SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934
For the fiscal year ended December 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
Commission File Number 0-23972
AMERICAN MORTGAGE ACCEPTANCE COMPANY
(Formerly American Mortgage Investors Trust)
--------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 13-6972380
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
- ---------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 421-5333
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Shares of Beneficial Interest, par value $.10 per share
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 X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act Rule
12b-2). Yes X No
----- -----
The approximate aggregate market value of the voting and non-voting
common equity held by non-affiliates of the Registrant as of June 30, 2003 was
$142,280,303, based on a price of $17.36 per share, the closing sales price for
the Registrant's shares of beneficial interest or the American Stock Exchange on
that date.
As of March 15, 2004 there were 8,338,180 outstanding shares of the
Registrant's shares of beneficial interest.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Those portions of the Registrant's Proxy Statement for the Annual
Meeting of Shareholders to be held on June 9, 2004, which are incorporated into
Items 10, 11, 12 and 13.
Index to exhibits may be found on page 60
Page 1 of 106
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, THE WORDS "BELIEVES",
"ANTICIPATES", "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO THE "SAFE HARBOR" PROVISION OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF.
2
PART I
Item 1. Business.
General
- -------
American Mortgage Acceptance Company (the "Company") was formed on June 11, 1991
as a Massachusetts business trust. The Company elected to be treated as a real
estate investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended (the "Code").
The Company's business plan focuses on originating and acquiring mortgages
secured by multifamily properties, which may take the form of government insured
first mortgages, insured mortgage pass-through certificates or insured mortgage
backed securities, and uninsured mezzanine loans, construction loans, and bridge
loans. Additionally, the Company has indirectly invested in subordinate
commercial mortgage-backed securities and may invest in other real estate
assets, including non-multifamily mortgages. The Company also issues guarantees
of construction and permanent financing and makes standby loan commitments.
The Company is governed by a board of trustees comprised of three independent
trustees and two non-independent trustees who are affiliated with CharterMac, an
American Stock Exchange listed company. The Company has engaged Related AMI
Associates, Inc. (the "Advisor"), an affiliate of CharterMac, to manage its
day-to-day affairs. The Advisor has subcontracted with Related Capital Company
("Related"), a subsidiary of CharterMac, to provide the services contemplated.
Through the Advisor, Related offers the Company a core group of experienced
staff and executive management providing the Company with services on both a
full and part-time basis. These services include, among other things,
acquisition, financial, accounting, tax, capital markets, asset monitoring,
portfolio management, investor relations and public relations services.
Effective November 17, 2003, CharterMac, an affiliate of the Advisor, acquired
Related, which included the Advisor. This acquisition did not affect the
Company's day-to-day operations or the services provided to the Company by the
Advisor. Ownership of the Advisor was transferred to CharterMac, but management
of the Advisor remained unchanged as the principals of Related who managed the
Advisor became executive officers of CharterMac and remain executive officers of
the Advisor.
As a result of CharterMac's acquisition of Related, two of the Company's
independent trustees, Mr. Arthur P. Fisch and Mr. Peter T. Allen, who are also
on CharterMac's board of trustees, were no longer considered to be independent.
Due to a provision in the Company's trust agreement which requires the Company
to have a majority of "independent" trustees, Mr. Fisch and Mr. Allen resigned
from the board and were replaced by Stanley R. Perla and Richard M. Rosan as
independent trustees on the Company's board.
The consolidated financial statements include the accounts of the Company and
three wholly-owned subsidiaries which it controls: AMAC Repo Seller, LLC,
AMAC/FM Corporation ("AMAC/FM") and AMAC Credit Facility, LLC. All intercompany
accounts and transactions have been eliminated in consolidation. Unless
otherwise indicated, the "Company" as hereinafter used, refers to American
Mortgage Acceptance Company and its subsidiaries.
Effective October 2003, the Company dissolved AMAC/FM due to the assignment of
all rights and obligations under the Fannie Mae loan program to PW Funding.
AMAC/FM was formed to manage this program.
Investment Strategy
- -------------------
Since the Company's 1999 listing on the American Stock Exchange, the Company's
goal has been to attempt to maximize the return on the Company's asset base by
investing in higher yielding assets while managing risk by maintaining a portion
of its investments in government agency guaranteed or insured assets and by
maintaining a conservative capital structure.
The Company seeks asset diversification, capital appreciation and income for
distribution to its shareholders primarily through the acquisition and
origination of mortgages secured by multifamily properties. These investments
may take the form of first mortgages, mezzanine loans, construction loans and
bridge loans. The Company also indirectly invests in subordinate commercial
mortgage-backed securities and may invest in other real estate assets.
The Company invests in the following types of assets:
GOVERNMENT INSURED AND GUARANTEED INVESTMENTS
Generally, the Company seeks to maintain a minimum of 40% of its investments in
government insured or guaranteed investments, primarily through the acquisition
of Government National Mortgage Association ("GNMA") and Federal National
Mortgage Association ("FNMA") mortgage-backed securities and pass-through
certificates. The Company believes that government agency insured lending offers
safety, liquidity and moderate yields, while also providing a strong asset base
for collateralized borrowing on favorable terms.
3
MEZZANINE LOANS
Mezzanine loans are subordinate to senior mortgages and may include a
participating component, such as a right to a portion of the cash flow and
proceeds generated from the refinancing and sale of the underlying properties.
The Company seeks to capitalize on attractive yields available through the
funding of mezzanine debt in combination with the origination of government
insured, multifamily first mortgages.
The Company's mezzanine loans typically finance newly constructed or
rehabilitated market-rate multifamily properties and generally have terms of 40
years with an option to call the loan on 12 months notice at any time after the
tenth anniversary of the completion of the construction or rehabilitation. These
loans are typically in a subordinated mortgage position, are also secured by
equity interests in the borrower and have limited recourse to the borrower for
the three years from the date of loan. The Company seeks properties in growing
real estate markets with well capitalized developers or guarantors. The Company
leverages the expertise of its Advisor and its affiliates in both the initial
underwriting of the property, as well as in the ongoing monitoring of the
property through construction, lease-up and stabilization.
BRIDGE LOANS
The Company has two bridge loan programs. In the first, the Company's bridge
loans are typically funded in connection with the development of multifamily
properties which benefit from the Low Income Housing Tax Credit program under
Section 42 of the Internal Revenue Code ("LIHTC program"). Due to the equity
payment schedule typically associated with the LIHTC program, there can be
periods in a construction cycle where a developer needs short-term capital. To
capitalize on this demand, the Company will offer bridge loans to developers
with typical terms of approximately 12 months and which are collateralized by
the equity interests in the property owner. In the second program, the Company
provides bridge loans for properties undergoing rehabilitation by new owners
when the rehabilitation process will add significant value to the property and
reduce the effective loan-to-value ratio and risk of loss. The Company's loans
may finance the initial purchase and/or the subsequent rehabilitation of a
property.
During October 2002, the Company entered into a mortgage warehouse line of
credit with Fleet National Bank (the "Fleet Warehouse Facility"), in the amount
of up to $40 million. Under the terms of the Fleet Warehouse Facility, Fleet
will advance up to 83% of the total loan package, to be used to fund notes
receivable, which the Company will make to its customers for the
acquisition/refinancing and minor renovation of existing, lender-approved
multifamily properties. From time to time, the Company will use this facility to
finance real estate owned.
COMMERCIAL MORTGAGE-BACKED SECURITIES ("CMBS")
The Company may invest in subordinated CMBS, which offer the advantage of
significantly higher yields than government insured and guaranteed investments.
The market values of subordinated interest in CMBS and other subordinated
securities tend to be more sensitive to changes in economic conditions than
senior, rated classes. As a result of these and other factors, subordinated
interest generally are not actively traded and may not provide holders with
liquidity of investment.
The Company currently invests indirectly in CMBS through a convertible preferred
equity investment in ARCap Investors, LLC ("ARCap"). ARCap specializes in, and
is a recognized industry leader in investing in, non-investment grade and
unrated subordinated CMBS. The CMBS which comprise ARCap's portfolio are
collateralized by a diverse range of underlying properties including
multifamily, retail, office and hotel.
REAL ESTATE OWNED
From time to time, in order to protect its investments, the Company may
foreclose on certain properties that have collateralized loans where the
borrower has defaulted on interest and/or principal payments that were due to
the Company. Once the property is in the Company's possession, the Company will
take the necessary steps to improve the performance of the property and protect
the value of its investment.
STANDBY LOAN COMMITMENTS
The Company issues standby bridge loan and permanent loan commitments for
projects involved with the construction or rehabilitation of multifamily
apartment complexes in various locations. In return, the Company receives a fee
for issuing these commitments.
STABILIZATION GUARANTEES
The Company has entered into an agreement with Wachovia Bank, National
Association ("Wachovia"), to provide stabilization guarantees for new
construction of multifamily properties under the LIHTC program. Wachovia already
provides construction and stabilization guarantees to Fannie Mae, for loans
Wachovia originates under the Fannie Mae LIHTC forward commitment loan program,
but only for loans within regions of the country Wachovia has designated to be
within its territory. For loans outside Wachovia's territory, the Company has
agreed to issue a stabilization guarantee, for the benefit of Wachovia. Under
this program, the Company guarantees that properties which have completed
construction will stabilize and the associated construction loans will convert
to permanent Fannie Mae loans. The Company receives origination and guarantee
fees from the developers for providing the guarantees. If the properties do not
stabilize with enough net operating income for Fannie Mae to fully fund its
commitment for a permanent loan, AMAC may be required to purchase the
4
construction loan from Wachovia or to fund the difference between the
construction loan amount and the reduced Fannie Mae permanent loan amount.
TAXABLE REVENUE BONDS
During 2003, the Company invested in taxable revenue bonds, each of which is
pari-passu with a first mortgage position held by CharterMac, the owner of each
related tax-exempt revenue bond. The Company will seek to make additional
investments in these types of bonds in the future.
OTHER INVESTMENTS
From time to time, the Company may invest in assets outside of the Company's
investment strategy if it believes that making such an investment is
advantageous in maximizing the Company's return on its asset base.
Portfolio
- ---------
At December 31, 2003, the Company had total assets of approximately $327.1
million. At December 31, 2003, the Company owned approximately $167.3 million in
GNMA and FNMA certificates, or approximately 51.1% of the Company's assets. The
Company generally seeks to maintain at least 40% of its investments in
government insured or guaranteed investments.
At December 31, 2003, the Company owned approximately $11.1 million in mezzanine
loans, approximately $2.8 million in mortgage loans, and approximately $35.9
million in total bridge loans (approximately $26.3 million in floating rate
bridge loans and approximately $9.6 million in fixed rate bridge loans) funded
in connection with the development of multifamily properties which benefit from
the LIHTC program. The Company also owned approximately $77.4 million in real
estate that was foreclosed upon, $7.6 million in taxable revenue bonds and owned
an indirect investment in CMBS through the Company's $20.2 million preferred
equity interest in ARCap.
DEBT SECURITIES - AVAILABLE FOR SALE
As of December 31, 2003, the Company's portfolio included ten GNMA and fifteen
FNMA DUS certificates.
