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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2005
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: 333-106900
REDWOOD MORTGAGE INVESTORS VIII,
a California Limited Partnership
(Exact name of registrant as specified in its charter)
California 94-3158788
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063-1743
(Address of principal executive offices) (Zip Code)
(650) 365-5341
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former 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.
Yes XX No
-------------- --------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No XX
-------------- --------------
1
Part I - Item 1. Financial Statements
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 and DECEMBER 31, 2004 (unaudited)
(in thousands)
ASSETS
March 31, December 31,
2005 2004
--------------- ---------------
Cash and cash equivalents $ 21,448 $ 16,301
--------------- ---------------
Loans
Loans, secured by deeds of trust 152,612 171,745
Loans, unsecured 34 34
Allowance for loan losses (2,434) (2,343)
--------------- ---------------
Net loans 150,212 169,436
--------------- ---------------
Interest and other receivables
Accrued interest and late fees 4,699 4,895
Advances on loans 78 131
--------------- ---------------
4,777 5,026
--------------- ---------------
Loan origination fees, net 45 62
Real estate held for sale, net of allowance of $1,000 20,366 9,793
Prepaid expenses 18 -
Due from affiliates 2,007 -
--------------- ---------------
Total assets $ 198,873 $ 200,618
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Line of credit $ - $ 16,000
Accounts payable 9 25
Payable to affiliate 653 638
--------------- ---------------
Total liabilities 662 16,663
--------------- ---------------
Minority interest 2,901 -
--------------- ---------------
Investors in applicant status 966 424
--------------- ---------------
Partners' capital
Limited partners' capital, subject to redemption net of unallocated
syndication costs of $1,143 and $1,084 for March 31, 2005 and December
31, 2004, respectively; and formation loan receivable of $10,192 and
$9,751 for March 31, 2005 and December 31, 2004, respectively 194,173 183,368
General partners' capital, net of unallocated syndication costs of
$12 and $11 for March 31, 2005 and December 31, 2004, respectively 171 163
--------------- ---------------
Total partners' capital 194,344 183,531
--------------- ---------------
Total liabilities and partners' capital $ 198,873 $ 200,618
=============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
2
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (unaudited)
(in thousands, except for per limited partner amounts)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2005 2004
------------- ------------
Revenues
Interest on loans $ 4,103 $ 3,733
Interest-bank 35 4
Late fees 35 53
Gain on sale of real estate held for sale 183 -
Imputed interest on Formation Loan 100 57
Other 69 3
------------- ------------
4,525 3,850
------------- ------------
Expenses
Mortgage servicing fees 388 353
Interest expense 36 106
Amortization of loan origination fees 20 12
Provisions for losses on loans and real estate 91 282
Asset management fees 184 141
Clerical costs through Redwood Mortgage Corp. 78 75
Professional services 48 55
Amortization of discount on imputed interest 100 57
Other 36 36
------------- ------------
981 1,117
------------- ------------
Net income $ 3,544 $ 2,733
============= ============
Net income: general partners (1%) $ 35 $ 27
limited partners (99%) 3,509 2,706
------------- ------------
$ 3,544 $ 2,733
============= ============
Net income per $1,000 invested by limited
partners for entire period
-where income is compounded and retained $ 17 $ 18
============= ============
-where partner receives income in monthly
distributions $ 17 $ 18
============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (unaudited)
(in thousands)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2005 2004
------------- -------------
Cash flows from operating activities
Net income $ 3,544 $ 2,733
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Imputed interest income (100) (57)
Amortization of discount 100 57
Amortization of loan origination fees 20 12
Provision for loan and real estate losses 91 282
Gain on sale of real estate (183) -
Change in operating assets and liabilities
Accrued interest and late fees (286) (653)
Advances on loans (9) (32)
Loan origination fees 3 -
Due from affiliates (2,007) -
Accounts payable (16) (214)
Payable to affiliate 15 36
Prepaid expenses (18) -
------------- -------------
Net cash provided by (used in) operating activities 1,154 2,164
------------- -------------
Cash flows from investing activities
Loans originated (23,831) (12,859)
Principal collected on loans 34,603 21,695
Payments for development of real estate (36) -
Proceeds from disposition of real estate 1,448 -
------------- -------------
Net cash provided by investing activities 12,184 8,836
------------- -------------
Cash flows from financing activities
Repayments on line of credit, net (16,000) (20,000)
Contributions by partner applicants 10,155 8,283
Partners' withdrawals (1,779) (1,627)
Syndication costs paid (118) (124)
Formation loan lending (748) (570)
Formation loan collections 299 204
------------- -------------
Net cash used in financing activities (8,191) (13,834)
------------- -------------
Net increase/(decrease) in cash and cash equivalents 5,147 (2,834)
Cash and cash equivalents - beginning of year 16,301 8,921
------------- -------------
Cash and cash equivalents - end of period 21,448 6,087
============= =============
Supplemental disclosures of cash flow information
Cash paid for interest $ 36 $ 106
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
4
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 (unaudited)
NOTE 1 - GENERAL
In the opinion of the management of the partnership, the accompanying
unaudited consolidated financial statements contain all adjustments, consisting
of normal, recurring adjustments, necessary to present fairly the consolidated
financial information included therein. These consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
included in the partnership's Form 10-K for the fiscal year ended December 31,
2004 filed with the Securities and Exchange Commission. The results of
operations for the three month period ended March 31, 2005 are not necessarily
indicative of the operating results to be expected for the full year.
Formation Loans
The following summarizes Formation Loan transactions to March 31, 2005 (in
thousands):
1st 2nd 3rd 4th 5th Total
------------ ----------- ------------ ----------- ----------- ------------
Limited partner
contributions $ 14,932 $ 29,993 $ 29,999 $ 49,985 $ 57,447 $ 182,356
============ =========== ============ =========== =========== ============
Formation loan made $ 1,075 $ 2,272 $ 2,218 $ 3,777 $ 4,318 $ 13,660
Discount on imputed
interest (19) (270) (272) (524) (716) (1,801)
------------ ----------- ------------ ----------- ----------- ------------
Formation loan made, net 1,056 2,002 1,946 3,253 3,602 11,859
Repayments to date (811) (1,061) (606) (583) (134) (3,195)
Early withdrawal
penalties applied (76) (114) (80) (3) - (273)
------------ ----------- ------------ ----------- ----------- ------------
Formation loan, net
at March 31, 2005 169 827 1,260 2,667 3,468 8,391
Unamortized discount
on imputed interest 19 270 272 524 716 1,801
------------ ----------- ------------ ----------- ----------- ------------
Balance
March 31, 2005 $ 188 $ 1,097 $ 1,532 $ 3,191 $ 4,184 $ 10,192
============ =========== ============ =========== =========== ============
Percent loaned 7.2% 7.6% 7.4% 7.6% 7.5% 7.5%
============ =========== ============ =========== =========== ============
The Formation Loan has been deducted from limited partners' capital in the
consolidated balance sheets. As amounts are collected from Redwood Mortgage
Corp., the deduction from capital will be reduced. Interest has been imputed at
the market rate of interest in effect at the date of the offerings' close. An
estimated amount of imputed interest is recorded for the offerings still
outstanding. During the three month periods ended March 31, 2005 and 2004,
amortization expense of $100,000 and $57,000, respectively, was recorded related
to the discount on the imputed interest.
Syndication costs
The partnership bears its own syndication costs, other than certain sales
commissions, including legal and accounting expenses, printing costs, selling
expenses, and filing fees. Syndication costs are charged against partners'
capital and are being allocated to the individual partners consistent with the
partnership agreement.
