the growth of Independence Realty Trust. During 2014, IRT acquired 20 properties for aggregate cost
of $497 million. The remaining increase of $2.3 million in rental revenue is due to continued
improvement in rental rates across the same-store properties.
Lastly, fee and other income was $24.3 million in 2014 and was comprised of the following; $9.5
million in CMBS loan sale profitability, $13 million of property management revenue, $1 million of
asset management fees, and $700,000 of other fee income.
With respect to our expenses, a couple items of note.
Interest expense this year is up $15.1 million compared to 2013 due primarily to a $8.7 million of
interest associated with mortgages used to finance the properties acquired during 2014 and those
mortgages present for a full year this year. The remaining increase in interest expense of $6.4
million resulted from our issuances of $132 million of senior unsecured notes during 2014 and the
amortization of associated debt issuance costs.
Property operating expenses increased by $20.7 million this year as compared to 2013. Of this
increase, $20 million is the result of the 32 properties acquired during 2014 and those present for
a full year. Operating expenses in the same-store portfolio increased $600,000 primarily because of
increased real estate taxes. Overall, the net operating income of our real estate portfolio was
$80.7 million this year, an increase of $27.4 million from last year. On a same-store basis, NOI
this year increased 3.7% from 2013.
Compensation and general administrative costs ended the year at $45.8 million or 16% of our total
revenue. While these costs are up $4.5 million, they are down from 17% of total revenue in 2013.
With respect to our CRE CDOs, we continue to meet all over-collateralization tests. CRE CDO 1
reported an OC test of 127% above the required level of 116%. CRE CDO 2 reported an OC test of 121%
above the required level of 112%. These OC tests are largely unchanged compared to year-end 2013.
As of quarter end, we continue to maintain good liquidity for investment, we accessed the capital
markets three times in 2014 at RAIT issuing common equity and two rounds of senior unsecured bonds
raising gross proceeds of $214.5 million. Additionally, Independence Realty Trust completed three
common shares issuances in 2014, in total IRT issues 22.1 million common shares and raised $201
million of gross proceeds during 2014. All of these proceeds have been invested. RAIT continues to
externally manage IRT and currently owns 23% of IRTs outstanding common stock.
Scott, this concludes the financial report. Back to you.
Scott Schaeffer - RAIT Financial Trust CEO
Thank you, Jim. As we look out over 2015 we see opportunities to continue growing both
fixed-rate and floating-rate loan origination volumes with the goal of originating $1.2 billion to
$1.6 billion of loans during 2015. We also expect to continue adding multi-family properties to
IRTs portfolio and to make property acquisitions through the Urban Retail platform. Additionally,
we have begun marketing a number of RAIT owned properties for sale with the focus on the
multifamily portfolio as we see opportunities to generate solid gains in the current environment.
Operator, at this time I would like to open up the call for questions.
QUESTION AND ANSWER
Operator
(Operator Instructions)
Steve DeLaney, JMP Securities
Steven DeLaney - JMP Securities Analyst
Congratulations on the Taberna exit. I must say the year-end balance sheet is certainly easier
on the eyes than the September one.
Just to touch on the Taberna exit, I just want to make sure I understand what happened in January.
You sold the residual you had already sold the management contracts, but you sold the residual
interest.
Did you sell all of the residual interest in that transaction? Or do you still own some bonds?
Jim Sebra - RAIT Financial Trust CFO
We sold all of the bonds, we still hold the preferred equity class and they will be disposed
of early in 2015.
Steven DeLaney - JMP Securities Analyst
Okay got it, thanks for clarifying that.
Jim Sebra - RAIT Financial Trust CFO
From a value standpoint there is no value there.
Steven DeLaney - JMP Securities Analyst
I got it okay and the proceeds of $20.4 million did that simply recover your carrying value or
was there possibly a gain related to that transaction?
Jim Sebra - RAIT Financial Trust CFO
The carrying value was... the face value of the bonds was significantly higher than $20.4
million.
Steven DeLaney - JMP Securities Analyst
Correct, yes, but in other words the sales proceeds roughly was roughly equal to where you
were carrying those at fair value?
Jim Sebra - RAIT Financial Trust CFO
Correct.
Steven DeLaney - JMP Securities Analyst
You made the point I believe that you freed up $24 million, $25 million of actual capital out
of the transaction.
Jim Sebra - RAIT Financial Trust CFO
Thats right.
Steven DeLaney - JMP Securities Analyst
Related to that I know that you were or through the holidays and earlier this year trying to
work with the folks at the SEC just to finalize your agreement with them that you had entered into
in September. Can you comment as to whether that has been finalized at this point?