GNMA is a wholly owned United States government corporation within the
Department of Housing and Urban Development ("HUD") created to support a
secondary market in government-insured and guaranteed mortgage loans. GNMA
guarantees the timely payment of principal and interest on its securities, which
are backed by pools of FHA and other government agency insured or guaranteed
mortgages. GNMA certificates are backed by the full faith and credits of the
United States government. Fannie Mae is a private, shareholder-owned company
that is the largest private-sector provider of multifamily financing for
affordable and market-rate rental housing in America. Fannie Mae pools loans and
converts them into single-class mortgage-backed securities known as Fannie Mae
MBS, which is then guaranteed as to timely payment of principal and interest.
GNMA and FNMA DUS certificates are widely held and traded mortgage-backed
securities and therefore provide a high degree of liquidity.
The yield on the GNMA and FNMA DUS certificates will depend, in part, upon the
rate and timing of principal prepayments on the underlying mortgages. Generally,
as market interest rates decrease, mortgage prepayment rates increase and the
market value of interest rate sensitive obligations like the GNMA FNMA DUS
certificates increases. As market interest rates increase, mortgage prepayment
rates tend to decrease and the market value of interest rate sensitive
obligations like the GNMA and FNMA DUS certificates tend to decrease. The effect
of prepayments on yield is greater the earlier a prepayment of principal is
received. Certain of the Company's GNMA and FNMA DUS certificates are
collateralized by mortgage loans on multifamily properties.
5
Investments in Debt Securities - Available for Sale
- ---------------------------------------------------
Information relating to debt securities owned by the Company as of December 31,
2003 is as follows:
(Dollars in thousands)
Date Purchased/ Amortized
Certificate Final Stated Cost at
Name Number Payment Date Interest Rate December 31, 2003
- ---------------- ----------- -------------- ------------- -----------------
GNMA CERTIFICATES
Western Manor (1) 355540 7/27/94 7.125% $ 2,457
3/15/29
Copper Commons (2) 382486 7/28/94 8.500% --
8/15/29
SunCoast Capital Group, Ltd. (1) G002412 6/23/97 7.000% 232
4/20/27
Elmhurst Village (1) 549391 6/28/01 7.745% 21,594
1/15/42
Reserve at Autumn Creek (1)(3) 448748 6/28/01 7.745% 15,962
1/15/42
Casitas at Montecito (4) 519289 3/11/02 7.300% --
10/15/42
Village at Marshfield (1) 519281 3/11/02 7.475% 21,371
1/15/42
Cantera Crossing (1) 532663 3/28/02 6.500% 6,419
6/1/29
Filmore Park (1) 536740 3/28/02 6.700% 1,432
10/15/42
Northbrooke (1) 548972 5/24/02 7.080% 14,018
8/1/43
Ellington Plaza (1) 585494 7/26/02 6.835% 27,447
6/1/44
Burlington (1) 595515 11/1/02 5.900% 6,814
4/15/31
FNMA DUS CERTIFICATES
Cambridge (1) 385971 4/11/03 5.560% 3,665
3/1/33
Bayforest (1) 381974 4/21/03 7.430% 4,305
10/1/28
Coventry Place (1) 384920 5/9/03 6.480% 791
3/1/32
Rancho de Cieto (1) 385229 5/13/03 6.330% 2,608
9/1/17
Elmwood Gardens (1) 386113 5/15/03 5.350% 5,545
5/1/33
30 West (1) 380751 5/27/03 6.080% 1,362
10/1/16
Jackson Park (1) 386139 5/30/03 5.150% 2,777
6/1/18
Interest Income
Unrealized Earned Applicable
Gain (Loss)at Balance at to the Year Ended
Name December 31,2003 December 31, 2003 December 31, 2003
- ---------- ---------------- ----------------- -----------------
GNMA CERTIFICATES
Western Manor (1) $ (22) $ 2,435 $ 193
Copper Commons (2) -- -- 17
SunCoastCapital Group, Ltd. (1) 11 243 25
Elmhurst Village (1) 3,329 24,923 1,675
Reserve at Autumn Creek (1)(3) -- 15,962 1,238
Casitas at Montecito (4) -- -- 70
Village at Marshfield (1) 1,082 22,453 1,439
Cantera Crossing (1) 747 7,166 395
Filmore Park (1) 152 1,584 85
Northbrooke (1) 1,824 15,842 905
Ellington Plaza (1) 2,420 29,867 1,175
Burlington (1) 288 7,102 397
FNMA DUS CERTIFICATES
Cambridge (1) (83) 3,582 142
Bayforest (1) (61) 4,244 178
Coventry Place (1) (24) 767 28
Rancho de Cieto (1) (78) 2,530 79
Elmwood Gardens (1) (145) 5,400 182
30 West (1) (89) 1,273 37
Jackson Park (1) (44) 2,733 82
6
Date Purchased/ Amortized
Certificate Final Stated Cost at
Name Number Payment Date Interest Rate December 31, 2003
- ---------------- ----------- --------------- ------------- -----------------
Courtwood (1) 386274 6/26/03 4.690% 1,765
6/1/33
Sultana (1) 386259 6/30/03 4.650% 4,104
6/1/23
Buena (1) 386273 6/30/03 4.825% 3,053
6/1/33
Allegro (1) 386324 6/30/03 5.380% 2,574
6/1/33
Village West (1) 386243 6/30/03 4.910% 786
6/1/21
Westwood/Monterey (1) 386421 9/15/03 5.090% 2,720
8/1/33
Euclid (1) 386446 9/15/03 5.310% 2,374
8/1/33
Edgewood (1) 386458 9/15/03 5.370% 2,358
9/1/33
-----------------
Total $158,533
=================
Interest Income
Unrealized Earned Applicable
Gain (Loss)at Balance at to the Year Ended
Name December 31,2003 December 31, 2003 December 31, 2003
- ---------- ---------------- ----------------- -----------------
Courtwood (1) (147) 1,618 42
Sultana (1) (293) 3,811 96
Buena (1) (245) 2,808 71
Allegro (1) (42) 2,532 69
Village West (1) (41) 745 19
Westwood/Monterey (1) 80 2,800 46
Euclid (1) 55 2,429 40
Edgewood (1) 53 2,411 40
-----------------------------------------------------------
Total $8,727 $167,260 $8,765
===========================================================
(1) These GNMA and FNMA DUS certificates are partially or wholly-pledged as
collateral for borrowings under the repurchase facility (see Note 9).
(2) This GNMA certificate was repaid in April 2003 at par. There was no
gain or loss recognized.
(3) In January 2004, the Company received proceeds in the approximate
amount of $14.5 million from HUD in relation to the paydown of the
Reserve at Autumn Creek GNMA certificate. This paydown approximated 90%
of the total outstanding balance of the underlying mortgage loan, which
was the initial payment pursuant to the FHA insurance claim made by the
Company when the borrower missed debt service payments. The remaining
balance of approximately $1.5 million is expected to be received in the
second quarter 2004, from the remaining amounts of the insurance and
potentially the guarantee from GNMA.
(4) This GNMA certificate was repaid in March 2003 at par. As a result of
the repayment, the Company realized a loss of approximately $391,000
due to the unamortized balance of the premium that was recorded when
the GNMA certificate had been purchased.
7
(Dollars in thousands)
Remaining
Outstanding Committed
Principal Unamortized Carrying Balance to Interest
Property Location Balance Fees Amount Fund (1) Rate Maturity
- -------------------------------------------------------------------------------------------------------------------------------
Parwood (2) Long Beach, CA $ 2,683 $ 2 $ 2,681 $ 567 11.00% January 2004
Noble Towers (2)(3) Oakland, CA 3,581 30 3,551 3,719 9.75% July 2005
Clarks Crossing (2) Laredo, TX 1,074 -- 1,074 -- 12.00% April 2004
Desert View (2) Coolidge, AZ 20 -- 20 -- 11.00% May 2004
Valley View (2) North Little Rock, AR 400 -- 400 -- 12.00% July 2004
Georgia King (2) Newark, NJ 1,495 25 1,470 5 11.50% May 2004
Reserve at Thornton (2) Thornton, CO 260 9 251 690 11.00% August 2006
Concord at Gessner Land Houston, TX 188 -- 188 -- 8.00% December 2008
LIBOR + 4.625%
Del Mar Villas (4) Dallas, TX 5,554 8 5,546 -- (5) April 2004
LIBOR + 4.750%
Mountain Valley (4) Dallas, TX 6,306 30 6,276 -- (5) November 2004
LIBOR + 4.000%
Baywoods (4) Antioch, CA 10,990 40 10,950 -- (5) March 2005
LIBOR + 4.500%
Oaks of Baytown (4) Baytown, TX 2,337 16 2,321 1,488 (5) August 2005
LIBOR + 3.600%
Quay Point (4) Houston, TX 1,223 5 1,218 -- (5) August 2005
---------------------------------------------------
Total $36,111 $165 $35,946 $6,469
===================================================
(1) Funded on an as needed basis.
(2) These loans are to limited partnerships who are affiliated with the
Advisor.
(3) Affiliate of the Advisor has provided a full guarantee on the payment of
principal and interest due on this note.
(4) Pledged as collateral in connection with warehouse facility with Fleet
National Bank.
(5) 30-day LIBOR at December 31, 2003 was 1.12%.
