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UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From  to
 
  DESERT CAPITAL REIT, INC.
  Maryland
(State or other jurisdiction of
incorporation or organization)
    
    20-0495883
(I.R.S. Employer
Identification No.)
 1291 Galleria Drive, Suite 200, Henderson, NV 89014
 (800) 419-2855
 þ o
 o þ




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##### Table of Contents



DESERT CAPITAL REIT, INC.
 FORM 10-Q
 For the Quarter Ended September 30, 2005
 INDEX
  
 Part I. Financial InformationItem 1. Consolidated Financial Statements (Unaudited)
    
    
    2a) Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004
    
    
    2b) Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004
    
    
    3c) Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 ended June 30, 2004
    
    
    4d) Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 2005
    
    
    5e) Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19Part II Other InformationItem 2. Unregistered sales of Equity Securities and Use of Proceeds
    
    
    20Item 5. Other Information
    
    
    20Item 6. Exhibits
    
    
    20Signatures
    
    
    21Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO and CFO Pursuant to Section 906




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Item 1. Consolidated Financial Statements
 
 DESERT CAPITAL REIT, INC.
Consolidated Balance Sheets
 September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSMortgage investments  net
    
    $
    47,216,340
    
    
    $
    17,217,116Goodwill
    
    
    10,576,657
    
    
    
    Building and equipment  net
    
    
    8,283,548
    
    
    
    180,000Land
    
    
    1,820,000
    
    
    
    Cash
    
    
    5,644,877
    
    
    
    2,375,309Investment in subsidiary
    
    
    
    
    
    
    3,501,047Other
    
    
    532,116
    
    
    
    281,882Total assets
    
    $
    74,073,538
    
    
    $
    23,555,354LIABILITIES AND STOCKHOLDERS EQUITYNotes payable
    
    $
    12,162,097
    
    
    $
    6,322,139Accounts payable and accrued expenses
    
    
    1,802,460
    
    
    
    450,227Total liabilities
    
    
    13,964,557
    
    
    
    6,772,366Minority interest
    
    
    409,831
    
    
    
    Preferred stock, $0.01 par value: 15,000,000 shares
authorized, none outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value: 100,000,000 shares authorized; 6,848,583, and 1,996,386
shares issued and outstanding on September 30, 2005, and December 31, 2004, respectfully
    
    
    68,486
    
    
    
    19,964Additional paid-in capital
    
    
    59,889,997
    
    
    
    16,782,200Retained earnings
    
    
    (259,333
    )
    
    
    (19,176
    )Total stockholders equity
    
    
    59,699,150
    
    
    
    16,782,988Total liabilities and stockholders equity
    
    $
    74,073,538
    
    
    $
    23,555,354
  2




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DESERT CAPITAL REIT, INC.
Consolidated Statements of Operations
 Three Months
    
    
    Nine MonthsEnded September, 30
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004INTEREST INCOME:Mortgage notes receivable
    
    $
    1,202,034
    
    
    
    
    
    
    $
    2,746,415
    
    
    
    Other interest
    
    
    59,520
    
    
    
    64,557
    
    
    
    133,324
    
    
    
    64,557Total interest income
    
    
    1,261,554
    
    
    
    64,557
    
    
    
    2,879,739
    
    
    
    64,557INTEREST EXPENSE:Interest expense
    
    
    289,428
    
    
    
    13,401
    
    
    
    790,735
    
    
    
    13,401Total interest expense
    
    
    289,428
    
    
    
    13,401
    
    
    
    790,735
    
    
    
    13,401Net interest income
    
    
    972,126
    
    
    
    51,156
    
    
    
    2,089,004
    
    
    
    51,156Provision for loan losses
    
    
    13,739
    
    
    
    4,589
    
    
    
    41,345
    
    
    
    4,589Net interest income after provision for loan loss
    
    
    958,387
    
    
    
    46,567
    
    
    
    2,047,659
    
    
    
    46,567NON-INTEREST INCOME:Loan brokerage fees
    
    
    2,350,262
    
    
    
    
    
    
    
    7,769,711
    
    
    
    Service and other loan fees
    
    
    385,439
    
    
    
    
    
    
    
    1,750,241
    
    
    
    Other
    
    
    66,978
    
    
    