5
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 (unaudited)
NOTE 1 - GENERAL (continued)
Syndication costs (continued)
Through March 31, 2005, syndication costs of $3,092,000 had been incurred
by the partnership with the following distribution (in thousands):
Costs incurred $ 3,092
Early withdrawal penalties applied (106)
Allocated to date (1,831)
-------------
March 31, 2005 balance $ 1,155
=============
Syndication costs attributable to the fifth offering ($75,000,000) will be
limited to the lesser of 10% of the gross proceeds or $3,000,000 with any excess
to be paid by the general partners. As of March 31, 2005, the fifth offering had
incurred syndication costs of $623,000 (1.08% of contributions).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The partnership's consolidated financial statements include the accounts of
its 100%-owned subsidiaries, Russian Hill Property Company, LLC ("Russian") and
Borrette Property Company, LLC ("Borrette"), its 72%-owned subsidiary, Larkin
Property Company, LLC ("Larkin") and its 66%-owned subsidiary, Stockton Street
Property Company, LLC ("Stockton"). All significant intercompany transactions
and balances have been eliminated in consolidation.
Reclassifications
Certain reclassifications, not affecting previously reported net income or
total partner capital, have been made to the previously issued consolidated
financial statements to conform to the current year presentation.
Loans secured by deeds of trust
At March 31, 2005 and December 31, 2004, the partnership had ten and eight
loans, past due 90 days or more in interest payments ("90 day Past Due Loans")
totaling $17,098,000 and $23,101,000, respectively. Included in the 90 day Past
Due Loans are four loans and three loans totaling $6,451,000 and $6,135,000 at
March 31, 2005 and December 31, 2004, respectively, which are past maturity (see
Note 8). A past maturity loan is a loan in which the principal and/or any
accrued interest is due and payable, but the borrower has failed to make such
payment of principal and/or accrued interest. Additionally, at March 31, 2005
and December 31, 2004, the Partnership had two loans and three loans past
maturity with outstanding principal balances of $10,834,000 and $1,912,000, for
a combined total of twelve loans and eleven loans during each period past due 90
days or more in interest payments, and/or past maturity totaling $27,932,000 and
$25,013,000. These delinquent and/or past maturity loans also had accrued
interest, advances and late charges due as of March 31, 2005 and December 31,
2004 of $3,019,000 and $3,202,000, respectively. The partnership does not
consider the six past maturity loans to be impaired because, in the opinion of
management, there is sufficient collateral to cover the amount outstanding to
the partnership and the partnership is still accruing interest on these loans.
At March 31, 2005 and December 31, 2004, loans categorized as impaired by the
partnership were $0.
6
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for loan losses
The composition of the allowance for loan losses as of March 31, 2005 and
December 31, 2004 was as follows (in thousands):
March 31, December 31,
2005 2004
--------------- --------------
Impaired loans $ - $ -
Specified loans 137 137
General 2,297 2,206
Unsecured loans - -
--------------- --------------
$ 2,434 $ 2,343
=============== ==============
Activity in the allowance for loan losses is as follows for the three
months through March 31, 2005 and for the year ended December 31, 2004 (in
thousands):
March 31, December 31,
2005 2004
--------------- --------------
Beginning balance $ 2,343 $ 2,649
Additions charged to income 91 1,146
Write-offs - (952)
Transferred to real estate held for
sale reserve - (500)
--------------- --------------
$ 2,434 $ 2,343
=============== ==============
Income taxes
No provision for federal and state income taxes (other than an $800 state
minimum tax) is made in the consolidated financial statements since income taxes
are the obligation of the partners if and when income taxes apply.
Net income per $1,000 invested
Amounts reflected in the consolidated statements of income as net income
per $1,000 invested by limited partners for the entire period are amounts
allocated to limited partners who held their investment throughout the period
and have elected to either leave their earnings to compound or have elected to
receive periodic distributions of their net income. Individual income is
allocated each month based on the limited partners' pro rata share of partners'
capital. Because the net income percentage varies from month to month, amounts
per $1,000 will vary for those individuals who made or withdrew investments
during the period, or selected other options.
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
7
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Management estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions about the reported amounts of
assets and liabilities, and disclosures of contingent assets and liabilities, at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Such estimates relate principally to the
determination of the allowance for loan losses, including the valuation of
impaired loans and the valuation of real estate held for sale. Actual results
could differ significantly from these estimates.
NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES
The following are commissions and/or fees, which are paid to the general
partners.
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, Redwood Mortgage Corp. may collect an amount equivalent
to 12% of the loaned amount until six months after the termination date of the
offering. Thereafter, loan brokerage commissions (points) will be limited to an
amount not to exceed 4% of the total partnership assets per year. The loan
brokerage commissions are paid by the borrowers and thus, are not an expense of
the partnership.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the unpaid
principal are paid to Redwood Mortgage Corp., based on the unpaid principal
balance of the loan portfolio, or such lesser amount as is reasonable and
customary in the geographic area where the property securing the mortgage is
located. Once a loan is categorized as impaired, mortgage servicing fees are no
longer accrued thereon. Additional service fees are recorded upon the receipt of
any subsequent payments on impaired loans.
Asset management fees
The general partners receive monthly fees for managing the partnership's
loan portfolio and operations up to 1/32 of 1% of the "net asset value" (3/8 of
1% annual), which is the partnership's total assets less its total liabilities.
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. Such fees are incurred by the
borrowers and are paid to the general partners.
Operating expenses
Redwood Mortgage Corp., a general partner, is reimbursed by the partnership
for all operating expenses incurred on behalf of the partnership, including
without limitation, out-of-pocket general and administration expenses of the
partnership, accounting and audit fees, legal fees and expenses, postage and
preparation of reports to limited partners.
8
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 (unaudited)
NOTE 4 - REAL ESTATE HELD FOR SALE
During 2002, a single-family residence that secured a partnership loan
totaling $4,402,000, including accrued interest and advances, was transferred
via a statutory warranty deed to a new entity named Russian Hill Property
Company, LLC ("Russian"). Russian is wholly owned by the partnership. Russian
was formed by the partnership to complete the development and sale of the
property. The assets, liabilities and operating results of Russian have been
consolidated into the accompanying consolidated financial statements of the
partnership. Costs related to the sale and development of this property were
capitalized during 2003. Commencing January 2004, costs related to sales and
maintenance of the property are being expensed. As of March 31, 2005 and
December 31, 2004, the partnership had advanced approximately $150,000 and
$150,000, respectively, to Russian for sales and maintenance costs. At March 31,
2005 and December 31, 2004, the partnership's total investment in Russian was
$3,979,000, net of a valuation allowance of $500,000.
In September, 2004, the partnership acquired a single family residence
through a foreclosure sale. At the time the partnership took ownership of the
property, the partnership's investment totaled $1,937,000 including accrued
interest and advances. The borrower began a substantial renovation of the
property, which was not completed at the time of foreclosure. The partnership
has decided to pursue development of the property by processing plans for the
creation of two condominium units on the property. These plans will incorporate
the majority of the existing improvements currently located on the property. As
of March 31, 2005, the partnership has capitalized approximately $9,000 in costs
related to this property. Management has established a reserve of $500,000 to
cover potential losses for this property, based upon management's estimate of
the fair value of the property.
In December, 2004, the partnership acquired an undeveloped parcel of land
through a deed in lieu of foreclosure. The land is located in Stanislaus County,
California. It is comprised of three separate lots, which total approximately 14
acres. The parcels are currently for sale. As of March 31, 2005 the
partnership's investment in this property totaled $4,386,000, including accrued
interest and advances, as of the date of the acquisition. Management believes
that the full value of this investment will be recovered from the eventual sale
of the property based upon its current estimate of the fair value of the
property. This property is jointly owned by two other affiliated partnerships.
In February, 2005, the partnership acquired a multi-unit property through
foreclosure. This property is located in an upscale neighborhood in San
Francisco. At the time the partnership took ownership of the property, the
partnership's investment, together with three other affiliate partnerships,
totaled $10,555,000 including accrued interest and advances. The partnership
intends to undertake additional improvements to the property. No valuation
allowance has been established against this property as management is of the
opinion that the property will have adequate equity to recover the entire
partnership investment. Upon acquisition, the property was transferred via a
statutory warranty deed to a new entity named Larkin Property Company, LLC
("Larkin"). The partnership owns 72.50% interest in the property and the other
three affiliates collectively own the remaining 27.50%.