8
INVESTMENTS IN MORTGAGE LOANS
Information relating to the Company's investments in mortgage loans as December
31, 2003 is as follows:
(Dollars in thousands)
Final
Maturity Lifetime
Property Description Date Call Date(A) Interest Rate Interest Cap(C)
- -------- ----------- -------- ----------- ------------- ---------------
FIRST MORTGAGE LOANS:
Stony Brook II
East Haven, CT 125 Units 6/37 12/06 7.625% N/A
Sunset Gardens
Eagle Pass, TX 60 Units 6/04 N/A 11.50% N/A
Alexandrine (H)
Detroit, MI 30 Units 12/03 N/A 11.00% N/A
Desert View (I)
Coolidge, AZ 45 Units 5/04 N/A 11.00% N/A
Subtotal First Mortgage Loans
MEZZANINE LOANS (J):
Stabilized Properties
- ---------------------
Stony Brook II
East Haven, CT 125 Units 6/37 12/06 15.33%(B) 16%
Plaza at San Jacinto (K)
Houston, TX 132 Units 1/43 6/11 11.40%(B) 16%
Subtotal Stabilized Mezzanine Loans
Properties in Lease-Up
- ----------------------
The Hollows (L)
Greenville, NC 184 Units 1/42 1/12 10.00%(B) 16%
Elmhurst Village (M)(N)
Oveido, FL 313 Units 1/42 3/19 10.00%(B) 16%
The Reserve at Autumn Creek (K)(M)(N)
Friendswood, TX 212 Units 1/42 9/14 10.00%(B) 16%
Club at Brazos (L)(O)
Rosenberg, TX 200 Units 5/43 4/13 10.00%(B) 14%
Northbrooke (M)(N)
Harris County, TX 240 Units 8/43 7/13 11.50%(B) 14%
Subtotal Properties in Lease-Up
Properties in Construction/Rehabilitation
- -----------------------------------------
Del Mar Villas
Dallas, TX 260 Units 4/04 N/A LIBOR+4.625% (P)
Mountain Valley
Dallas, TX 312 Units 11/04 N/A LIBOR+4.750% (P)
Villas at Highpoint
Lewisville, TX 304 Units 4/33 TBD 14.57% N/A
Subtotal Properties in Construction/Rehabilitation
Subtotal Mezzanine Loans
Total Mortgage Loans
Share of
Share of Excess Sale or
Excess Operating Refinancing Periodic
Property Cash Flows Proceeds Payment Terms Prior Liens
- -------- ---------------- -------------- ------------- -----------
FIRST MORTGAGE LOANS:
Stony Brook II
East Haven, CT N/A N/A (F) --
Sunset Gardens
Eagle Pass, TX N/A N/A (G) --
Alexandrine (H)
Detroit, MI N/A N/A (G) --
Desert View (I)
Coolidge, AZ N/A N/A (G) --
Subtotal First Mortgage Loans
MEZZANINE LOANS (J):
Stabilized Properties
- ---------------------
Stony Brook II
East Haven, CT 40% 35% (F) --
Plaza at San Jacinto (K)
Houston, TX 50% 50% (G) --
Subtotal Stabilized Mezzanine Loans
Properties in Lease-Up
- ----------------------
The Hollows (L)
Greenville, NC 50% 25% (G) $ 8,880
Elmhurst Village (M)(N)
Oveido, FL 50% 25% (G) 21,594
The Reserve at Autumn Creek (K)(M)(N)
Friendswood, TX 50% 25% (G) 15,993
Club at Brazos (L)(O)
Rosenberg, TX 50% 25% (G) 14,343
Northbrooke (M)(N)
Harris County, TX 50% 50% (G) 13,871
Subtotal Properties in Lease-Up
Properties in Construction/Rehabilitation
- -----------------------------------------
Del Mar Villas
Dallas, TX N/A N/A (G) 5,554
Mountain Valley
Dallas, TX N/A N/A (G) 6,306
Villas at Highpoint
Lewisville, TX N/A N/A (G) 18,800
Subtotal Properties in Construction/Rehabilitation
Subtotal Mezzanine Loans
Total Mortgage Loans
Interest
Outstanding Carrying Earned Applicable
Face Amount of Unamortized Amount of to the Year Ended
Property Mortgages(D) Costs and Fees Mortgages(E) December 31, 2003
- -------- -------------- -------------- ------------ -----------------
FIRST MORTGAGE LOANS:
Stony Brook II
East Haven, CT $ -- $ -- $ -- $ 497
Sunset Gardens
Eagle Pass, TX 1,479 -- 1,479 182
Alexandrine (H)
Detroit, MI 342 -- 342 38
Desert View (I)
Coolidge, AZ 960 -- 960 69
-----------------------------------------------------------
Subtotal First Mortgage Loans 2,781 -- 2,781 786
-----------------------------------------------------------
MEZZANINE LOANS (J):
Stabilized Properties
- ---------------------
Stony Brook II
East Haven, CT -- -- -- 527
Plaza at San Jacinto (K)
Houston, TX -- -- -- 39
-----------------------------------------------------------
Subtotal Stabilized Mezzanine Loans -- -- -- 566
-----------------------------------------------------------
Properties in Lease-Up
- ----------------------
The Hollows (L)
Greenville, NC 1,549 (133) 1,416 174
Elmhurst Village (M)(N)
Oveido, FL 2,874 (391) 2,483 320
The Reserve at Autumn Creek (K)(M)(N)
Friendswood, TX -- -- -- 36
Club at Brazos (L)(O)
Rosenberg, TX 1,962 (75) 1,887 200
Northbrooke (M)(N)
Harris County, TX 1,500 (133) 1,367 177
-----------------------------------------------------------
Subtotal Properties in Lease-Up
7,885 (732) 7,153 907
-----------------------------------------------------------
Properties in Construction/Rehabilitation
- -----------------------------------------
Del Mar Villas
Dallas, TX 765 -- 765 46
Mountain Valley
Dallas, TX 776 -- 776 47
Villas at Highpoint
Lewisville, TX 2,574 (185) 2,389 245
-----------------------------------------------------------
Subtotal Properties in Construction/Rehabilitation 4,115 (185) 3,930 338
-----------------------------------------------------------
Subtotal Mezzanine Loans 12,000 (917) 11,083 1,811
-----------------------------------------------------------
Total Mortgage Loans $14,781 $ (917) $13,864 $ 2,597
===========================================================
9
(A) Loans are subject to mandatory prepayment at the option of the Company ten
years after construction completion, with one year's notice. Loans with a
call date of "TBD" are still under construction.
(B) Interest on the mezzanine loans is based on a fixed percentage of the
unpaid principal balance of the related first mortgage loans. The amount
shown is the approximate effective rate earned on the balance of the
mezzanine loan. The mezzanine loans also provide for payments of additional
interest based on a percentage of cash flow remaining after debt service
and participation in sale or refinancing proceeds and certain provisions
that cap the Company's total yield, including additional interest and
participations, over the term of the loan.
(C) Lifetime interest cap represents the maximum annual return, including
interest, fees and participations, that can be earned by the Company over
the life of the mezzanine loan, computed as a percentage of the balance of
the first mortgage loan plus the mezzanine loan.
(D) As of December 31, 2003, all interest payments on the mortgage loans are
current, except as noted.
(E) Carrying amounts of the loans are net of unamortized origination costs and
fees and loan discounts.
(F) The Stonybrook II first mortgage loan and mezzanine loan were repaid in
January 2003.
(G) Interest only payments are due monthly, with loan balance due at maturity.
(H) The first mortgage loan, which matured in December 2003, did not pay off
the outstanding balance at the maturity date, which caused the loan to be
in default. The Company is currently in the process of determining the
necessary steps needed to be taken to protect its investment. The Company
has obtained an independent appraisal for the property underlying the
mortgage. The appraisal indicates that the value of the property exceeds
the carrying amount of the first mortgage loan on the property.
Accordingly, the Company has not recorded an allowance for probable losses
on this loan.
(I) Loan purchased in April 2003 in connection with the performance under a
guarantee made by the Company.
(J) The principal balance of the mezzanine loans is secured by the partnership
interests of the entity that owns the underlying property and a third
mortgage deed of trust. Interest payments on the mezzanine loans are
secured by a second mortgage deed of trust and are guaranteed for the first
36 months after construction completion by an entity related to the general
partner of the entity that owns the underlying property.
(K) These mezzanine loans have been reclassified to real estate owned -- see
Note 7.
(L) The Company does not have an interest in the first lien position relating
to this mezzanine loan.
(M) The Company has an interest in the first lien position relating to this
mezzanine loan.
(N) The first mortgage loans related to these properties were converted from
participations in FHA loans to ownership of the GNMA certificates and are
held by the Company - see Note 3.
(O) The funding of this mezzanine loan is based on property level operational
achievements.
(P) Interest cap on these loans is the maximum rate permitted by law.
10
Investment in ARCap
- -------------------
The Company owns 800,000 preferred equity units of ARCap, with a face amount of
$25 per unit, representing a 7.41% ownership and voting interest. The preferred
equity units are convertible, at the Company's option, into ARCap common units.
If converted into common units, the conversion price is equivalent to $25 per
unit, subject to certain adjustments. Also, if not already converted, for a
period of sixty days following the fifth anniversary of the first closing date,
which will be August 4, 2005, the preferred equity units are convertible, at the
Company's option, into a three-year note bearing interest at 12% that would be
junior to all of ARCap's then existing indebtedness. The preferred equity units
are also redeemable, at the option of ARCap, up until the fifth anniversary of
the first closing date.
Through the Company's convertible preferred membership interests in ARCap, it
has a substantial indirect investment in CMBS owned by ARCap. ARCap was formed
in January 1999 by REMICap, an experienced CMBS investment manager, and Apollo
Real Estate Investors, the real estate arm of one of the country's largest
private equity investors. In conjunction with a preferred equity offering,
REMICap and ARCap merged, making ARCap the only internally managed investment
vehicle exclusively investing in subordinated CMBS. As of December 31, 2003,
ARCap had approximately $1.1 billion in assets, including investments of
approximately $1.0 billion of CMBS. Multifamily properties underlie
approximately one-third of ARCap's CMBS.
The Company's equity in the earnings of ARCap will generally be equal to the
preferred equity rate of 12% , unless ARCap does not have earnings and cash
flows adequate to meet this distribution requirement. ARCap has met its
distribution requirements to the Company to date. Yields on CMBS depend, among
other things, on the rate and timing of principal payments, the pass-through
rate, interest rate fluctuations and defaults on the underlying mortgages. The
Company's interest in ARCap is illiquid and the Company would need to obtain the
consent of the board of managers of ARCap before it could transfer its interest
in ARCap to any party other than a current member. The carrying amount of the
investment in ARCap is not necessarily representative of the amount the Company
would receive upon a sale of the interest.
ARCap has shifted its focus to CMBS fund management, whereby ARCap manages CMBS
investment funds raised from third-party investors. ARCap is generally a
minority investor in these funds. ARCap thereby diversifies its revenue base by
increasing its proportion of revenue derived from fees as opposed to interest
income.
Loan Origination Program with Fannie Mae
- ----------------------------------------
In the first quarter of 2003, the Company discontinued its loan program with
Fannie Mae, under which Fannie Mae had agreed to fully fund the origination of
$250 million of Delegated Underwriter and Servicer loans ("DUS") for apartment
properties that qualify for low income housing tax credits ("LIHTC") under
Section 42 of the Internal Revenue Code. Under the loan program, the Company
originated and contracted for individual loans of up to $6 million each. The
Company guaranteed a first loss position of the aggregate principal amount of
these loans and also guaranteed construction loans for which it had issued a
forward commitment to originate under this program. Accordingly, the Company
wrote off approximately $358,000 of unamortized deferred costs relating to this
program, which is included in other expenses on the consolidated statement of
income.
In September 2003, the Company entered into a letter of agreement with PW
Funding Inc. ("PWF"), a subsidiary of CharterMac, each of which are affiliates
of the Advisor, under which the Company transferred and assigned all of its
rights and obligations to the two loans it originated under this program to PWF.
There was no payment made or received by the Company in connection with this
transfer. CharterMac has agreed to guarantee PWF's performance with regard to
this program, which in turn, allowed for the release of approximately $8.3
million in collateral pledged by the Company to secure its obligations under the
loan program. In turn, the Company indemnified PWF against any losses to Fannie
Mae on the loans and indemnified CharterMac against any obligations under its
guaranty. The maximum aggregate exposure to the Company under this agreement is
approximately $7.5 million. However, the Company believes that it will not be
called upon to fund any of these guarantees and, accordingly, that the fair
value of the guarantees is insignificant.
Effective October 2003, as a result of the release of the collateral due to the
assignment of all rights and obligations under this program to PW Funding, the
Company as dissolved AMAC/FM, which was formed for the purpose of managing this
program.
Competition
- -----------
The Company competes with various financial institutions in each of its lines of
business. The Company competes with banks and quasi-governmental agencies such
as Fannie Mae, Freddie Mac and HUD, as well as their designated mortgagees, for
multifamily loan product. For CMBS investments, competitors include major
financial institutions that sponsor CMBS conduits, pension funds, REITs and
finance companies that specialize in CMBS investment management.