    
    
    
    
    133,609
    
    
    
    Total non-interest income
    
    
    2,802,679
    
    
    
    
    
    
    
    9,653,561
    
    
    
    NON-INTEREST EXPENSE:Compensation
    
    
    475,000
    
    
    
    43,993
    
    
    
    1,412,455
    
    
    
    91,993Management fees
    
    
    816,764
    
    
    
    5,606
    
    
    
    2,562,539
    
    
    
    5,606Professional fees
    
    
    378,501
    
    
    
    
    
    
    
    1,363,305
    
    
    
    Insurance
    
    
    99,780
    
    
    
    51,000
    
    
    
    328,911
    
    
    
    51,000Other
    
    
    329,990
    
    
    
    17,947
    
    
    
    953,822
    
    
    
    34,804Total non-interest expense
    
    
    2,100,035
    
    
    
    118,546
    
    
    
    6,621,032
    
    
    
    183,403Net income before taxes
    
    
    1,661,031
    
    
    
    (71,979
    )
    
    
    5,080,188
    
    
    
    (136,836
    )Income tax expense
    
    
    89,662
    
    
    
    
    
    
    
    451,678
    
    
    
    Income before minority interest
    
    
    1,571,369
    
    
    
    (71,979
    )
    
    
    4,628,510
    
    
    
    (136,836
    )Income allocated to minority interest
    
    
    259,744
    
    
    
    
    
    
    
    1,695,101
    
    
    
    Net income
    
    $
    1,311,625
    
    
    
    (71,979
    )
    
    $
    2,933,409
    
    
    
    (136,836
    )Net earnings (loss) per share  basic and diluted
    
    
    0.25
    
    
    
    (0.30
    )
    
    
    0.78
    
    
    
    (1.45
    )Weighted average outstanding shares
    
    
    5,271,441
    
    
    
    243,068
    
    
    
    3,764,800
    
    
    
    94,356
  3




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DESERT CAPITAL REIT, INC.
Consolidated Statements of Cash Flows
 Nine MonthsEnded September 30,2005
    
    
    2004OPERATING ACTIVITIESNet income (loss)
    
    $
    2,933,409
    
    
    $
    (136,836
    )Adjustments to reconcile net income (loss) to net cashDepreciation
    
    
    127,802
    
    
    
    Minority interest
    
    
    1,695,101
    
    
    
    Stock based compensation
    
    
    61,111
    
    
    
    5,556Provision for loan loss
    
    
    41,345
    
    
    
    4,589Net change inOther assets
    
    
    (248,234
    )
    
    
    (99,288
    )Accounts payable
    
    
    71,999
    
    
    
    40,083Net cash provided by operating activities
    
    
    4,682,533
    
    
    
    (185,896
    )INVESTING ACTIVITIESInvestment in subsidiary (net of cash received of $1,039,908)
    
    
    (4,960,092
    )
    
    
    Increase in mortgage notes receivable
    
    
    (27,452,029
    )
    
    
    (8,284,885
    )Increase in land
    
    
    (1,820,000
    )
    
    
    Increase in building and equipment
    
    
    (7,969,839
    )
    
    
    Net cash used by investing activities
    
    
    (42,201,960
    )
    
    
    (8,284,885
    )FINANCING ACTIVITIESIncrease in borrowings
    
    
    4,588,558
    
    
    
    3,650,675Issuance of common stock
    
    
    44,875,218
    
    
    
    5,915,116Dividends on common stock
    
    
    (1,680,555
    )
    
    
    Dividends to minority interest
    
    
    (1,741,068
    )
    
    
    Offering costs paid
    
    
    (5,253,158
    )
    
    
    (953,084
    )Net cash provided by financing activities
    
    
    40,788,995
    
    
    
    8,612,707Net increase in cash
    
    
    3,269,568
    
    
    
    141,926Cash at beginning of period
    
    
    2,375,309
    
    
    
    182,202Cash at end of period
    
    $
    5,644,877
    
    
    $
    324,128Cash paid for interest
    
    $
    790,734
    
    
    $
    1,174Cash paid for taxes
    
    
    29,085
    
    
    
    Supplemental schedule of non-cash investing and financingCommon stock issued in exchange for interest in subsidiary
    