The following schedule reflects the costs of real estate acquired through
foreclosure and the recorded reductions to estimated fair values, including
estimated costs to sell as of March 31, 2005 and December 31, 2004:
March 31, December 31,
2005 2004
--------------- --------------
Cost of properties $ 21,366,000 $ 10,793,000
Reduction in value (1,000,000) (1,000,000)
--------------- --------------
Real estate held for sale, net $ 20,366,000 $ 9,793,000
=============== ==============
9
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 (unaudited)
NOTE 5 - BANK LINE OF CREDIT
The partnership has a bank line of credit expiring November 25, 2005, of up
to $42,000,000 at prime, secured by its loan portfolio. The outstanding balances
were $0 and $16,000,000 at March 31, 2005 and December 31, 2004, respectively.
The interest rate was 5.75% (prime) at March 31, 2005. The line of credit calls
for certain financial covenants. To the best of its knowledge, the partnership
was in compliance with these covenants for the three month period ended March
31, 2005 and for the year ended December 31, 2004.
NOTE 6 - NON-CASH TRANSACTIONS
During the quarter ended March 31, 2005 the partnership acquired a real
estate property through foreclosure and in order to reduce potential
liabilities, subsequently transferred the property at its book value to a newly
formed limited liability company ("LLC"). This transaction resulted in an
increase in real estate held for sale of $10,536,000, a decrease in loans
receivable, accrued interest, advances, and late charge receivable of
$7,635,000, and an increase in liability of $2,901,000, which was the affiliate
partnerships' interest in the property.
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Secured loans carrying value was $152,612,000 and $171,745,000 at March 31,
2005 and December 31, 2004, respectively. The fair value of these loans of
$156,301,000 and $173,067,000, respectively, was estimated based upon projected
cash flows discounted at the estimated current interest rates at which similar
loans would be made. The applicable amount of the allowance for loan losses
along with accrued interest and advances related thereto should also considered
in evaluating the fair value versus the carrying value.
10
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 (unaudited)
NOTE 8 - ASSET CONCENTRATIONS AND CHARACTERISTICS (in thousands)
Most loans are secured by recorded deeds of trust. At March 31, 2005 and
December 31, 2004 there were 79 and 75 secured loans outstanding, respectively,
with the following characteristics:
March 31, December 31,
2005 2004
-------------- --------------
Number of secured loans outstanding 79 75
Total secured loans outstanding $ 152,612 $ 171,745
Average secured loan outstanding $ 1,932 $ 2,289
Average secured loan as percent of total secured loans 1.27% 1.33%
Average secured loan as percent of partners' capital 0.99% 1.25%
Largest secured loan outstanding $ 11,685 $ 12,045
Largest secured loan as percent of total secured loans 7.66% 7.01%
Largest secured loan as percent of partners' capital 6.01% 6.56%
Largest secured loan as percent of total assets 5.96% 6.00%
Number of counties where security is located (all California) 19 17
Largest percentage of secured loans in one county 18.28% 20.48%
Average secured loan to appraised value of security based on
appraised values and prior liens at time loan was consummated 60.16% 56.94%
Number of secured loans in foreclosure status 4 6
Amount of secured loans in foreclosure $ 6,185 $ 14,682
11
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 (unaudited)
NOTE 8 - ASSET CONCENTRATIONS AND CHARACTERISTICS (in thousands) (continued)
The following secured loan categories were held at March 31, 2005, and
December 31, 2004:
March 31, December 31,
2005 2004
--------------- ---------------
First Trust Deeds $ 109,427 $ 115,082
Second Trust Deeds 34,389 50,282
Third Trust Deeds 8,796 6,381
--------------- ---------------
Total loans 152,612 171,745
Prior liens due other lenders at time of loan 80,864 99,140
--------------- ---------------
Total debt $ 233,476 $ 270,885
=============== ===============
Appraised property value at time of loan $ 388,098 $ 475,710
--------------- ---------------
Total secured loans as a percent of appraisals 60.16% 56.94%
--------------- ---------------
Secured loans by type of property
Owner occupied homes $ 11,224 $ 9,234
Non-owner occupied homes 51,130 75,125
Apartments 21,825 30,981
Commercial 66,700 54,670
Land 1,733 1,735
--------------- ---------------
$ 152,612 $ 171,745
=============== ===============
The interest rates on the loans range from 8.50% to 13.00% at March 31,
2005. This range of interest rates is typical of our portfolio.
Scheduled maturity dates of loans as of March 31, 2005 are as follows:
Year Ending
December 31, Amount
---------------------------- --------------
2005 $ 56,804
2006 46,984
2007 27,803
2008 10,956
2009 8,828
Thereafter 1,237
--------------
$ 152,612
==============
The scheduled maturities for 2005 include six past maturity loans totaling
$17,285,000, and representing 11.33% of the portfolio at March 31, 2005.
Interest payments on four of these loans with an aggregate principal balance of
$6,451,000 were categorized as 90 days or more delinquent. Several borrowers are
in process of selling the properties or refinancing their loans through other
institutions, as this is an opportune time for them to do so and/or take
advantage of lower interest rates. Occasionally the partnership allows borrowers
to continue to make the payments on debt past maturity for periods of time. Of
these six past maturity loans, the partnership has begun foreclosure proceedings
by filing a notice of default on three with aggregate principal balances
totaling $6,135,000.
12
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 (unaudited)
NOTE 8 - ASSET CONCENTRATIONS AND CHARACTERISTICS (in thousands) (continued)
Cash deposits at March 31, 2005 of $14,705,000, before clearing deposits in
transit and outstanding checks, were in one bank. The balances exceeded FDIC
insurance limits (up to $100,000 per bank) by $14,605,000. This bank is the same
financial institution that has provided the partnership with the $42,000,000
limit line of credit (LOC).
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Construction/Rehabilitation Loans
The partnership makes construction and rehabilitation loans which are not
fully disbursed at loan inception. The partnership has approved the borrowers up
to a maximum loan balance; however, disbursements are made periodically during
completion phases of the construction or rehabilitation or at such other times
as required under the loan documents. At March 31, 2005 there were $9,075,000 of
undisbursed loan funds which will be funded by a combination of borrower monthly
mortgage payments, line of credit draws, retirements of principal on current
loans, cash and capital contributions from investors. The partnership does not
maintain a separate cash reserve to hold the undisbursed obligations, which are
intended to be funded.
Workout Agreements
The partnership has negotiated various contractual workout agreements with
borrowers whose loans are past maturity or who are delinquent in making
payments. The partnership is not obligated to fund additional money on these
loans as of March 31, 2005. There are six loans totaling $6,611,000 in workout
agreements as of March 31, 2005.
Legal proceedings
The partnership is involved in various legal actions arising in the normal
course of business. In the opinion of management, such matters will not have a
material effect upon the financial position of the partnership.
Part I - Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP
Critical Accounting Policies.
In preparing the consolidated financial statements, management is required
to make estimates based on the information available that affect the reported
amounts of assets and liabilities as of the balance sheet dates and revenues and
expenses for the reporting periods. Such estimates relate principally to the
determination of (1) the allowance for loan losses (i.e. the amount of allowance
established against loans receivable as an estimate of potential loan losses)
including the accrued interest and advances that are estimated to be
unrecoverable based on estimates of amounts to be collected plus estimates of
the value of the property as collateral and (2) the valuation of real estate
acquired through foreclosure. At March 31, 2005, the partnership owned six real
estate properties, which were taken back from defaulted borrowers.