The Company's business is also affected by competition to the extent that
underlying properties from which it derives interest and, ultimately, principal
payments may be subject to rental rates and relative levels of amenities from
comparable neighboring properties.
Additional information about the Company is also available at
www.americanmortgageco.com. We have made available, free of charge on or through
our website, our annual report on Form 10-K, our quarterly reports in Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
11
practicable after such material was electronically filed with, or furnished to
the Securities and Exchange Commission ("SEC"). Materials we filed with the SEC
may be read and copies at the SEC's Public Reference Room at 450 Fifth Street,
NY, Washington D.C. 20549. This information may also be obtained by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC at www.sec.gov. We will provide a
copy of any of the foregoing documents to shareholders upon request.
Employees and Management
- ------------------------
The Company does not directly employ anyone. All services are performed for the
Company by the Advisor and its affiliates. The Advisor receives compensation in
connection with such activities as set forth in Item 8, Financial Statements and
Supplementary Data, Item 11, Executive Compensation and Item 13, Certain
Relationships and Related Transactions. In addition, the Company reimburses the
Advisor and certain of its affiliates for expenses incurred in connection with
the performance by their employees of services for the Company in accordance
with the Declaration of Trust.
12
Item 2. Properties.
During 2003, the Company had three bridge loans and two mezzanine loans
on which required debt service payments were not received, causing the
notes to be in default. In all five of these instances, the Company has
foreclosed on the property securing the note receivable and taken
possession of the property. The Company sold three of the properties in
2003 and is currently managing the other two properties in an attempt
to stabilize the properties for future marketing attempts.
Item 3. Legal Proceedings.
On October 27, 2003, prior to taking possession of the real estate
collateral supporting the Gulfgate loan, the Company was named in a
lawsuit, Concord Gulfgate, Ltd. vs. Robert Parker, Sunrise Housing
Ltd., and American Mortgage Acceptance Company, Cause No. 2003-59290
in the State District Court of Harris County, Texas. The suit claims,
among other causes of action against the respective defendants, that
the Company conducted wrongful foreclosure in that the Guarantor did
not derive any benefit from the Company's loan and that the limited
partners of the Guarantor did not authorize the loan transaction. The
suit seeks, among other relief, actual, consequential, exemplary, and
punitive damages, a declaration that the loan made by the Company is
unenforceable, and that the Company was involved in a conspiracy to
defraud the Guarantor. The suit is currently in the discovery phase.
Item 4. Submission of Matters to a Vote of Shareholders.
None.
13
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters.
As of March 12, 2004, there were 242 registered shareholders owning 8,338,180
Shares. The Company's Shares have been listed on the American Stock Exchange
since July 1, 1999, under the symbol "AMC". Prior to July 1, 1999, there was no
established public trading market for the Company's Shares.
The high and low common share prices for each quarterly period in the past two
fiscal years in which the Shares were traded is as follows:
2003 2003 2002 2002
Quarter Ended Low High Low High
- ------------- ------ ------ ------ ------
March 31 $13.60 $16.06 $12.60 $14.70
June 30 $14.93 $17.99 $12.70 $14.09
September 30 $13.50 $17.94 $10.05 $13.60
December 31 $15.40 $16.97 $11.50 $14.09
The last reported sale price of Shares on the American Stock Exchange on March
12, 2004 was $17.69.
On February 25, 2002, the Company completed a public offering 2,500,000 common
shares at a price of $13.50 per share. The net proceeds from this offering,
approximately $30.9 million, net of underwriters' discount and expenses, were
used to fund investments.
On April 23, 2003, the Company completed a public offering of 1,955,000 common
shares at a price of $15.00 per share resulting in proceeds, net of
underwriters' discount and expenses, of approximately $27.5 million. The net
proceeds from this offering have been used to fund investment activity.
Incentive Share Option Plan
- ---------------------------
The Company adopted an incentive share option plan (the "Incentive Share Option
Plan") to attract and retain qualified persons as trustees and officers and to
provide incentive to and more closely align the financial interests of the
Advisor and its employees and officers with the interests of the Company's
shareholders by providing the Advisor with substantial financial interest in the
Company's success. The compensation committee (the "Compensation Committee"),
which is comprised of Messrs. Scott M. Mannes and Richard M. Rosan, administers
the Incentive Share Option Plan. Pursuant to the Incentive Share Option Plan, if
the Company's distributions per share in the immediately preceding calendar year
exceed $1.45 per share, the Compensation Committee has the authority to issue
options to purchase, in the aggregate, that number of shares which is equal to
three percent of the shares outstanding as of December 31 of the immediately
preceding calendar year (or in the initial year, as of December 31, 1999),
provided that the Compensation Committee may only issue, in the aggregate,
options to purchase a maximum number of shares over the life of the Incentive
Share Option Plan equal to 383,863 shares (i.e. 10% of the shares outstanding on
December 31, 2001). If the Compensation Committee does not grant the maximum
number of options in any year, then the excess of the number of authorized
options over the number of options granted in such year will be added to the
number of authorized options in the succeeding year and will be available for
grant by the Compensation Committee in such succeeding year. All options granted
by the Compensation Committee will have an exercise price equal to or grater
than the fair market value of the share on the date of the grant. The maximum
option term is ten years from the date of grant. All share options granted
pursuant to the Incentive Share Option Plan may vest immediately upon issuance
or in accordance with the determination of the Compensation Committee.
In April 2003, in accordance with the Incentive Share Option Plan, the Company's
Compensation Committee granted 190,000 options to employees of Related at an
exercise price of $15.03, which was the market price of the Company's common
shares at the grant date. These options vest equally, in thirds, in April 2004,
2005 and 2006 and expire in 10 years.
Share Repurchase Program
- ------------------------
In August 2003, the Company's Board of Trustees approved a share repurchase plan
for the Company. The plan enables the Company to repurchase, from time to time,
up to 1,000,000 common shares. The repurchases will be made in the open market,
and the timing will be dependent on the availability of shares and other market
conditions. No repurchases have been made at December 31, 2003.
14
Distribution Information
- ------------------------
Cash distributions per share for the years ended December 31, 2003 and 2002 are
as set forth in the following table:
(Dollars in thousands, except per share amounts)
Cash Distribution Total Amount
for Quarter Ended Date Paid Per Share Distributed
- ----------------- --------- --------- ------------
March 31, 2003 5/15/03 $ .4000 $ 2,546
June 30, 2003 8/14/03 .4000 3,335
September 30, 2003 11/14/03 .4000 3,335
December 31, 2003 2/14/04 .4000 3,335
------- -------
Total for 2003 $1.6000 $12,551
======= =======
March 31, 2002 5/15/02 $ .3625 $ 2,308
June 30, 2002 8/14/02 .3750 2,386
September 30, 2002 11/14/02 .3750 2,386
December 31, 2002 2/14/03 .4000 2,545
------- -------
Total for 2002 $1.5125 $ 9,625
======= =======
There are no material legal restrictions upon the Company's present or future
ability to make distributions in accordance with the provisions of the
Declaration of Trust. Future distributions paid by the Company will be at the
discretion of the Trustees and will depend on the actual cash flow of the
Company, its financial condition, capital requirements and such other factors as
the Trustees deem relevant.
In order to qualify as a REIT under the Internal Revenue Code, as amended, the
Company must, among other things, distribute at least 90% of its taxable income
to shareholders. The Company believes that it is in compliance with the
REIT-related provisions of the Code.
During 2003, for federal income tax purposes, the Company's per share
distribution totaled $1.60, all of which was reported as ordinary income to
shareholders for 2003. During 2002, for federal income tax purposes, the
Company's per share distribution totaled $1.47, of which $1.42 and $.05 were
reported as ordinary income and capital gain, respectively, to shareholders for
2002.
15
Item 6. Selected Financial Data.
The information set forth below presents selected financial data of the Company.
Additional financial information is set forth in the audited financial
statements and footnotes thereto contained in Item 8, Financial Statements and
Supplementary Data.
(Dollars in thousands except per share amounts)
Year ended December 31,
--------------------------------------------------------------
OPERATIONS 2003 2002 2001 2000 1999
- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues $ 15,510 $ 10,458 $ 5,698 $ 7,910 $ 5,507
Total expenses 5,653 3,812 2,660 4,766 2,301
---------- ---------- ---------- ---------- ----------
Income before other income 9,857 6,646 3,038 3,144 3,206
Total other income 2,027 3,014 2,149 174 3,054
---------- ---------- ---------- ---------- ----------
Net income $ 11,884 $ 9,660 $ 5,187 $ 3,318 $ 6,260
========== ========== ========== ========== ==========
Net income per share
basic and diluted $ 1.52 $ 1.61 $ 1.35 $ .86 $ 1.63
========== ========== ========== ========== ==========
Weighted average shares outstanding
Basic 7,802,957 6,017,740 3,838,630 3,838,630 3,841,831
========== ========== ========== ========== ==========
Diluted 7,814,810 6,017,740 3,838,630 3,838,630 3,841,931
========== ========== ========== ========== ==========
December 31,
--------------------------------------------------------------
FINANCIAL POSITION 2003 2002 2001 2000 1999
- ------------------ ---------- ---------- ---------- ---------- ----------
Total assets $ 327,107 $ 195,063 $ 101,982 $ 70,438 $ 115,565
========== ========== ========== ========== ==========
Repurchase facility payable $ 149,529 $ 87,880 $ 43,610 $ 12,656 $ 19,127
========== ========== ========== ========== ==========
Warehouse facility payable $ 34,935 $ 8,788 $ -- $ -- $ --
========== ========== ========== ========== ==========
Mortgage payable on real estate owned $ 15,993 $ -- $ -- $ -- $ --
========== ========== ========== ========== ==========
Total liabilities $ 206,212 $ 100,725 $ 46,703 $ 15,362 $ 58,474
========== ========== ========== ========== ==========
Total shareholders' equity $ 120,895 $ 94,338 $ 55,279 $ 55,076 $ 57,091
========== ========== ========== ========== ==========
DISTRIBUTIONS
- ------------
Distributions to shareholders $ 12,551 $ 9,625 $ 5,566 $ 5,566 $ 5,544
========== ========== ========== ========== ==========
Distribution per share $ 1.600 $ 1.513 $ 1.450 $ 1.450 $ 1.444
========== ========== ========== ========== ==========
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
- --------
The Company is a real estate investment trust specializing in multi-family
housing finance. The Company originates and acquires mezzanine loans, bridge
loans, and government-insured first mortgages secured by multi-family housing
properties throughout the United States. The Company seeks to increase the
return on its asset base by investing in higher yielding assets while balancing
risk by maintaining a portion of its investments in government-insured or
agency-guaranteed loans.
The Company primarily generates revenue from the collection of interest income
from mezzanine loans, bridge loans, and debt securities. The Company also earns
fees on standby loan commitments and stabilization guarantees that it makes.
The Company is managed by an affiliate of CharterMac, who provides services
including, among other things, acquisition, financial, accounting, tax, capital
markets, asset monitoring, portfolio management, investor relations, and public
relation services. A significant amount of the expenditures made by the Company
are in the form of fees paid to the Advisor for these services rendered. The
Company also incurs costs relating to interest expense on debt.