Scott Schaeffer - RAIT Financial Trust CEO
It has not been finalized at this point. We are at the mercy of the SEC, they will be
providing us the first draft of the settlement agreement and they have not provided it to us at
this time.
I will tell you however, though all of the changes that we need within RAIT exiting the Taberna
business the exiting or separation with the two officers all of that had been communicated to the
SEC as it was happening. And they had no comment, so they are fully aware of what we have done. We
are just waiting on them to provide the settlement agreement.
Steven DeLaney - JMP Securities Analyst
Thank you for that, Scott. One final thing for me. Jim, you mentioned that your ownership at
IRT is 23%. For modeling purposes for at least for 2015, should we just assume going forward that
IRTs multifamily assets will continue to be consolidated onto the RAIT balance sheet?
Jim Sebra - RAIT Financial Trust CFO
Through 2015 correct yes I would.
Steven DeLaney - JMP Securities Analyst
Thank you for the comments guys.
Scott Schaeffer - RAIT Financial Trust CEO
Thank you, Steve.
Operator
Lucy Webster, Compass Point
Jason Stewart - Compass Point Research & Trading Analyst
Good morning its Jason here. A couple questions Scott if you could elaborate on the property
sales. Im assuming these are the properties financed via CRE, CDO 1 or 2. What happens to the
proceeds when you do sell a property in those portfolios?
Scott Schaeffer - RAIT Financial Trust CEO
There are 3 properties that we have identified, its 1000 units. They all have senior debt that
is not held by RAIT that is maturing in the near-term and there is some minor amount of RAIT
mezzanine debt still held in the CDOs.
So the proceeds obviously will go to pay off the CDOs and it will reduce or pay off CDO bonds at
100% relative to that mezz debt. The senior loans will be paid off to the third parties and then
the value in excess of those debt balances will be held by RAIT.
Jason Stewart - Compass Point Research & Trading Analyst
Okay so you do get the excess. That does not go to pay down any additional CDO debt?
Scott Schaeffer - RAIT Financial Trust CEO
No. Because the CDO liabilities will be paid in full relative to the CDO exposure.
Jason Stewart - Compass Point Research & Trading Analyst
You said three properties, 1000 units. Is that I guess a near-term event we should expect and
is it something that could continue throughout the year? Or is it more of a strategic push or just
opportunistic near term?
Scott Schaeffer - RAIT Financial Trust CEO
We are looking towards a second quarter transaction. It is opportunistic relative to the
market environment that we are in, but we are expecting this to be the first of a number of sales.
Jason Stewart - Compass Point Research & Trading Analyst
The trends in terms of occupancy and rent growth were particularly strong in the fourth
quarter especially in office and retail. How much of that trend should we expect to continue? I
know it can be a little bumpy, but that certainly was much stronger than we had modeled. Anything
you can give us to think about how that should trend going throughout the year?
Scott Schaeffer - RAIT Financial Trust CEO
I think it should continue to trend well. It takes a little bit longer as weve always said to
stabilize the office and retail portfolio rather than the multifamily. But were making good
progress and we think that the properties are well-positioned to continue to experience higher
occupancy rates and hopefully lease rates, rental rates.
Jason Stewart - Compass Point Research & Trading Analyst
One last from me and then Ill jump out. In the conduit business, was there any particular
loan that depressed the gain on sale or was it you know, I know sometimes you can have timing
because of spreads or is that really a good run rate for where the competitive environment is
pushed margins?
Scott Schaeffer - RAIT Financial Trust CEO
I think first, let me just say that we were a victim of our own success. Really our spreads
were much wider than the market as a whole previously because the market wasnt focused on smaller
loans.
So what weve seen is spreads on those smaller loans come in as a more and more competition moved
into that space. As you know, it is somewhat volatile. The spreads changed almost daily. Right now
were seeing a little bit of an increased spread environment here in the first quarter leading into
the second quarter than what we saw late in the fourth quarter of last year, but you know its
anyones guess if that spread environment will continue.
Operator
Jade Rahmani, KBW
Jade Rahmani - Keefe, Bruyette & Woods, Inc. Analyst
Thanks for taking my questions. On the competitive environment for lending beyond the conduit
market that you cited where are you seeing the greatest amount of competition and with you think
you will continue to have a niche or an advantage.
Scott Schaeffer - RAIT Financial Trust CEO
I think the competition is across the board. Clearly, in the conduit space the originate
for-sale program, there is a more competition just because its less capital intensive. Lets be
clear there is competition everywhere.