    
    1,125,000
    
    
    
    Common stock issued as repayment of indebtedness
    
    
    1,322,139
    
    
    
    Common stock issued for dividend reinvestment program
    
    
    995,225
    
    
    
    Common stock dividends declared but not paid
    
    
    624,057
    
    
    
    30,906Offering costs incurred but not paid
    
    $
    27,708
    
    
    $
    278,223
  4




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DESERT CAPITAL REIT, INC.
Consolidated Statements of Changes in Stockholders Equity
 Common
    
    
    Common Stock Par
    
    
    Additional Paid -Stock Shares
    
    
    Value
    
    
    in Capital
    
    
    Retained Earnings
    
    
    TotalBalance at December 31, 2004
    
    
    1,996,386
    
    
    $
    19,964
    
    
    $
    16,782,200
    
    
    $
    (19,176
    )
    
    $
    16,782,988Issuance of common stock
    
    
    4,832,197
    
    
    
    48,322
    
    
    
    48,268,851
    
    
    
    
    
    
    
    48,317,173Stock based compensation
    
    
    20,000
    
    
    
    200
    
    
    
    61,112
    
    
    
    
    
    
    
    61,312Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,173,568
    )
    
    
    (3,173,568
    )Offering costs
    
    
    
    
    
    
    
    
    
    
    (5,222,166
    )
    
    
    
    
    
    
    (5,222,166
    )Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,933,411
    
    
    
    2,933,411Balance at September 30, 2005
    
    
    6,848,583
    
    
    $
    68,486
    
    
    $
    59,889,997
    
    
    $
    (259,333
    )
    
    $
    59,699,150
  5




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Desert Capital REIT, INC.
Notes to Consolidated Financial Statements
September 30, 2005
(Unaudited)
 Note 1  Description of Business and Basis of Presentation
    6




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July 1,2005AssetsCash
    
    $
    553,364Mortgage investments
    
    
    1,741,328Equipment
    
    
    287,515Receivables
    
    
    125,527Goodwill
    
    
    10,280,064Total assets
    
    $
    12,987,799LiabilitiesAccounts payable and accrued expenses
    
    $
    746,471Notes payable
    
    
    1,741,328Total liabilities
    
    $
    2,487,799Total purchase price
    
    
    10,500,000Total liabilities and purchase price
    
    $
    12,987,799
    Note 2  Summary of Significant Accounting Policies
 Use of Estimates
  7




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Cash and Cash Equivalents
  Revenue Recognition
   Organization Expenses
  Offering Costs
  Building and Equipment
  Loans
  Allowance for Loan Losses
  Impairment Policy
  8




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Goodwill
  Income Taxes
    Stock Compensation
  Recent Accounting Developments
  9




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Note 3  Mortgage Investments
   September 30,
    
    
    December 31,2005
    
    
    2004Acquisition and development loans
    
    $
    33,173,689
    
    
    $
    7,839,934Construction loans
    
    
    14,105,900
    
    
    
    8,899,086Commercial property loans
    
    
    
    
    
    
    500,000Allowance for loan losses
    
    
    (63,249
    )
    
    
    (21,904
    )Mortgage investments  net
    
    $
    47,216,340
    
    
    $
    17,217,116
 Note 4  Allowance for Loan Losses
   Balance, December 31, 2004
    
    $
    21,904Provision for loan loss
    
    
    41,345Balance, September 30, 2005
    
    $
    63,249
  Note 5  Stock Based Compensation
  10




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Note 6  Building and Equipment
   September 30,2005Building
    
    $
    7,341,993Equipment
    
    
    244,276Furniture and fixtures
    
    
    789,983Software
    
    
    279,622Less accumulated depreciation
    
    
    (372,326
    )$
    8,283,548
  Note 7  Income taxes
   Three months ended
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005Income tax computed on REIT income
    
    $
    
    
    
    $
    Income tax computed on taxable REIT subsidiary income
    
    
    89,662
    
    
    
    451,678Total income taxes
    
    $
    89,662
    
    
    $
    451,678
  11




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Note 8  Earnings per Share
  Three months ended
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005Net income
    