Results of Operations
- ---------------------
2003 was a challenging year for the Company as several of its loans went into
default and the Company took aggressive steps to protect its investments. In
certain instances this required the Company to invest additional capital to
acquire senior mortgage positions and subsequently foreclose its position to
acquire the real estate securing the loans. While the Company believes that to
date it has been successful in protecting its investments and over time it will
recover all its invested capital, some of the steps taken resulted in capital
being invested at returns lower than the Company's targeted returns for a period
of time. This, combined with the lost interest due to defaulted loans, is the
primary driver of the decrease in the Company's net income per share from 2002
to 2003.
As a result of the foreclosures, the Company now has a significant amount of
real estate owned on its balance sheet. The Company is focused on increasing the
occupancy level and operating income of the properties to projected
stabilization levels. As property level operations improve, the Company will
seek to sell or refinance the properties with third parties such that the
Company can redeploy the capital invested in higher yielding investments.
COMPARISON OF YEARS ENDED DECEMBER 31, 2003 AND 2002
Interest income from debt securities increased approximately $2,996,000 for the
year ended December 31, 2003, as compared to 2002, primarily due to the purchase
of an additional three GNMA certificates in the latter part of 2002
(approximately $1,907,000) and the purchase of fifteen FNMA DUS certificates
during 2003 at an average interest rate yield of 5.49% (approximately
$1,150,000).
Interest income from mortgage loans increased approximately $547,000 for the
year ended December 31, 2003, as compared to 2002, primarily due to the
additional interest and prepayment penalties received (approximately $330,000),
as well as the recognition of deferred loan origination fees from the repayment
of the Stonybrook II first mortgage and mezzanine loans in 2003 (approximately
$113,000).
Interest income from notes receivable increased approximately $896,000 for the
year ended December 31, 2003, as compared to 2002, due to the initial funding of
ten notes receivable during 2003 (approximately $1,404,000), partially offset by
the default of required debt service payments from the Concord at Gessner,
Concord at Little York, and Concord at Gulfgate notes (approximately $680,000).
Interest income from revenue bonds in the approximate amount of $151,000,
relating to the purchase of nine taxable revenue bonds in October 2003, was
recorded for the year ended December 31, 2003. The nine taxable revenue bonds
carry a weighted average interest rate of 8.69%.
Other income increased approximately $457,000 for the year ended December 31,
2003, as compared to 2002, primarily due to the increase in net operating income
picked up from the operations of foreclosed property.
General and administrative increased approximately $232,000 for the year ended
December 31, 2003, as compared to 2002 primarily due to increased legal fees on
foreclosed properties (approximately $107,000) and an increase in excise taxes
paid by the company due to untimely dividend distributions (approximately
$99,000).
Interest expense increased approximately $1,320,000 for the year ended December
31, 2003, as compared to 2002, due to the increased borrowings on the Fleet
Warehouse Facility and additional borrowings under the repurchase facility
(approximately $755,000), as well as the addition of an interest rate swap
agreement (approximately $537,000), put into place in March 2003 to mitigate the
impact of interest rate fluctuations on the Company's cash flows and earnings.
Fees to Advisor increased approximately $292,000 for the year ended December 31,
2003, as compared to 2002, primarily due to an increase in asset management fees
payable to the Advisor due to an increase in the assets (approximately $265,000)
and an increase in the overhead reimbursement paid by the Company to the Advisor
(approximately $272,000), offset by a decrease in incentive management fees paid
to the Advisor (approximately $235,000).
17
A loss on the repayment of debt securities in the amount of approximately
$391,000, relating to the write-off of a purchase premium due to the repayment
of one GNMA certificate and a gain of approximately $18,000 for the sale of
Concord at Gessner vacant lot, were recorded for the year ended December 31,
2003. During 2002, the Company had a gain of approximately $614,000, resulting
from the sale of one GNMA certificate.
COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND 2001
Interest income from mortgage loans decreased approximately $723,000 for the
year ended December 31, 2002, as compared to 2001, primarily due to the sale of
the Columbiana mortgage during 2001 (approximately $602,000) offset by
additional construction period interest received from the Club at Brazos and
Northbrooke (approximately $320,000). The decrease can also be attributed to the
conversion of the Hollows, Elmhurst Village and Autumn Creek mortgages to GNMA
certificates (approximately $712,000); the interest income on these assets was
included in interest income from mortgage loans prior to conversion and in
interest income from GNMA certificates after the conversion. Conversely,
interest income from GNMA certificates increased approximately $3.5 million for
the year ended December 31, 2002 as compared to 2001 primarily due to the
conversion of these three mortgage loans to GNMA certificates (approximately
$1,215,000) and the purchase of an additional six GNMA certificates in 2002
(approximately $2,288,000) offset by the loss of interest income from the
Hollows GNMA certificate (approximately $216,000) which was sold in March of
2002. The increase in interest income from GNMA certificates and the decrease in
interest income from mortgage loans were, in part, a result of the interest
income earned by these loans converted to GNMA certificates subsequent to the
conversion. No gains or losses resulted from the conversion.
Interest income from notes receivable increased approximately $1,819,000, for
the year ended December 31, 2002, as compared to 2001, primarily due to the
addition of nine notes receivable during 2001 and 2002.
Other income increased approximately $212,000, for the year ended December 31,
2002, as compared to 2001, primarily due to the collection of loan extension
fees from Autumn Creek during 2002.
Interest expense decreased approximately $178,000, for the year ended December
31, 2002, as compared to 2001, primarily due to the net effect of lower interest
rates on repurchase facility borrowings and increased leverage.
General and administrative expenses increased approximately $24,000, for the
year ended December 31, 2002, as compared to 2001, primarily due to an increase
in accounting fees and legal expenses (approximately $102,000) offset by a
decrease in unused Nomura Asset Capital Corporation fees and amortization
(approximately $76,000).
Fees to Advisor increased approximately $927,000, for the year ended December
31, 2002, as compared to 2001, due to an increase in the Company's assets and an
increase in the reimbursements of certain administrative and other costs
incurred by the Advisor on behalf of the Company. The Company also paid to the
Advisor an incentive management fee of approximately $235,000 for 2002; no such
fee was paid in 2001.
Amortization and other expenses increased by approximately $379,000, for the
year ended December 31, 2002, as compared to 2001, primarily due to the fact
that during the year ended December 31, 2002, the Company recognized
approximately $358,000 in Fannie Mae loan program expenses associated with the
write-off of the unamortized deferred costs related to this program, which is
being discontinued. The Company has not recognized significant fee income from
this program. Except for the write-off of the program costs, this program has
not, and its discontinuance is not anticipated to have a significant impact on
the Company's financial position or results of operation.
A gain on the sale or repayment of GNMAs and mortgage loans increased
approximately $865,000, for the year ended December 31, 2002 as compared to
2001, due to the sale of the Hollows GNMA in March of 2002 (approximately
$614,000) and the repayment of the Columbiana loans in 2001 (approximately
$251,000). Although the Company intends to hold its GNMA certificates until
maturity, it elected "available for sale" designation under SFAS 115 to give it
the flexibility to liquidate those assets if business conditions require. The
Company decided to sell the Hollows GNMA when it received an unsolicited offer
at an extremely favorable price.
18
Acquisitions
- ------------
During the year ended December 31, 2003, the Company made the following
investments:
(Dollars in thousands)
Acquisitions for the Year Ended December 31, 2003
-------------------------------------------------
Loan/Note
Property Name Closing Date Amount (1) Interest Rate Maturity Date
- ----------------------------------------- -------------- --------------- ----------------- --------------
Mortgage Loans
---------------------------------------
Desert View 4/4/03 $ 1,011 11.00% 5/31/04
-------------- -----------------
Total Mortgage Loans $ 1,011 11.00%
============== =================
Mezzanine Loans
---------------------------------------
Villas at Highpoint 4/22/03 $ 2,600 14.57% 4/22/33
Villas at Highpoint 4/22/03 693 23.76% 4/22/33
-------------- -----------------
Total Mezzanine Loans $ 3,293 16.50% (4)
============== =================
Bridge Loans/Notes Receivable
---------------------------------------
Noble Towers 2/19/03 $ 7,300 12.00% 7/31/05
Clark's Crossing 3/6/03 1,649 12.00% 4/1/04
Concord at Gessner (2) 3/11/03 1,700 12.00% N/A
Desert View 4/1/03 20 11.00% 5/31/04
Valley View 5/1/03 400 12.00% 7/1/04
Related Capital Guaranteed Corporate
Partners II (3) 10/15/03 1,300 N/A N/A
Georgia King Village 11/3/03 1,500 11.50% 5/3/04
Reserve at Thornton 12/1/03 950 11.00% 8/1/06
Concord at Gessner - Land Parcel 12/29/03 188 8.00% 12/29/08
-------------- -----------------
Total Bridge Loans/Notes Receivable $ 15,007 11.82% (4)
============== =================
Variable Rate Bridge Loans
---------------------------------------
Baywoods 3/7/03 $ 10,990 LIBOR + 4.00% 3/7/05
Oaks of Baytown 8/28/03 3,826 LIBOR + 4.50% 8/28/05
Quay Point 8/28/03 1,223 LIBOR + 3.60% 8/28/05
-------------- -----------------
Total Variable Rate Bridge Loans $ 16,039 LIBOR + 4.09% (4)
============== =================
19
(Dollars in thousands)
Acquisitions for the Year Ended December 31, 2003
Face Purchase Maturity
Property Name Closing Date Amount Price Interest Rate Date
- ------------------------------------ -------------- ----------- ----------- -------------- -----------
FNMA DUS Certificates
----------------------------------
Cambridge 4/11/03 $ 3,600 $ 3,699 5.56% 3/1/33
Bay Forest 4/21/03 3,771 4,347 7.43% 10/1/28
Coventry Place 5/9/03 719 797 6.48% 3/1/32
Rancho De Cieto 5/13/03 2,329 2,633 6.33% 9/1/17
Elmwood Gardens 5/15/03 5,500 5,584 5.35% 5/1/33
30 West Apartments 5/27/03 1,226 1,379 6.08% 10/1/16
Jackson Park 5/30/03 2,750 2,795 5.15% 6/1/18
Courtwood 6/26/03 1,750 1,777 4.69% 6/1/33
Buena 6/30/03 3,000 3,075 4.83% 6/1/33
Sultana 6/30/03 4,120 4,132 4.65% 6/1/23
Village West 6/30/03 779 792 4.91% 6/1/21
Allegro 6/30/03 2,567 2,587 5.38% 7/1/33
Edgewood 9/15/03 2,454 2,365 5.37% 9/1/33
Euclid 9/15/03 2,485 2,381 5.31% 8/1/33
Westwood/Monterey 9/15/03 2,910 2,731 5.09% 8/1/33
----------- ----------- -------------
Total FNMA DUS Certificates $ 39,960 $ 41,074 5.48% (4)
=========== =========== =============
Taxable Revenue Bonds
----------------------------------
Clearwood Villas 10/10/03 $ 125 $ 124 9.00% 1/1/06
Colonial Park 10/10/03 375 371 8.75% 3/1/12
Johnston Mill 10/10/03 500 495 8.00% 9/1/12
Lake Park 10/10/03 302 299 9.00% 9/15/35
Magnolia Arbors 10/10/03 1,000 990 8.95% 7/1/18
Meridian 10/10/03 375 371 8.75% 12/1/13
Oaks at Brandlewood 10/10/03 1,200 1,188 8.75% 3/1/17
Ocean Ridge 10/10/03 2,325 2,302 8.75% 9/1/23
Pleasant Valley Villas 10/10/03 1,470 1,456 8.50% 9/1/42
----------- ----------- -------------
Total Taxable Revenue Bonds $ 7,672 $ 7,596 8.69% (4)
=========== =========== =============
(1) Amount represents total funding commitment.