Loans and related accrued interest, fees, and advances are analyzed on a
regular basis for recoverability. Delinquencies are identified and followed as
part of the loan system. Provisions are made to adjust the allowance for loan
losses and real estate held for sale to an amount considered by management to be
adequate, with due consideration to original collateral values at loan inception
and to provide for unrecoverable accounts receivable, including impaired loans,
other loans, accrued interest, late fees and advances on loans, and other
accounts receivable (unsecured).
13
Recent trends in the economy have been taken into consideration in the
aforementioned process of arriving at the allowance for loan losses and real
estate. Actual results could vary from the aforementioned provisions for losses.
If the probable ultimate recovery of the carrying amount of a loan, with due
consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement and the shortfall in
the amounts due are not insignificant, the carrying amount of the loan is
reduced to the present value of future cash flows discounted at the loan's
effective interest rate. If a loan is collateral dependent, it is valued at the
estimated fair value of the related collateral.
If events and/or changes in circumstances cause management to have serious
doubts about the collectibility of the contractual payments, a loan may be
categorized as impaired and interest is no longer accrued. Any subsequent
payments on impaired loans are applied to reduce the outstanding loan balances,
including accrued interest and advances.
Forward Looking Statements.
Certain statements in this Report on Form 10-Q which are not historical
facts may be considered forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended, including statements regarding the
partnership's expectations, hopes, intentions, beliefs and strategies regarding
the future. Forward-looking statements include statements regarding future
interest rates and economic conditions and their effect on the partnership and
its assets, trends in the California real estate market, estimates as to the
allowance for loan losses and the valuation of real estate held for sale,
estimates of future limited partner withdrawals, the total amount of the
Formation Loan, and 2005 annualized yield estimates. Actual results may be
materially different from what is projected by such forward-looking statements.
Factors that might cause such a difference include unexpected changes in
economic conditions and interest rates, the impact of competition and
competitive pricing and downturns in the real estate markets in which the
partnership has made loans. All forward-looking statements and reasons why
results may differ included in this Form 10-Q are made as of the date hereof,
and we assume no obligation to update any such forward-looking statement or
reason why actual results may differ.
Related Parties.
The general partners of the partnership are Redwood Mortgage Corp., Gymno
Corporation and Michael R. Burwell. Most partnership business is conducted
through Redwood Mortgage Corp. which arranges, services and maintains the loan
portfolio for the benefit of the partnership. Michael R. Burwell is President
and Chief Financial Officer of Redwood Mortgage Corp. and Gymno Corporation. The
following is a list of various partnership activities for which related parties
are compensated.
o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, the partnership may
collect an amount equivalent to 12% of the loaned amount until six months after
the termination date of the offering. Thereafter, the loan brokerage commissions
(points) will be limited to an amount not to exceed 4% of the total partnership
assets per year. The loan brokerage commissions are paid by the borrowers, and
thus, are not an expense of the partnership. Loan brokerage commissions paid by
the borrowers were $598,000 and $448,000 for the three month periods ended March
31, 2005 and 2004, respectively.
o Mortgage Servicing Fees Monthly mortgage servicing fees of up to 1/8 of
1% (1.5% on an annual basis) of the unpaid principal of the partnership's loans
are paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and
customary in the geographic area where the property securing the mortgage is
located. Mortgage servicing fees of $388,000 and $353,000 were incurred for the
three month periods ended March 31, 2005 and 2004, respectively.
o Asset Management Fees The general partners receive monthly fees for
managing the partnership's portfolio and operations up to 1/32 of 1% of the `net
asset value' (3/8 of 1% on an annual basis). Management fees to the general
partners of $184,000 and $141,000 were incurred for the three month periods
ended March 31, 2005 and 2004, respectively.
14
o Other Fees The partnership agreement provides that the general partners
may receive other fees such as processing and escrow, reconveyance, mortgage
assumption and mortgage extension fees. Such fees are incurred by the borrowers
and are paid to the general partners. Such fees totaled $16,000 and $13,000 for
the three month periods ended March 31, 2005 and 2004, respectively.
o Income and Losses All income and losses are credited or charged to
partners in relation to their respective partnership interests. The allocation
to the general partners (combined) shall be a total of 1%, which was $35,000 and
$27,000 for the three month periods ended March 31, 2005 and 2004, respectively.
o Operating Expenses Redwood Mortgage Corp. is reimbursed by the
partnership for all operating expenses actually incurred on behalf of the
partnership, including without limitation, out-of-pocket general and
administration expenses of the partnership, accounting and audit fees, legal
fees and expenses, postage and preparation of reports to limited partners.
Operating expenses totaling $78,000 and $75,000 for the three month periods
ended March 31, 2005 and 2004, respectively, were reimbursed to Redwood Mortgage
Corp.
o Contributed Capital The general partners jointly and severally were to
contribute 1/10 of 1% in cash contributions as proceeds from the offerings are
received from the limited partners. As of March 31, 2005 and December 31, 2004,
a general partner, Gymno Corporation, had contributed $184,000 and $174,000,
respectively, as capital in accordance with Section 4.02(a) of the partnership
agreement.
o Sales Commission - "Formation Loan" to Redwood Mortgage Corp. Sales
commissions relating to the capital contributions by limited partners are not
paid directly by the partnership out of the offering proceeds. Instead, the
partnership loans to Redwood Mortgage Corp., a general partner, amounts
necessary to pay all sales commissions and amounts payable in connection with
unsolicited orders. The loan is referred to as the "Formation Loan". It is
unsecured and non-interest bearing and is applied to reduce limited partners'
capital in the consolidated balance sheets. The sales commissions range between
0% (for units sold by the general partners) and 9%. It is estimated that the
total amount of the formation loan will approximate 7.6% based on the assumption
that 65% of the investors will reinvest earnings, which qualify for the higher
commission percentage.
The amount of the annual installments paid by Redwood Mortgage Corp. are
determined at annual installments of one-tenth of the principal balance of each
formation loan at December 31 of each year until the offering period is closed.
Thereafter, the remaining formation loan is paid in ten equal amortizing
payments over a period of ten years.
15
Results of Operations - For the three months ended March 31, 2005 and 2004
Changes in the partnership's operating results for the three month periods
ended March 31, 2005 versus 2004 are discussed below:
Changes during the
three months ended
March 31, 2005
versus 2004
----------------------
Net income $ 811,000
===============
Revenue
Interest on loans 370,000
Interest - bank 31,000
Late fees (18,000)
Gain on sale of real estate held for sale 183,000
Imputed interest on Formation Loan 43,000
Other 66,000
---------------
$ 675,000
---------------
Expenses
Mortgage servicing fees 35,000
Interest expense (70,000)
Amortization of loan origination fees 8,000
Provision for losses on loans and real estate held for sale (191,000)
Asset management fees 43,000
Clerical costs through Redwood Mortgage Corp. 3,000
Professional services (7,000)
Amortization of discount on imputed interest 43,000
---------------
$ (136,000)
---------------
Net income increase $ 811,000
===============
The increase in interest on loans of $370,000 (10%) for the three month
period ended March 31, 2005 versus March 31, 2004, was due primarily to the
increased size of the partnership secured loan portfolio at March 31, 2005 of
$152,612,000, as compared to a secured loan portfolio of $138,220,000 as of
March 31, 2004. The increase in interest on loans for the three month period
ended March 31, 2005 was mitigated by a lower average portfolio interest rate of
10.11% at March 31, 2005 versus 10.52% at March 31, 2004. Average loan balances
for the three month periods ended March 31, 2005 and 2004 were $162,179,000 and
$142,697,000, respectively.
The increase in mortgage servicing fees of $35,000 (10%) for the three
month period ended March 31, 2005 versus March 31, 2004 is primarily due to an
increase in the average size of the loan portfolio for the three month period
ended March 31, 2005 from the amount as of March 31, 2004, as noted above.
The decrease in interest expense of $70,000 for the three month period
ended March 31, 2005 versus March 31, 2004 is primarily due to the lower average
outstanding balance of the line of credit during the first quarter of 2005.
