Real Estate Finance

Commercial Real Estate Loans. The Company's commercial real estate loan business purchases at a discount non-conforming commercial real estate loans and restructures and refinances those loans. These loans are generally acquired from private market sellers, primarily financial institutions. Since entering this business in fiscal 1991 and through the end of September 1998, the Company had acquired 51 loans. At September 1998, outstanding loan receivables were $665.8 million, acquired at an investment cost of $435.1 million.

The Company seeks to minimize the amount of its own capital invested in the loans, thus maximizing its returns. This is accomplished through sales of senior lien interests relating to the loans, or through borrower refinancings. Often the Company can recover most, if not all, of its invested cash while still retaining an interest in the loan.

As a result of its increased resources, the Company has acquired loans in recent years (and particularly following fiscal 1997) much larger than those it has previously acquired and has increased the amount of its average net investment in loans. Prior to fiscal 1998, the Company had focused on acquiring loans with outstanding receivable balances of between $1.0 million and $15.0 million, with investment costs (invested funds before proceeds from refinancings or sales of senior lien interests) typically between $1.0 million and $8.0 million. During the fiscal year ended September 30, 1999, the Company acquired four loans and originated one loan for a cost of $88.9 million. For loans acquired during the year ended September 30, 1999, the average contractual receivable balance was $33.9 million, the average investment cost was $17.8 million and the receivable balances ranged from $1.5 million to $127.8 million. During the fiscal year ended September 30, 1998, the Company acquired 12 loans for a cost of $337.1 million. For loans acquired during this period, the average outstanding receivable balance was $37.2 million, the average investment cost was $27.8 million and the receivable balances range from $2.0 million and $100.7 million. During the fiscal year ended September 30, 1997, the Company acquired 18 loans for a cost of $71.7 million. For loans acquired during this period, the average outstanding receivable balance was $6.1 million, the average investment cost was $3.2 million and the loans acquired had outstanding receivable balances ranging from $401,000 to $52.6 million.

During the fiscal years ended September 30, 1998, 1997, 1996, and 1995, the Company's yield on its net investment in commercial mortgage loans (including gains on sale of senior lien interests in, and gains, if any, resulting from refinancings of commercial mortgage loans) was 40%, 35%, 36%, and 35%, respectively.

Resource Asset Investment Trust ("RAIT"). The Company sponsored the formation and the January 1998 initial public offering of RAIT, a real estate investment trust, which is publicly traded on the American Stock Exchange. The Company acquired 15% of RAIT's outstanding shares in the initial offering for an investment of approximately $7.0 million. In June 1998, the Company acquired additional common shares in a secondary offering for $5.0 million and currently holds approximately 14% of RAIT's outstanding common shares.

In connection with RAIT's initial offering, the Company sold ten loans and senior lien interests in two other loans to RAIT at an aggregate purchase price of $20.1 million (including $2.1 million attributable to senior lien interests acquired by the Company in connection with the sales to RAIT). The Company realized a total gain on the sale of the loans and senior lien interests of $3.1 million. During fiscal 1998, the Company and RAIT also engaged in several other transactions including jointly acquiring a loan at a purchase price of $85.5 million.