(2) This loan balance was reclassified to real estate owned in May 2003.
(3) This loan balance was fully repaid October 31, 2003.
(4) Weighted average interest rate.
20
Liquidity and Capital Resources
- -------------------------------
During 2003, the Company had three bridge loans and two mezzanine loans on which
required debt service payments were not received, causing the notes to be in
default. In all five of these instances, the Company has foreclosed on the
property securing the note receivable and taken possession of the property. The
Company goes through an extensive underwriting process prior to making its
investments, and the Company believes that these recent events of default are
part of the risks and nature of making certain types of mezzanine investments.
While the Company is working to preserve its invested capital, the defaults have
had a negative impact on the Company's cash flows in the short term, as required
interest payments on the notes have not been received. Through recent
independent appraisals on each of the properties, the Company believes that it
will be able to liquidate each of the properties at amounts greater than that of
their carrying amounts. The Company sold three of the properties in 2003 and is
currently managing the other two properties in an attempt to stabilize the
properties for future marketing attempts.
During the year ended December 31, 2003, cash and cash equivalents decreased
approximately $8,376,000 primarily due to funding of notes receivable of
approximately $23,906,000, purchase of mortgage loans of approximately
$46,627,000, investments in debt securities of approximately $62,290,000,
funding of first mortgage loans of approximately $3,866,000, and repayments of
repurchase facility payable of approximately $54,169,000, partially offset by
repayments of mortgage loans of approximately $9,463,000, proceeds from
repurchase facility payable of approximately $115,818,000, proceeds from the
issuance of common shares of approximately $27,455,000, proceeds from the
warehouse facility payable of approximately $26,147,000, principal repayments of
debt securities of approximately $8,539,000 and a repayment of a notes
receivable of approximately $5,746,000.
The Company finances the acquisition of its assets primarily through borrowing
at short-term rates using demand repurchase agreements and the mortgage
warehouse line of credit (see below). Under the Company's declaration of trust,
the Company may incur permanent indebtedness of up to 50% of total market value
calculated at the time the debt is incurred. Permanent indebtedness and working
capital indebtedness may not, in the aggregate, exceed 100% of the Company's
total market value.
On April 23, 2003, the Company completed a public offering of 1,955,000 common
shares, at a price of $15.00 per share, resulting in proceeds, net of
underwriters discount and expenses, of approximately $27.5 million. The net
proceeds from the public offering were used to fund investments.
The Company has the capacity to raise an additional approximate amount of $170
million in either common or preferred shares remaining under a shelf
registration statement filed with the Securities and Exchange Commission during
2002. If market conditions warrant, the Company may seek to raise additional
funds up to this amount for investment through further common and/or preferred
offerings in the future, although the timing and amount of such offerings cannot
be determined at this time.
Effective February 15, 2000, the Company entered into a repurchase facility with
Nomura Securities International Inc. ("Nomura"). This facility enables the
Company to borrow up to 97% of the fair market value of GNMA and FNMA DUS
certificates owned by the Company, which are pledged as collateral for the
borrowings. Interest on borrowings are at 30-day LIBOR plus 0.02%. As of
December 31, 2003 and December 31, 2002, the amount outstanding under this
facility was approximately $149.5 and $87.9 million, respectively, and weighted
average interest rates were 1.56% and 1.47%, respectively. All borrowings under
this facility typically have 30-day settlement terms.
In January 2004, Nomura notified the Company that it intended to terminate the
repurchase facility. Nomura agreed to allow the Company time to find a
replacement repurchase facility, while reducing the amount the Company could
borrow under the existing facility to 93% of the fair market value of the
collateral certificates. In February 2004, the Company executed repurchase
agreements with three counterparties, Greenwich Capital, Bear Stearns, and RBC
Capital Markets, which provides the Company with the capacity to completely
terminate the facility with Nomura. Terms of the three newly executed agreements
offer advance rates between 94% and 97% and borrowing rates between the LIBOR
plus 2 basis points and LIBOR plus 10 basis points. In the first week of March
2004, the Company executed multiple transactions whereby the repurchase
transactions outstanding with Nomura were transferred to the three new trading
partners.
Of the Company's portfolio of debt securities, 13 are in an unrealized loss
position, totaling approximately $1,313,000, at December 31, 2003. All of these
securities have been in an unrealized position for less than one year. These
unrealized losses are as a result of increases in interest rates subsequent to
the acquisition of these securities. All of the debt securities are performing
according to their terms. Accordingly, the Company has concluded that these
impairments are not other than temporary.
In October 2002, the Company entered into the Fleet Warehouse Facility with
Fleet National Bank in the amount of $40 million. Advances under the warehouse
facility, up to 83% of the total loan package, will be used to fund notes
receivable, which the Company will make to its customers for the
acquisition/refinancing and minor renovation of existing, lender-approved
multifamily properties located in stable sub-markets. The warehouse facility,
which matures April 2006, bears interest at a rate of 30, 60, 90 or 180-day
LIBOR + 200 basis points, at the discretion of the Company, payable monthly on
advances. Principal is due upon the earlier of refinance or sale of the
underlying property or upon maturity. The Company pays a fee of 12.5 basis
points, paid quarterly, on any unused portion of the facility. From time to
time, the Company will use this facility to finance real estate owned. As of
December 31, 2003 and December 31, 2002, the Company had approximately $34.9
million and $8.8 million, respectively, in loans outstanding under this program.
In order to qualify as a REIT under the Code, as amended, the Company must,
among other things, distribute at least 90% of its taxable income. The Company
believes that it is in compliance with the REIT-related provisions of the Code.
21
The Company expects that cash generated from the Company's investments, as well
as cash generated from additional borrowings from the new repurchase facilities
and Fleet Warehouse Facility, will meet its needs for short-term liquidity, and
will be sufficient to pay all of the Company's expenses and to make
distributions to its shareholders in amounts sufficient to retain the Company's
REIT status in the foreseeable future.
In February 2004, a distribution of $3,335,272 ($.40 per share), which was
declared in December 2003, was paid to the shareholders for the quarter ended
December 31, 2003.
Management is not aware of any trends or events, commitments or uncertainties,
which have not otherwise been disclosed that will or are likely to impact
liquidity in a material way.
Critical Accounting Policies
- ----------------------------
In preparing the consolidated financial statements, management must make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Some of these estimates and
assumptions require application of difficult, subjective, complex judgment,
often about the effect of matters that are uncertain and that may change in
later periods. Set forth below is a summary of the accounting policies that
management believes involve the most significant estimates and assumptions.
The Company's portfolio of mortgage loans and notes is periodically evaluated
for possible impairment to establish appropriate loan loss reserves, if
necessary. The Company's Advisor has a credit review committee which meets each
month. This committee reviews the status of each of the Company's loans and
notes, and maintains a "watch list" of loans (including loans for which the
Company has issued guarantees) for which the underlying property may be
experiencing construction cost overruns, delays in construction completion,
occupancy shortfalls, lower than expected debt service coverage ratios, or other
matters which might cause the borrower to be unable to make the interest and
principal payments as scheduled in the loan agreement. If a loan is experiencing
difficulties, members of this credit committee work with the borrower to try to
resolve the issues, which could include extending the loan term, making
additional advances, or reducing required payments. If, in the judgment of
Company management, it is determined that is probable that the Company will not
receive all contractually required payments when they are due, the loan or note
would be deemed impaired, and a loan loss reserve established. As of December
31, 2003, management has determined that no loan loss reserve is necessary.
The Company's GNMA and FNMA DUS certificates are carried at estimated fair
values. Changes in these valuations do not impact the Company's income or cash
flows, but affect shareholders' equity. GNMA and FNMA DUS certificates are
relatively liquid investments. The Company uses third party quoted market prices
as its primary source of valuation information.
The Company's mezzanine investments of approximately $11.1 million at December
31, 2003 bear interest at fixed or variable rates, but some also include
provisions that allow the Company to participate in a percentage of the
underlying property's excess cash flows from operations and excess proceeds from
a sale or refinancing. At the inception of each such investment, Company
management must determine whether such investment should be accounted for as a
loan, joint venture or as real estate, using the guidance contained in the Third
Notice to Practitioners issued by the AICPA. Although the accounting methodology
does not affect the Company's cash flows from these investments, this
determination affects the balance sheet classification of the investments as
well as the classification, timing and amounts of reported earnings.
Accounting for the investment as real estate is required if the Company expects
that the amount of profit, whether called interest or another name, such as an
equity kicker, that it expects to receive above a reasonable amount of interest
and fees, is over 50 percent of the property's total expected residual profit.
If a mezzanine investment were to be accounted for as an investment in real
estate, the Company's balance sheet would show the underlying property and its
related senior debt (if such debt were not also held by the Company), and the
income statement would include the property's rental revenues, operating
expenses and depreciation.
If the Company expects that it will receive less than 50 percent of the
property's residual profit, then loan or joint venture accounting is applied.
Loan accounting is appropriate if the borrower has a substantial equity
investment in the property, if the Company has recourse to substantial assets of
the borrower, if the property is generating sufficient cash flow to service
normal loan amortization, or if certain other conditions are met. Under loan
accounting, the Company recognizes interest income as earned and additional
interest from participations as received. Joint venture accounting would require
that the Company only record its share of the net income from the underlying
property.
The Company's management must exercise judgment in making the required
accounting determinations. For each mezzanine arrangement, the Company projects
total cash flows over the loan's term and the Company's share in those cash
flows, and considers the borrower's equity, the contractual cap, if any, on
total yield to the Company over the term of the loan, market yields on
comparable loans, borrower guarantees, and other factors in making its
assessment of the proper accounting. To date, the Company has determined that
all mezzanine investments are properly accounted for as loans.
During 2003, the Company guaranteed certain loans related to the construction of
affordable multifamily apartment complexes in various locations. The loan
guarantees provide credit support for the properties after construction
22
completion, up until the date in which permanent financing takes place. For each
guarantee, the Company monitors the status of the underlying properties and
evaluates its exposure under the guarantees. To date, the Company has concluded
that no accrual for probable losses is required under SFAS 5.
During 2003, the Company entered into a five-year interest rate swap, which is
accounted for under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". At the inception, the Company designated this interest rate
swap as a cash flow hedge on the variable interest payments on its floating rate
financing. Accordingly, the interest rate swap is recorded at fair market value
each accounting period, with changes in market value being recorded in other
comprehensive income to the extent the hedge is effective in achieving
offsetting cash flows. This hedge has been highly effective, so there has been
no ineffectiveness included in earnings. Net amounts receivable or payable under
the swap agreements are recorded as adjustments to interest expense.
During 2003, the Company exercised its rights under subordinated promissory
notes and other documents to take possession of certain real estate collateral.