During the three month period ended March 31, 2005 the partnership did not
significantly utilize the line of credit facility. Instead, loan commitments
were funded from loan pay-offs and the sale of limited partner unit proceeds.
Interest expense of $36,000 was paid on the line of credit balance of
$16,000,000 that was brought forward from December 31, 2004.
16
The decrease in provision for losses on loans and real estate held for sale
of $191,000 (68%) for the three month period ended March 31, 2005 versus March
31, 2004 is due to management's determination that a total provision of
$3,434,000 was adequate based on the loan and real estate held for sale balances
as of March 31, 2005. As of March 31, 2005 the loan portfolio has a
loan-to-value ratio of 60.16%, based on appraised values and prior liens at the
time the loans were consummated. Across virtually all of California, real estate
values are stable or rising. The partnership's real estate held for sale
properties will benefit from the strong real estate market. Consequently,
management did not believe that any material addition to the provision for
losses against real estate held for sale was warranted.
The increase in the asset management fees of $43,000 for the three month
period ended March 31, 2005 versus March 31, 2004 is due to an increase in the
limited partners' capital under management at March 31, 2005 to $194,173,000
from $147,156,000 at March 31, 2004.
The decrease in professional fees of $7,000 for the three month period
ended March 31, 2005 versus March 31, 2004 is primarily due to timing of billing
and payment of fees associated with various partnership regulatory filings and
the annual audit.
The increase in amortization of loan origination fees of $8,000 for the
three month period ended March 31, 2005 versus March 31, 2004, is due to a
revision of fee rates and an extension of the maturity date on the increased
line of credit when the credit line was increased from $32,000,000 to
$42,000,000 in November, 2004.
The increase in other income of $66,000 for the three month period ended
March 31, 2005 versus March 31, 2004 is primarily a result of an increase of
$29,000 in miscellaneous income. Additionally, the partnership may accept
unsolicited orders for units from investors who utilize the services of a
registered investment advisor. If an investor utilizes the services of a
registered investment advisor in acquiring units, Redwood Mortgage Corp. will
contribute to the partnership an amount equal to the sales commissions otherwise
attributable to a sale of units through a participating broker dealer. This
amount is based on the investor's election to retain earnings (9%) or have their
earnings distributed (5%). As of March 31, 2005 $37,000 was paid and recorded
under other income for such amount, contributed by Redwood Mortgage Corp. to the
partnership.
The increase in gain on sale of real estate held for sale of $183,000 for
the three month period ended March 31, 2005 versus March 31, 2004 was primarily
due to a gain realized upon the disposal of a real estate property.
The increase in imputed interest of $43,000 for the three month period
ended March 31, 2005 versus March 31, 2004 is primarily due to increases in the
Formation Loan due to additional limited partnership investments.
The increase in bank interest of $31,000 for the three month period ended
March 31, 2005 versus March 31, 2004 is due to larger average deposits of
$16,744,000 and $602,000 as of such dates, respectively, in the money market
accounts during the periods.
Partnership capital continued to increase during the three month period
ended March 31, 2005. The partnership received new limited partner capital
contributions of $10,133,000 and retained the earnings of limited partners that
have chosen to reinvest earnings of $2,215,000 for the three month period ended
March 31, 2005, versus $8,274,000 and $1,656,000 for such amounts for the three
month period ended March 31, 2004. The increased partnership capital resulted in
an increase in loans outstanding to $152,612,000 at March 31, 2005, versus
$138,220,000 at March 31, 2004. The limited partner contributions of $10,133,000
relate to the partnership's current offering of units, which is currently
ongoing.
At March 31, 2005, outstanding loans with filed notices of default were
four totaling $6,185,000 or 4.05% of outstanding secured loans versus the three
totaling $2,931,000 or 2.12% of outstanding secured loans that existed at March
31, 2004. Two of the foreclosures at March 31, 2005, have entered into workout
agreements. These foreclosures are a reflection of the economic times that
existed at March 31, 2005 and 2004, and yet are not unusual in the general
partners' experience.
17
The general partners received mortgage brokerage commissions from loan
borrowers of $598,000 for the three month period ended March 31, 2005 versus
$448,000 for the three month period ended March 31, 2004. The increase is due to
more loans being funded in the three month period ended March 31, 2005 versus
the corresponding period of 2004.
Allowance for Losses.
The general partners regularly review the loan portfolio, examining the
status of delinquencies, borrowers' payment records, etc. Based upon this
information and other data, the allowance for loan losses is increased or
decreased. Borrower foreclosures are a normal aspect of partnership operations.
The partnership is not a credit based lender and hence while it reviews the
credit history and income of borrowers, and if applicable, the income from
income producing properties, the general partners expect that the partnership
will on occasion take back real estate security. During 2002 and 2003 the
economy stabilized. During 2004 and continuing in 2005, the economy and the
Northern California real estate market strengthened. As of March 31, 2005, the
partnership had twelve loans past due 90 days or more on interest payments or
past maturity totaling $27,932,000. With respect to four of these twelve loans,
we have filed notices of default, beginning the process of foreclosure. The
principal amounts of the four loans with filed notices of default total
$6,185,000 or 4.05% of the secured loan portfolio. Of these four, two loans,
with a principal amount totaling $2,535,000, were categorized as delinquent and
past maturity, and as of March 31, 2005, we have entered into workout agreements
with respect to these two loans.
The partnership periodically enters into workout agreements with borrowers
who are past maturity or delinquent in their regular payments. In addition to
the two workout agreements with borrowers in foreclosure there were four other
borrowers in workout agreements as of March 31, 2005. The partnership has
entered into a total of six workout agreements with borrowers inclusive of
matured, foreclosed or 90-day delinquent loans. Typically, a workout agreement
allows the borrower to extend the maturity date of the balloon payment and/or
allows the borrower to make current monthly payments while deferring for periods
of time, past due payments, and allows time to pay the loan in full. These
workout agreements and foreclosures generally exist within our loan portfolio to
greater or lesser degrees, depending primarily on the health of the economy. The
number of foreclosures and workout agreements will generally rise during
difficult economic times and conversely fall during good economic times. The
number and amount of foreclosures existing at March 31, 2005, in management's
opinion, does not have a material effect on our results of operations or
liquidity. These workouts and foreclosures have been considered when management
arrived at appropriate loan loss reserves and based on our experience, are
reflective of our loan marketplace segment. In 2005, we may initiate foreclosure
on delinquent borrowers or borrowers who become delinquent during the balance of
the year. We may take back additional real estate through the foreclosure
process in 2005. Borrower foreclosures are a normal aspect of partnership
operations and the general partners anticipate that they will not have a
material effect on liquidity. As a prudent guard against potential losses, the
general partners have made provisions for losses on loans and real estate held
for sale of $3,434,000 through March 31, 2005. These provisions for losses were
made to protect against collection losses. The total cumulative provision for
losses as of March 31, 2005 is considered by the general partners to be
adequate. Because of the number of variables involved, the magnitude of the
swings possible and the general partners' inability to control many of these
factors, actual results may and do sometimes differ significantly from estimates
made by the general partners.
18
PORTFOLIO REVIEW - For the three months ended March 31, 2005 and 2004
Loan Portfolio.
The partnership's loan portfolio consists primarily of short-term (one to
five years), fixed rate loans secured by real estate. As of March 31, 2005 and
2004 the partnership's loans secured by real property collateral in the six San
Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Alameda,
Contra Costa, and Marin) represented $116,032,000 (76.03%) and $99,435,000
(71.94%) of the outstanding secured loan portfolio. The remainder of the
portfolio represented loans secured primarily by Northern California real estate
outside of the San Francisco Bay Area counties.