    $
    1,311,625
    
    
    $
    2,933,409Weighted average shares outstanding
    
    
    5,271,441
    
    
    
    3,764,800Earnings per share
    
    $
    0.25
    
    
    $
    0.78
 Note 9  Dividends
  Note 10  Notes Payable
   Note 11  Commitments and Related Parties
  12




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion of our financial condition and results of operations should be read
in conjunction with the financial statements and notes to those statements included elsewhere in
this document. This discussion may contain certain forward-looking statements. Forwarding-looking
statements are those that are not historical in nature. They can often be identified by their
inclusion of words such as will, anticipate, estimate, should, expect, believe,
intend and similar expressions. Any projection of revenues, earnings or losses, capital
expenditures, distributions, capital structure or other financial terms is a forward-looking
statement. Our forward-looking statements are based upon our managements beliefs, assumptions and
expectations of our future operations and economic performance, taking into account the information
currently available to us. Forward-looking statements involve risks and uncertainties, some of
which are not currently known to us, that might cause our actual results, performance or financial
condition to be materially different from the expectations of future results, performance or
financial condition we express or imply in any forward-looking statements. Some of the important
factors that could cause our actual results, performance or financial condition to differ
materially from expectations are:
 
    
    Changes in interest rates;
    
    Potential impacts of our leveraging policies and strategies without notice to
you or stockholder approval;
    
    Our Advisors motivation to recommend riskier investments in an effort to
maximize its incentive compensation under the advisory agreement; and
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
    
    Although we believe our proposed method of operations will be in conformity with
the requirements for qualification as a REIT, we cannot assure you that we will
qualify as a REIT or, if so qualified, will continue to qualify as a REIT. Our
failure to qualify or remain qualified as a REIT could have material adverse effect
on our performance and your investment.
  General
    Public Offering of Equity Securities/Use of Proceeds
   14




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Critical Accounting Policies and Management Estimates
  Revenue Recognition
   Loans
  Allowance for Loan Losses
  Impairment Policy
  Income Taxes
  15




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Results of Operations
  Comparison of the three months ended September 30, 2005 to the three months ended September 30,
2004
   Comparison of the nine months ended September 30, 2005 to the nine months ended September 30, 2004
  16




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Taxable income
  Three months ended
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005GAAP net income (loss)
    
    $
    1,311,625
    
    
    $
    2,933,409Adjustments to GAAP net income (loss):Provision for loan loss
    
    
    13,739
    
    
    
    41,345Net adjustment for TRS income
    
    
    (187,794
    )
    
    
    (718,878
    )REIT taxable net income (loss)
    
    $
    1,137,570
    
    
    $
    2,255,876
  Liquidity and Capital Resources
    Cash Flows from Operating Activities .
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Cash Flows used in Investing Activities .
 Cash Flows from Financing Activities .
     18




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Funds From Operations (FFO)
   Three months ended
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005GAAP net income (loss)
    
    $
    1,311,625
    
    
    $
    2,933,409Add:Depreciation
    
    
    64,399
    
    
    
    64,850Funds From Operations
    
    $
    1,376,024
    
    
    $
    2,998,259
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
     
 Item 4. Controls and Procedures
  19




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Part II. Other Information
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
 Item 5. Other Information
  
 Item 6. Exhibits
  31.1
    
    
    
    Certification of Chief Executive Officer, Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*31.2
    
    
    
    Certification of Chief Financial Officer, Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*32.1
    
    
    
    Certification of Chief Executive Officer and Chief Financial Officer, Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002**
 
 *
    
    Filed herewith**
    
    Furnished herewith 20




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SIGNATURES
  DESERT CAPITAL REIT, INC.November 14, 2005
    
    /s/ TODD B. PARRIOTTTodd B. Parriott,Chairman of the Board, Chief Executive Officer,President and Chief Investment Officer(Principal Executive Officer)November 14, 2005
    
    /s/ JONATHAN G. ARENSJonathan G. Arens,Chief Financial Officer(Principal Accounting Officer)
 21




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Exhibit Number
    
    Description31.1
    
    

    Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002*31.2
    
    

    Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002*32.1
    
    
    Certification of Chief Executive Officer and Chief Financial Officer, Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
 
 *
    
    Filed herewith**
    
    Furnished herewith