Our niche really is the relationships that weve developed and maintained over 18 or 19 years and
just the reputation of being able to deliver. As you can see, we had a big increase in volume last
year and we expect another sizable increase in volume this year based upon our early projections.
You know our niche is just knowing what we do there are barriers to entry, no one You cant just
jump into this business. You have to have the capital, the know-how and the relationships. Weve
been doing it for a long time and we have the capital to continue this growth.
The floating-rate business is really our bread and butter. We see a big opportunity to continue to
originate good, well-positioned and strong credit loans and to securitize them in the floating-rate
CMBS.
We were one of the early movers in that space, we have closed three of those deals. Now it becomes
like clockwork and as weve said we expect to have our fourth one done in the second quarter of
this year.
Jason Stewart - Compass Point Research & Trading Analyst
Regarding the floating-rate business have you seen just sequentially any spread widening or
would you say, competition has offset that and so perhaps spreads have either remained flat or
compressed slightly?
Scott Schaeffer - RAIT Financial Trust CEO
Spreads have come in on both the liabilities and on the assets or I should say pricing. Our
spread has been weve been able to maintain it and we expect that to continue.
Jason Stewart - Compass Point Research & Trading Analyst
Regarding the CMBS volatility has there been any notable impact on floating-rate issuance? Do
you think pricing on this fourth securitization based on what you know today would be similar to
past deals or do you think it would be improved upon?
Scott Schaeffer - RAIT Financial Trust CEO
I would expect it to be improved upon.
Jason Stewart - Compass Point Research & Trading Analyst
Do you guys plan to continue to report FFO and AFFO? I dont believe they were disclosed this
quarter.
Jim Sebra - RAIT Financial Trust CFO
We do not plan to continue to present AFFO simply because that was effected by the Taberna
business and included the NIM on Taberna, so were going to be removing that going forward and we
will still be reporting FFO in the K when its published.
Jason Stewart - Compass Point Research & Trading Analyst
Can you disclose FFO for this quarter.
Jim Sebra - RAIT Financial Trust CFO
Sure fourth quarter was a loss of $2.97 because of the Taberna deconsolidation, obviously.
Jason Stewart - Compass Point Research & Trading Analyst
And do you have that excluding the Taberna deconsolidation?
Jim Sebra - RAIT Financial Trust CFO
I do not have it in front of me. I can call you back with that.
Jason Stewart - Compass Point Research & Trading Analyst
Finally, the comment around investment capacity. Can you I mean, do you mind providing some
color on current investment capacity and also targeted financial leverage?
Jim Sebra - RAIT Financial Trust CFO
We ended the year with $122 million of cash in the balance sheet and we only had, we generated
proceeds coming in from the bonds as well from the bond sale and our current were expecting
current leverage in the float rate business of approximately 80%.
Scott Schaeffer - RAIT Financial Trust CEO
Once its match funded 80% leverage on the floating-rate business. The warehousing advance is
50%.
Operator
Richard Eckart, MLV and Company
Rich Eckert - MLV & Co. Analyst
Good morning and thanks for taking my call. I just had a quick question on the originations.
On the last two or three quarters there appear to be a significant tilt back toward the conduit
business. Are you expecting what kind of mix are you expecting in 2015 between your
floating-rate and fixed-rate businesses?
Scott Schaeffer - RAIT Financial Trust CEO
We are modeling a 50/50 split.
Rich Eckert - MLV & Co. Analyst
Okay, alright, fair enough.
Operator
Matthew Stolzer, Pyrrho Capital Management
Matthew Stolzer - Pyrrho Capital Management Analyst
Thank you for taking my question. In 2014 you paid out roughly all of your CAD in dividends
and that CAD was inclusive of taking a $0.26 charge. How should we think about your targeted payout
ratio going forward
Jim Sebra - RAIT Financial Trust CFO
Previously weve targeted 75% of CAD for the dividend and yes clearly in 2014 that was
impacted by the SEC settlement. The board looks at the dividend payout every quarter and we really
dont have a formal policy.
Operator
With no further questions at this time. I will now like to hand the call back to Mr. Scott
Schaeffer for any closing remarks.
Scott Schaeffer - RAIT Financial Trust CEO
Thank you, operator. Thanks for joining us today. We look forward to sharing our progress with
you next quarter. Thank you.
Operator
Ladies and gentlemen, thank you for your participation in todays conference. This concludes
the presentation. You may now disconnect, good day.