As of March 31, 2005 and 2004 the partnership held 79 and 75 secured loans,
respectively, in the following categories (in thousands):
March 31,
---------------------------------------------------------------
2005 2004
----------------------------- -----------------------------
Single family homes (1-4 units) $ 62,354 40.86% $ 58,620 42.41%
Apartments (5+ units) 21,825 14.30% 23,621 17.09%
Commercial 66,700 43.71% 50,587 36.60%
Land 1,733 1.13% 5,392 3.90%
------------- ------------ ------------- ------------
Total $ 152,612 100.00% $ 138,220 100.00%
============= ============ ============= ============
As of March 31, 2005, the partnership held 79 loans secured by deeds of
trust. The following table sets forth the priorities, asset concentrations and
maturities of the loans held by the partnership as of March 31, 2005.
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of March 31, 2005 (in thousands)
# of
Secured
Loans Amount Percent
------------- ------------- ------------
1st Mortgages 44 $ 109,427 71.70%
2nd Mortgages 30 34,389 22.53%
3rd Mortgages 5 8,796 5.77%
============= ============= ============
Total 79 $ 152,612 100.00%
Maturing 12/31/05 and prior 19 $ 56,804 37.22%
Maturing prior to 12/31/06 21 46,984 30.79%
Maturing prior to 12/31/07 16 27,803 18.22%
Maturing after 12/31/07 23 21,021 13.77%
============= ============= ============
Total 79 $ 152,612 100.00%
Average secured loan as a % of secured loan portfolio $ 1,932 1.27%
Largest secured loan as a % of secured loan portfolio 11,685 7.66%
Smallest secured loan as a % of secured loan portfolio 50 0.03%
Average secured loan-to-value at time of loan based on
appraisals and prior liens at time of loan 60.16%
Largest secured loan as a percent of partnership assets 11,685 5.96%
19
Liquidity and Capital Resources.
The partnership relies upon purchases of units, loan payoffs, borrowers'
mortgage payments, and, to a lesser degree, its line of credit for the source of
funds for loans and for the undisbursed portion of Construction Loans and
Rehabilitation Loans (see ASSET QUALITY). Recently, mortgage interest rates have
decreased somewhat from those available at the inception of the partnership. If
interest rates were to increase substantially, the yield of the partnership's
loans may provide lower yields than other comparable debt-related investments.
As such, additional limited partner unit purchases could decline, which would
reduce the overall liquidity of the partnership. Additionally, since the
partnership has made primarily fixed rate loans, if interest rates were to rise,
the likely result would be a slower prepayment rate for the partnership. This
could cause a lower degree of liquidity as well as a slowdown in the ability of
the partnership to invest in loans at the then current interest rates.
Conversely, in the event interest rates were to decline, the partnership could
experience a surge of unit purchases by prospective limited partners, and/or
significant borrower prepayments. In such event, if the partnership can only
obtain the then existing lower rates of interest, there may be a dilution of the
partnership's yield on loans, thereby lowering the partnership's overall yield
to the limited partners. The partnership to a lesser degree relies upon its line
of credit to fund loans. Generally, the partnership's loans are fixed rate,
whereas the credit line is a variable rate loan. In the event of a significant
increase in overall interest rates, the credit line rate of interest could
increase to a rate above the average portfolio rate of interest. Should such an
event occur, the general partners would desire to pay off the line of credit and
would generally not use it to fund loans. This could reduce the overall
liquidity of the partnership. Cash is constantly being generated from borrower
payments of interest, principal and loan payoffs. Currently, cash flow greatly
exceeds partnership expenses and cash distribution requirements to limited
partners. Excess cash flow is invested in new loan opportunities, and for
funding the undisbursed portion of Construction and Rehabilitation Loans, and is
used to reduce the partnership credit line or for other partnership business.
At the time of subscription to the partnership, limited partners must elect
either to receive monthly, quarterly or annual cash distributions from the
partnership, or to compound earnings in their capital account. If an investor
initially elects to receive monthly, quarterly or annual distributions, such
election, once made, is irrevocable. If the investor initially elects to
compound earnings in his/her capital account, in lieu of cash distributions, the
investor may, after three (3) years, change the election and receive monthly,
quarterly or annual cash distributions. Earnings allocable to limited partners,
who elect to compound earnings in their capital account, will be retained by the
partnership for making further loans or for other proper partnership purposes;
and such amounts will be added to such limited partners' capital accounts.
During the three month periods ended March 31, 2005 and 2004, the
partnership, after allocation of syndication costs, made the following
allocation of earnings both to the limited partners who elected to compound
their earnings, and those that chose to distribute:
Three months ended
March 31,
------------------------------
2005 2004
------------- --------------
Compounding $ 2,215,000 $ 1,656,000
Distributing $ 1,239,000 $ 1,005,000
As of March 31, 2005 and 2004 limited partners electing to receive cash
distributions of earnings represented 37% and 38%, respectively, of the limited
partners' outstanding capital accounts. These percentages have remained
relatively stable. The general partners anticipate that after all capital has
been raised, the percentage of limited partners electing to withdraw earnings
will decrease due to the dilution effect which occurs when compounding limited
partners' capital accounts grow through compounded earnings.
20
The partnership also allows the limited partners to withdraw their capital
account subject to certain limitations and penalties. Once a limited partner's
initial five-year hold period has passed, the general partners expect to see an
increase in liquidations due to the ability of limited partners to withdraw
without penalty. This ability to withdraw five years after a limited partner's
investment has the effect of providing limited partner liquidity and the general
partners expect a portion of the limited partners to avail themselves of this
liquidity. The general partners expect to see increasing numbers of limited
partner withdrawals during a limited partner's 5th through 10th anniversary, at
which time the bulk of those limited partners who have sought withdrawal have
been liquidated. Since the five-year hold period for many limited partners has
yet to expire, as of March 31, 2005, many limited partners may not have yet
opted for such liquidation. Earnings and capital liquidations including early
withdrawals during the three month periods ended March 31, 2005 and 2004 were:
Three months ended
March 31,
------------------------------
2005 2004
------------- -------------
Cash distributions $ 1,239,000 $ 1,005,000
Capital liquidation* $ 514,000 $ 627,000
------------- -------------
Total $ 1,753,000 $ 1,632,000
============= =============
* These amounts represent gross of early withdrawal penalties.
Additionally, limited partners may liquidate their investment over a
one-year period subject to certain limitations and penalties. During the three
month periods ended March 31, 2005 and 2004, capital liquidated subject to the
10% penalty for early withdrawal was:
Thee months ended
March 31,
------------------------------
2005 2004
------------- -------------
$ 96,000 $ 328,000
This represents 0.05% and 0.21% of the limited partners' ending capital as
of March 31, 2005 and 2004, respectively. These withdrawals are within the
normally anticipated range and represent a small percentage of limited partner
capital.
In some cases in order to satisfy broker dealers and other reporting
requirements, the general partners have valued the limited partners' interest in
the partnership on a basis which utilizes a per unit system of calculation,
rather than based upon the investors' capital account. This information has been
reported in this manner in order to allow the partnership to integrate with
certain software used by the broker dealers and other reporting entities. In
those cases, the partnership will report to broker dealers, Trust Companies and
others a "reporting" number of units based upon a $1.00 per unit calculation.
The number of reporting units provided will be calculated based upon the limited
partner's capital account value divided by $1.00. Each investor's capital
account balance is set forth periodically on the partnership account statement
provided to investors. The reporting units are solely for broker dealers
requiring such information for their software programs and do not reflect actual
units owned by a limited partner or the limited partners' right or interest in
cash flow or any other economic benefit in the partnership. Each investor's
capital account balance is set forth periodically on the partnership account
statement provided to investors. The amount of partnership earnings each
investor is entitled to receive is determined by the ratio that each investor's
capital account bears to the total amount of all investor capital accounts then
outstanding. The capital account balance of each investor should be included on
any NASD member client account statement in providing a per unit estimated value
of the client's investment in the partnership in accordance with NASD Rule 2340.