The Company has also purchased the first mortgage loans on the properties and
acquired the real estate at foreclosure auctions. When a loan is in the process
of foreclosure, it is the Company's policy to reclassify the balance of the loan
into real estate owned at the lower of fair value of the real estate, less
estimated disposal costs or the carrying amount of the loan, and to cease
accrual of interest. The Company obtains independent appraisals of all
foreclosed real estate to assist management in evaluating property values. To
date, no losses have been recorded upon foreclosure.
During 2003, in accordance with the Incentive Share Option Plan, the Company's
Compensation Committee granted 190,000 options to employees of Related. The
Company has adopted the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" for its share options issued to non-employees. Accordingly,
compensation cost is accrued based on the estimated fair value of the options
issued, and amortized over the vesting period. Because vesting of the options is
contingent upon the recipient continuing to provide services to the Company
until the vesting date, the Company estimates the fair value of the non-employee
options at each period-end up to the vesting date, and adjusts expensed amounts
accordingly. The fair value of each option grant is estimated using the
Black-Scholes option-pricing model.
Commitments and Contingencies
- -----------------------------
In the first quarter of 2003, the Company discontinued its loan program with
Fannie Mae, under which Fannie Mae had agreed to fully fund the origination of
$250 million of Delegated Underwriter and Servicer loans ("DUS") for apartment
properties that qualify for low income housing tax credits ("LIHTC") under
Section 42 of the Internal Revenue Code. Under the loan program, the Company
originated and contracted for individual loans of up to $6 million each. The
Company guaranteed a first loss position of the aggregate principal amount of
these loans and also guaranteed construction loans for which it had issued a
forward commitment to originate under this program. Accordingly, the Company
wrote off approximately $358,000 of unamortized deferred costs relating to this
program, which is included in other expenses on the consolidated statement of
income.
In September 2003, the Company entered into a letter of agreement with PW
Funding Inc. ("PWF"), a subsidiary of CharterMac, each of which are affiliates
of the Advisor, under which the Company transferred and assigned all of its
rights and obligations to the two loans it originated under this program to PWF.
There was no payment made or received by the Company in connection with this
transfer. CharterMac has agreed to guarantee PWF's performance with regard to
this program, which in turn, allowed for the release of approximately $8.3
million in collateral pledged by the Company to secure its obligations under the
loan program. In turn, the Company indemnified PWF against any losses to Fannie
Mae on the loans and indemnified CharterMac against any obligation under its
guaranty. The maximum aggregate exposure to the Company under this agreement is
approximately $7.5 million. However, the Company believes that it will not be
called upon to fund any of these guarantees and, accordingly, that the fair
value of the guarantees is insignificant.
Off-Balance Sheet Arrangements
- ------------------------------
The Company has no unconsolidated subsidiaries, special purpose off-balance
sheet financing entities, or other off-balance sheet arrangements.
23
Contractual Obligations
- -----------------------
In conducting business, the Company enters into various contractual obligations.
Detail of these obligations, including expected settlement periods, is contained
below.
Payments Due by Period
(Dollars in thousands)
Less than More than
Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years
------------ ----------- ------------ ------------ -------------
Debt:
Lines of credit:
Repurchase facility $149,529 $149,529 $ -- $ -- $ --
Fleet warehouse facility 34,935 23,853 11,082 -- --
Mortgage loan 15,993 -- -- -- 15,993 (1)
Contingent liabilities:
Standby and forward bridge
loan commitments 6,469 2,750 3,719 -- --
Standby and forward mezzanine
loan commitments 719 26 693 -- --
Forward GNMA commitments 10,255 10,255 -- -- --
Stabilization loan guarantees 19,205 12,290 6,915 -- --
------------ ----------- ------------ ------------ -------------
Total $237,105 $198,703 $ 22,409 $ -- $15,993
============ =========== ============ ============ =============
(1) Represents contractual maturity of mortgage loan on real estate owned.
However, it is the Company's intention to find a buyer who will assume this
obligation in the near term.
24
Distributions
- -------------
Of the total distributions of $12,551,268 and $9,624,992 for the years ended
December 31, 2003 and 2002, respectively, $666,885 ($.08 per share or 5.31%)
represented a return of capital for the year ended December 31, 2003, determined
in accordance with generally accepted accounting principles. There was no return
of capital for the year ended December 31, 2002. As of December 31, 2003, the
aggregate amount of the distributions made since the commencement of the initial
public offering representing a return of capital, in accordance with generally
accepted accounting principles, totaled $15,137,780. The portion of the
distributions which constituted a return of capital was made in order to
maintain level distributions to shareholders.
Recently Issued Accounting Standards
- ------------------------------------
There are no new accounting pronouncements pending adoption that would have a
significant impact on the Company's consolidated financial statements. The
adoption of the following pronouncements during 2003 did not have a significant
impact on the consolidated financial statements:
o FASB Statement No. 145 "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13 and Technical Corrections".
o FASB Statement No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities".
o FASB Interpretation No. 45, "Guarantors' Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". The Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements
about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The disclosure
provisions of this Interpretation are included in Note 14.
o FASB Statement SFAS No. 148, "Accounting for Stock-Based Compensation
- Transition and Disclosure, an amendment of FASB Statement No. 123".
o FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities" ("FIN 46") as amended and interpreted by FIN 46 (R).
o FASB Statement SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities".
o FASB Statement SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity".
Forward-Looking Statements
- --------------------------
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements include statements regarding the intent, belief or
current expectations of the Company and its management and involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following: general economic and business conditions, which will, among other
things, affect the availability and creditworthiness of prospective tenants,
lease rents and the terms and availability of financing; adverse changes in the
real estate markets including, among other things, competition with other
companies; risks of real estate development and acquisition; governmental
actions and initiatives; and environment/safety requirements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof.
Inflation
- ---------
Inflation did not have a material effect on the Company's results for the
periods presented.
Item 7. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. The primary
market risk to which the investments of the Company are exposed is interest rate
risk, which is highly sensitive to many factors, including governmental monetary
and tax policies, domestic and international economic and political
considerations and other factors beyond the control of the Company.
INTEREST RATE RISK
Interest rate fluctuations can adversely affect the Company's income and value
of its common shares in many ways and present a variety of risks, including the
risk of mismatch between asset yields and borrowing rates.
25
The Company's operating results will depend in large part on differences between
the income from its assets (net of credit losses) and its borrowing costs. Most
of the Company's assets generate fixed returns and have terms in excess of five
years. The Company funds the origination and acquisition of a significant
portion of these assets with borrowings which have interest rates that reset
relatively rapidly, such as monthly or quarterly. In most cases, the income from
assets will respond more slowly to interest rate fluctuations than the cost of
borrowings, creating a mismatch between asset yields and borrowing rates.
Consequently, changes in interest rates, particularly short-term interest rates,
may influence the Company's net income. The Company's borrowings under
repurchase and warehouse agreements bear interest at rates that fluctuate with
LIBOR.
Various financial vehicles exist which would allow Company management to
mitigate the impact of interest rate fluctuations on the Company's cash flows
and earnings. During March 2003, upon management's analysis of the interest rate
environment and the costs and risks of such strategies, the Company entered into
an interest rate swap in order to hedge against increases in the floating
interest rate on its repurchase facility. On March 25, 2003, the Company entered
into a five-year interest rate swap agreement with Fleet National Bank ("Fleet")
whereby the Company has agreed to pay Fleet a fixed 3.48% on a notional amount
of $30 million. In return, Fleet will pay the Company a floating rate equivalent
to the 30-day LIBOR rate on the same notional amount. This effectively fixes $30
million of the Company's secured borrowings at 3.48%, protecting the Company in
the event the 30-day LIBOR rate rises. A possible risk of such swap agreements
is the possible inability of Fleet to meet the terms of the contracts with the
Company; however, there is no current indication of such an inability.
Based on the $154.5 million unhedged portion of $184.5 million of borrowings
outstanding under these facilities at December 31, 2003, a 1% change in LIBOR
would impact the Company's annual net income and cash flows by approximately
$1.6 million. However, due to the fact that the interest income from loans made
under the Fleet Warehouse Facility are also based on LIBOR, a 1% increase in
LIBOR would increase the Company's annual net income and cash flows from such
loans by approximately $349,000. Increases in these rates will decrease the net
income and market value of the Company's net assets. Interest rate fluctuations
that result in interest expense exceeding interest income would result in
operating losses.
The value of the Company's assets may be affected by prepayment rates on
investments. Prepayment rates are influenced by changes in current interest
rates and a variety of economic, geographic and other factors beyond the
Company's control, and consequently, such prepayment rates cannot be predicted
with certainty. When the Company originates mortgage loans, it expects that such
mortgage loans will have a measure of protection from prepayment in the form of
prepayment lock-out periods or prepayment penalties. However, such protection
may not be available with respect to investments which the Company acquires, but
does not originate. In periods of declining mortgage interest rates, prepayments
on mortgages generally increase. If general interest rates decline as well, the
proceeds of such prepayments received during such periods are likely to be
reinvested by the Company in assets yielding less than the yields on the
investments that were prepaid. In addition, the market value of mortgage
investments may, because of the risk of prepayment, benefit less from declining
interest rates than from other fixed-income securities. Conversely, in periods
of rising interest rates, prepayments on mortgages generally decrease, in which
case the Company would not have the prepayment proceeds available to invest in
assets with higher yields. Under certain interest rate and prepayment scenarios
the Company may fail to recoup fully its cost of acquisition of certain
investments.
REAL ESTATE RISK
Multifamily and commercial property values and net operating income derived from
such properties are subject to volatility and may be affected adversely by a
number of factors, including, but not limited to, national, regional and local
economic conditions (which may be adversely affected by industry slowdowns and
other factors); local real estate conditions (such as an oversupply of housing,
retail, industrial, office or other commercial space); changes or continued
weakness in specific industry segments; construction quality, age and design;
demographic factors; retroactive changes to building or similar codes; and
increases in operating expenses (such as energy costs). In the event net
operating income decreases, a borrower may have difficulty paying the Company's
mortgage loan, which could result in losses to the Company. In addition,
decreases in property values reduce the value of the collateral and the
potential proceeds available to a borrower to repay the Company's mortgage
loans, which could also cause the Company to suffer losses.
RISK IN OWNING SUBORDINATED INTERESTS
The Company has invested indirectly in subordinated CMBS through its ownership
of a $20.2 million preferred membership interest in ARCap. Subordinated CMBS of
the type in which ARCap invests include "first loss" and non-investment grade
subordinated interests. A first loss security is the most subordinate class in a
structure and accordingly is the first to bear the loss upon a default on
restructuring or liquidation of the underlying collateral and the last to
receive payment of interest and principal. Such classes are subject to special
risks, including a greater risk of loss of principal and non-payment of interest
than more senior, rated classes. The market values of subordinated interests in
CMBS and other subordinated securities tend to be more sensitive to changes in
economic conditions than more senior, rated classes. As a result of these and
other factors, subordinated interests generally are not actively traded and may
not provide holders with liquidity of investment. With respect to the Company's
investment in ARCap, the ability to transfer the membership interest in ARCap is
further limited by the terms of ARCap's operating agreement.