21
While the general partners have set an estimated value for the partnership
units, such determination may not be representative of the ultimate price
realized by an investor for such units upon sale. No public trading market
exists for the partnership units and none is likely to develop. Thus, there is
no certainty that the units can be sold at a price equal to the stated value of
the capital account. Furthermore, the ability of an investor to liquidate his or
her investment is limited subject to certain liquidation rights provided by the
partnership, which may include early withdrawal penalties.
Current Economic Conditions.
Since January, 2001, and through December 31, 2003, the Federal Reserve
reduced interest rates significantly by cutting the Federal Funds Rate to 1.00%.
From July 1, 2004 through March 31, 2005, the Federal Reserve increased the
Federal Funds Rate to 2.75%. The effect of these changes has greatly reduced
short-term interest rates and to a lesser extent reduced long-term interest
rates. The recent upward movement in the Federal Funds Rate during 2004 and 2005
has raised short-term rates but has not yet raised long-term interest rates
significantly. New loans will be originated at then existing interest rates. In
the future the general partners anticipate that interest rates likely will
change from their current levels. The general partners cannot, at this time,
predict at what levels interest rates will be in the future. The general
partners anticipate that new loans will be placed during 2005 at rates slightly
above those that prevailed in 2004. The lowering of interest rates has
encouraged those borrowers that have mortgages with higher interest rates than
those currently available to seek refinancing of their obligations. The
partnership may face prepayments in the existing portfolio from borrowers taking
advantage of these lower rates. However, demand for loans from qualified
borrowers continues to be strong and as prepayments occur, the general partners
expect to replace paid off loans with loans at somewhat lower interest rates. At
this time, the general partners believe that the average loan portfolio interest
rate will remain relatively stable over the year 2005. Based upon the rates
payable in connection with the existing loans, and anticipated interest rates to
be charged by the partnership and the general partners' experience, the general
partners anticipate that the annualized yield will range between 6.75% and 7.25%
in 2005.
The partnership makes loans primarily in Northern California. As of March
31, 2005, approximately 76.03%, ($116,032,000) of the loans held by the
partnership were in six San Francisco Bay Area Counties. The remainder of the
loans held was secured primarily by Northern California real estate outside of
the San Francisco Bay Area.
Recently the national and Northern California economies seem to be
improving. Job creation remains a concern, as little job creation seems to be
evident. The partnership makes loans primarily in Northern California and real
estate values of residential, commercial, multi-family properties and of land
are of particular interest to the partnership. Real estate is the primary
security for the partnership's loans.
The residential real estate market in California continues to appreciate.
The San Francisco Chronicle dated March 11, 2005 reported that "Median prices
for existing homes in the Bay Area hit an all-time-high of $569,000 in February,
rocketing 19.5% from $476,000 in February 2004 and up 2.3% from $556,000 in
January. Prices are increasing at their fastest pace in four years, according to
DataQuick Information Systems, a La Jolla (San Diego County) real estate market
research firm. `It's stronger than we'd anticipated,' said John Karevoll, a
DataQuick analyst. `These numbers show there's still gas in the tank, and the
market has a way to go before it levels off. We did not anticipate a downturn
but thought we'd be coming in for a soft landing.' Instead, prices for
single-family homes continued to soar. Home buyers in the nine-county Bay Area
snapped up 4,905 resale single-family residences in February, a slight decline
form 4,925 last February. The highest median price was in Marin County, at
$808,000, followed by San Mateo at $711,000 and San Francisco at $701,000,
according to DataQuick. Experts said low inventory continues to fuel the frenzy.
`The bottom line is lots of buyers and very few homes,' said Joan Underwood, a
broker with Marvin Gardens who specializes in El Cerrito and Richmond Annex.
Another factor in the increase is that interest rates are inching higher.
Everyone who looks at the market says the price acceleration can't last, but
real estate agents and other experts said they expect a gradual leveling rather
than a bubble bursting. Meanwhile, there still seems to be plenty of life in the
market. The record February prices, which reflect homes that were on the market
in historically slow December and January, are likely to be exceeded once the
spring season gets in full swing."
22
On the commercial front the San Francisco Business Times for April 8-14,
2005 reports that "Big spenders are rolling back into San Francisco and up the
city's highrises to lease the swankiest view space. And the price is rising
fast. In the past few months a handful of firms, including hedge fund Caxton
Associates LLC and law firm McKenna Long & Aldridge, LLP have leased prime view
space. Those firms did deals for the 33rd floor of the Transamerica pyramid and
the 41st floor of 101 California Street for $60 and $53 per square foot,
respectively - a major pop from the mid-$40s range similar space commanded less
than a year ago. `Asking rental quotes in the $50s or even the $60s doesn't
elicit the broker pushback it would have in 2004,' said Jim Ousman, managing
director of leasing for Equity Office Properties. `That's an indication this
higher-end space is priced accordingly.' As the rest of the San Francisco office
market struggles with vacancy rates that remain in the high teens and average
rents stuck at around $30, the vacancy rate for view space - the upper floors of
the best highrises - is an estimated 5%, according to a recent study by Cushman
& Wakefield. Prices are being rapidly marked up to leverage that scarcity.
Leasing agents representing landlords say the rise is being largely driven by
tenant demand. Whether these high rents for high-class space will have a
trickle-down effect on the less desirable space is unclear. The average asking
rents of Class A space in the central business district last quarter increased
roughly 3% to $30 a square foot, according to averages from Grubb & Ellis Co.
and CB Richard Ellis research reports. Some pockets are a little hotter,
however, like at 50 California Street where rents have increased 20% over the
past six months to as high as the mid $40 range."
As described above, the commercial property market in the San Francisco Bay
Area has recently been improving. Increased occupancies in commercial properties
enable owners to better handle their debt payments. Improved occupancies also
stabilize commercial real estate values, which benefits the partnership.
For partnership loans outstanding as of March 31, 2005, the partnership had
an average loan-to-value ratio of 60.16%, computed based on appraised values and
senior liens as of the date the loan was made. This percentage does not account
for any increases or decreases in property values since the date the loan was
made, nor does it include any reductions in principal on senior indebtedness
through amortization of payments after the loan was made. This low loan-to-value
ratio will assist the partnership in weathering loan delinquencies and
foreclosures should they eventuate.
Contractual Obligations
A summary of the contractual obligations of the partnership as of March 31,
2005 is set forth below (in thousands):
Contractual Obligation Total Less than 1 Year 1-3 Years 3-5 Years
-------------------------- -------------- ------------------ --------------- ---------------
Line of credit $ - $ - $ - $ -
Construction loans 2,444 2,444 - -
Rehabilitation loans 6,631 6,631 - -
-------------- ------------------ --------------- ---------------
Total $ 9,075 $ 9,075 $ - $ -
============== ================== =============== ===============
23
Part I - Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table contains information about the cash held in money
market accounts, loans held in the partnership's portfolio and loans to the
partnership pursuant to its line of credit as of March 31, 2005. The
presentation, for each category of information, aggregates the assets and
liabilities by their maturity dates for maturities occurring in each of the
years 2005 through 2009 and separately aggregates the information for all
maturities arising after 2009. The carrying values of these assets and
liabilities approximate their fair market values as of March 31, 2005 (in
thousands):
2005 2006 2007 2008 2009 Thereafter Total
----------------------------------------------------------------------------------
Interest earning assets:
Money market accounts $ 14,557 $ 14,557
Average interest rate 1.20% 1.20%
Loans secured by deeds of
trust $ 56,804 46,984 27,803 10,956 8,828 1,237 $152,612
Average interest rate 10.75% 9.88% 9.43% 10.32% 9.28% 9.44% 10.11%
Loans, unsecured $ 34 $ 34
Average interest rate - -
Interest bearing liabilities:
Line of credit $ - $ -
Average interest rate 5.75% 5.75%
Market Risk.
The partnership's line of credit bears interest at a variable rate, tied to
the prime rate. As a result, the partnership's primary market risk exposure with
respect to its obligations is to changes in interest rates, which will affect
the interest cost of outstanding amounts on the line of credit. The partnership
may also suffer market risk tied to general trends affecting real estate values
that may impact the partnership's security for its loans.
The partnership's primary market risk in terms of its profitability is the
exposure to fluctuations in earnings resulting from fluctuations in general
interest rates. The majority of the partnership's mortgage loans earn interest
at fixed rates. Changes in interest rates may also affect the value of the
partnership's investment in mortgage loans and the rates at which the
partnership reinvests funds obtained from loan repayments and new capital
contributions from limited partners. If interest rates increase, the interest
rates the partnership obtains from reinvested funds will generally increase, but
the value of the partnership's existing loans at fixed rates will generally tend
to decrease. The risk is mitigated by the fact that the partnership does not
intend to sell its loan portfolio, rather such loans are held until they are
paid off. If interest rates decrease, the amounts becoming available to the
partnership for investment due to repayment of partnership loans may be
reinvested at lower rates than the partnership had been able to obtain in prior
investments, or than the rates on the repaid loans. In addition, interest rate
decreases may encourage borrowers to refinance their loans with the partnership
at a time where the partnership is unable to reinvest in loans of comparable
value.
The partnership does not hedge or otherwise seek to manage interest rate
risk. The partnership does not enter into risk sensitive instruments for trading
purposes.
ASSET QUALITY
A consequence of lending activities is that occasionally losses will be
experienced and that the amount of such losses will vary from time to time,
depending upon the risk characteristics of the loan portfolio as affected by
economic conditions and the financial experiences of borrowers. Many of these
factors are beyond the control of the general partners. There is no precise
method of predicting specific losses or amounts that ultimately may be charged
off on particular segments of the loan portfolio, especially in light of the
current economic environment.
24
The conclusion that a loan may become uncollectible, in whole or in part,
is a matter of judgment. Although institutional lenders are subject to
requirements and regulations that, among other things, require them to perform
ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and
to obtain and maintain current information regarding their borrowers and the
securing properties, the partnership is not subject to these regulations and has
not adopted all of these practices. Rather, the general partners, in connection
with the periodic closing of the accounting records of the partnership and the
preparation of the financial statements, determine whether the allowance for
loan losses is adequate to cover potential loan losses of the partnership. As of
March 31, 2005 the general partners have determined that the allowance for loan
losses and real estate held for sale of $3,434,000 (1.77% of net assets) is
adequate in amount. Because of the number of variables involved, the magnitude
of the swings possible and the general partners' inability to control many of
these factors, actual results may and do sometimes differ significantly from
estimates made by the general partners. As of March 31, 2005, ten loans were
delinquent over 90 days on interest payments amounting to $17,098,000.
Additionally, two loans totaling $10,834,000 were past maturity 90 days or more
but current in interest payments as of March 31, 2005.
The partnership also makes loans requiring periodic disbursements of funds.
As of March 31, 2005, there were thirteen such loans. These loans include ground
up construction of buildings and loans for rehabilitation of existing
structures. Interest on these loans is computed using a simple interest method
and only on the amounts disbursed on a daily basis.
A summary of the status of the partnership's loans which are periodically
disbursed, as of March 31, 2005, is set forth below:
Complete Construction Rehabilitation
----------------------- -----------------------
Disbursed funds $ 13,487,000 $ 49,567,000
Undisbursed funds $ 2,444,000 $ 6,631,000
-------------- --------------
Total commitments $ 15,931,000 $ 56,198,000
============== ==============
"Construction Loans" are determined by the management to be those loans
made to borrowers for the construction of entirely new structures or dwellings,
whether residential, commercial or multifamily properties. The partnership has
approved the borrowers up to a maximum loan balance; however, disbursements are
made in phases throughout the construction process. As of March 31, 2005, the
partnership had commitments for Construction Loans totaling $15,931,000, of
which $13,487,000 had been disbursed and $2,444,000 remains to be disbursed. The
$15,931,000 of Construction Loans committed exceeds 10% of the loan portfolio,
which is in excess of the partnership's limit on Construction Loan funding. The
partnership will not make any additional Construction Loan obligations until
such time as the aggregate amount of the outstanding Construction Loan
commitments is less than 10% of the loan portfolio.
The partnership also makes loans, the proceeds of which are used to
remodel, add to and/or rehabilitate an existing structure or dwelling, whether
residential, commercial or multifamily properties and which, in the
determination of management, are not Construction Loans. These loans are
referred to by management as "Rehabilitation Loans". As of March 31, 2005 the
partnership had commitments for Rehabilitation Loans totaling $56,198,000, of
which $49,567,000 had been disbursed and $6,631,000 remains to be disbursed.
While the partnership does not classify Rehabilitation Loans as Construction
Loans, Rehabilitation Loans do carry some of the same risks as Construction
Loans. There is no limit on the amount of Rehabilitation Loans the partnership
may make. One of the loans with $5,000 in undisbursed funds as of March 31,
2005, was fully disbursed in April, 2005.
25
Part I - Item 4. CONTROLS AND PROCEDURES
As of March 31, 2005, the partnership carried out an evaluation, under the
supervision and with the participation of the general partners of the
effectiveness of the design and operation of the partnership's disclosure
controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act
of 1934, as amended. Based upon that evaluation, the general partners concluded
that the partnership's disclosure controls and procedures are effective in
timely alerting the general partners to material information relating to the
partnership that is required to be included in our periodic filings with the
Securities and Exchange Commission. There were no significant changes in the
partnership's internal control over financial reporting during the partnership's
first fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the partnership's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Notes to Consolidated Financial Statements - Note 9
discussed earlier
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
None
Item 6. Exhibits
31.1 Certification of General Partner pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of General Partner pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of General Partner pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of General Partner pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized on the 16th day of May
2005.
REDWOOD MORTGAGE INVESTORS VIII
By: /S/ Michael R. Burwell
----------------------------------------
Michael R. Burwell, General Partner
By: Gymno Corporation, General Partner
By: /S/ Michael R. Burwell
-----------------------------------------------
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer
By: Redwood Mortgage Corp.
By: /S/ Michael R. Burwell
-----------------------------------------------
Michael R. Burwell,
President, Secretary/Treasurer
27
Exhibit 31.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VIII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we 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 quarterly report is being prepared;
(b) 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
(c) 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 officers 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 Registrant's board of
directors (or persons performing the equivalent function):
(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 data; 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.
/s/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell, General Partner
May 16, 2005
28
Exhibit 31.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President, Secretary/Treasurer and Chief Financial
Officer of Gymno Corporation, General Partner, and Redwood Mortgage Corp.,
General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VIII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we 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 quarterly report is being prepared;
(b) 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
(c) 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 officers 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 Registrant's board of
directors (or persons performing the equivalent function):
(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 data; 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.
/s/ Michael R. Burwell
- -------------------------------------
Michael R. Burwell, President, Secretary/Treasurer
and Chief Financial Officer of Gymno Corporation, General
Partner, and Redwood Mortgage Corp., General Partner
May 16, 2005
29
Exhibit 32.1
CERTIFICATION 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 of Redwood Mortgage Investors VIII
(the "Partnership") on Form 10-Q for the period ending March 31, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the
Partnership, certify, that to the best of my 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
Partnership at the dates and for the periods indicated.
/s/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell, General Partner
May 16, 2005
30
Exhibit 32.2
CERTIFICATION 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 of Redwood Mortgage Investors VIII
(the "Partnership") on Form 10-Q for the period ending March 31, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General
Partner of the Partnership, and Redwood Mortgage Corp., General Partner of the
Partnership, certify that to the best of my 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
Partnership at the dates and for the periods indicated.
/s/ Michael R. Burwell
- --------------------------------------
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial
Officer of Gymno Corporation, General Partner,
and Redwood Mortgage Corp., General Partner
May 16, 2005
31