PARTICIPATING INTEREST
In connection with the acquisition and origination of mortgages, the Company
has, on occasion, obtained and may continue to obtain participating interests
that may entitle it to payments based upon a development's cash flow, profits or
any increase in the value of the development that would be realized upon a
refinancing or sale of the development. Competition for participating interests
is dependent to a large degree upon market conditions. Participating interests
are more difficult to obtain when mortgage financing is available at relatively
low interest rates. In the current interest rate environment, the Company may
have greater difficulty obtaining participating interest. Participating
26
interests are not government insured or guaranteed and are therefore subject to
the general risks inherent in real estate investments. Therefore, even if the
Company is successful in investing in mortgage investments which provide for
participating interests, there can be no assurance that such interests will
result in additional payments.
REPURCHASE FACILITY COLLATERAL RISK
Repurchase agreements involve the risk that the market value of the securities
sold by the Company may decline and that the Company will be required to post
additional collateral, reduce the amount borrowed or suffer forced sales of the
collateral. If forced sales were made at prices lower than the carrying value of
the collateral, the Company would experience additional losses. If the Company
is forced to liquidate these assets to repay borrowings, there can be no
assurance that the Company will be able to maintain compliance with the REIT
asset and source of income requirements.
BRIDGE AND MEZZANINE LOAN RISK
The Company has originated and expects to continue to originate bridge and
mezzanine loans. These types of mortgage loans are considered to involve a
higher degree of risk than long-term senior mortgage lending secured by
income-producing real property due to a variety of factors, including the loan
becoming unsecured as a result of foreclosure by the senior lender. The Company
may not recover some or all of its investment in such loans. In addition, bridge
loans and mezzanine loans may have higher loan to value ratios than conventional
mortgage loans resulting in less equity in the property and increasing the risk
of loss of principal.
27
Item 8. Financial Statements and Supplementary Data.
Page
--------
(a) 1. Financial Statements
--------------------
Independent Auditors' Report 29
Consolidated Balance Sheets as
of December 31, 2003 and 2002 30
Consolidated Statements of
Income for the years ended
December 31, 2003, 2002 and
2001 31
Consolidated Statements of
Changes in Shareholders' Equity
for the years ended December
31, 2003, 2002 and 2001 32
Consolidated Statements of Cash
Flows for the years ended
December 31, 2003, 2002 and
2001 33
Notes to Consolidated Financial
Statements 35
(a) 2. Financial Statement Schedules
-----------------------------
All schedules have been omitted because they are not required or
because the required information is contained in the financial
statements or notes thereto.
28
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees
And Shareholders of
American Mortgage Acceptance Company
New York, New York
We have audited the accompanying consolidated balance sheets of American
Mortgage Acceptance Company and subsidiaries (the "Company") as of December 31,
2003 and 2002, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of American Mortgage Acceptance
Company and subsidiaries as of December 31, 2003 and 2002, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 15, 2004
29
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
December 31,
----------------------
2003 2002
--------- ---------
Investments in debt securities - available for sale $ 167,260 $ 114,034
Real estate owned - subject to sales contracts 51,616 --
Real estate owned - held for sale 25,802 --
Notes receivable, net 35,946 25,997
Investment in ARCap 20,240 20,240
Investments in mortgage loans, net 13,864 22,384
Revenue bonds - available for sale 7,586 --
Cash and cash equivalents 2,028 10,404
Other assets 2,765 2,004
--------- ---------
Total assets $ 327,107 $ 195,063
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Repurchase facilities payable $ 149,529 $ 87,880
Warehouse facility payable 34,935 8,788
Mortgage payable on real estate owned 15,993 --
Interest rate derivatives 278 --
Accounts payable and accrued expenses 1,552 822
Due to Advisor and affiliates 590 690
Distributions payable 3,335 2,545
--------- ---------
Total liabilities 206,212 100,725
--------- ---------
Commitments and contingencies
Shareholders' equity:
Shares of beneficial interest; $.10 par value; 25,000,000
shares authorized; 8,713,376 issued and 8,338,180
outstanding in 2003 and 6,738,826 issued and 6,363,630
outstanding in 2002 871 674
Treasury shares of beneficial interest;
375,196 shares (38) (38)
Additional paid-in capital 126,779 99,470
Deferred compensation - stock options (29) --
Distributions in excess of net income (15,138) (14,471)
Accumulated other comprehensive income 8,450 8,703
--------- ---------
Total shareholders' equity 120,895 94,338
--------- ---------
Total liabilities and shareholders' equity $ 327,107 $ 195,063
========= =========
See accompanying notes to consolidated financial statements.
30
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
Years Ended December 31,
----------------------------------------
2003 2002 2001
----------- ----------- -----------
Revenues:
Interest income:
Debt securities $ 8,765 $ 5,769 $ 2,294
Mortgage loans 2,597 2,050 2,773
Notes receivable 3,166 2,270 451
Revenue bonds 151 -- --
Temporary investments 55 50 73
Other income 776 319 107
----------- ----------- -----------
Total revenues 15,510 10,458 5,698
----------- ----------- -----------
Expenses:
Interest 2,548 1,228 1,406
General and administrative 917 685 661
Fees to Advisor 1,812 1,520 593
Amortization and other 376 379 --
----------- ----------- -----------
Total expenses 5,653 3,812 2,660
----------- ----------- -----------
Other income:
Equity in earnings of ARCap 2,400 2,400 2,400
Net gain (loss) on sale or repayment of
debt securities and land parcel (373) 614 (251)
----------- ----------- -----------
Total other income 2,027 3,014 2,149
----------- ----------- -----------
Net income $ 11,884 $ 9,660 $ 5,187
=========== =========== ===========
Net income per share
(basic and diluted) $ 1.52 $ 1.61 $ 1.35
=========== =========== ===========
Weighted average
shares outstanding
Basic 7,802,957 6,017,740 3,838,630
=========== =========== ===========
Diluted 7,814,810 6,017,740 3,838,630
=========== =========== ===========
See accompanying notes to consolidated financial statements.
31
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Dollars in thousands)
TREASURY SHARES OF DEFERRED
SHARES OF BENEFICIAL INTEREST BENEFICIAL INTEREST ADDITIONAL COMPENSATION
----------------------------- ------------------- PAID-IN STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL OPTIONS
----------- ------------ -------- -------- -------------- ------------
Balance at January 2001 4,213,826 $ 421 (375,196) $ (38) $ 68,841
Comprehensive income:
Net income
Other comprehensive income:
Net unrealized holding gain
arising during the period
Comprehensive income
Distributions
---------------------------------------------------------------------------------------
Balance at December 31, 2001 4,213,826 421 (375,196) (38) 68,841
Comprehensive income:
Net income
Other comprehensive income:
Unrealized holding gain arising
during the period
Less: reclassification adjustment
for gain included in net income
Total other comprehensive gain
Comprehensive income
Issuance of common shares 2,525,000 253 30,629
Distributions
---------------------------------------------------------------------------------------
Balance at December 31, 2002 6,738,826 674 (375,196) (38) 99,470
Comprehensive income:
Net income
Other comprehensive income:
Net unrealized loss on interest
rate derivatives
Unrealized holding gain arising
during the period
Plus: reclassification adjustment
for loss included in net income
Total other comprehensive income
Comprehensive income
Issuance of stock options 51 (51)
Deferred compensation costs 22
Common shares issued 1,974,550 197 27,258
Distributions
---------------------------------------------------------------------------------------
Balance at December 31, 2003 8,713,376 $ 871 (375,196) $ (38) $ 126,779 $(29)
=======================================================================================
ACCUMULATED
DISTRIBUTIONS OTHER
IN EXCESS COMPREHENSIVE COMPREHENSIVE
OF NET INCOME INCOME INCOME TOTAL
------------- ------------- ------------- ----------
Balance at January 2001 $ (14,126) $ (22) $ 55,076
Comprehensive income:
Net income 5,187 $ 5,187 5,187
Other comprehensive income:
Net unrealized holding gain
arising during the period 582 582 582
---------
Comprehensive income $ 5,769
=========
Distributions (5,566) (5,566)
----------- ------------------------
Balance at December 31, 2001 (14,505) 560 55,279
Comprehensive income:
Net income 9,660 $ 9,660 9,660
Other comprehensive income:
Unrealized holding gain arising
during the period 8,757
Less: reclassification adjustment
for gain included in net income (614)
---------
Total other comprehensive gain 8,143 8,143 8,143
---------
Comprehensive income $ 17,803
=========
Issuance of common shares 30,882
Distributions (9,626) (9,626)
----------- ------------------------
Balance at December 31, 2002 (14,471) 8,703 94,338
Comprehensive income:
Net income 11,884 $ 11,884 11,884
---------
Other comprehensive income:
Net unrealized loss on interest
rate derivatives (278)
Unrealized holding gain arising
during the period (348)
Plus: reclassification adjustment
for loss included in net income 373
---------
Total other comprehensive income (253) (253) (253)
---------
Comprehensive income $ 11,631
=========
Issuance of stock options
Deferred compensation costs 22
Common shares issued 27,455
Distributions (12,551) (12,551)
------------------------------------------------------------
Balance at December 31, 2003 $ (15,138) $ 8,450 $120,895
=========== ========================
See accompanying notes to consolidated financial statements.
32
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended December 31,
------------------------------------
2003 2002 2001
--------- --------- ---------
Cash flows from operating activities:
Net income $ 11,884 $ 9,660 $ 5,187
Adjustments to reconcile net income to net
cash provided by operating activities:
Net loss (gain) on sale or repayment of
debt securities and land parcel 373 (614) 251
Equity in earnings of ARCap, in excess of
distributions received -- 6 (204)
Amortization - deferred financing costs 170 6 113
Amortization - deferred compensation costs 22 -- --
Amortization - loan premium and
origination costs and fees (518) (89) 40
Accretion of discount on debt securities 157 23 (22)
Changes in operating assets and liabilities:
Accrued interest receivable (936) (599) 111
Other assets 8 743 (410)
Due to (from) Advisor and affiliates (100) 359 (638)
Accounts payable and accrued expenses 91 (586) 1,069
Accrued interest payable 639 39 (6)
--------- --------- ---------
Net cash provided by operating activities 11,790 8,948 5,491
--------- --------- ---------
Cash flows from investing activities:
Net proceeds from sale of land 37 -- --
Funding of mortgage loans (4,053) (4,711) (24,813)
Repayment of mortgage loans 9,463 -- 9,245
Purchase of mortgage loans (46,627) 46 85
Funding of notes receivable (23,906) (22,307) (9,959)
Loan orgination fees on mortgage loans
net of acquisition expenses) 187 169 152
Repayment of notes receivable 5,746 7,683 --
Principal repayments of debt securities 8,539 526 346
Investment in debt securities (62,290) (55,768) (6,506)
Additions to real estate owned (3,166) -- --
Investment in revenue bonds (7,586) -- --
--------- --------- ---------
Net cash used in investing activities (123,656) (74,362) (31,450)
--------- --------- ---------
(continued)
33
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(continued)
Years Ended December 31,
------------------------------------
2003 2002 2001
--------- --------- ---------
Cash flows from financing activities:
Proceeds from repurchase facilities payable 115,818 100,750 62,030
Proceeds from warehouse facility payable 26,147 8,788 --
Repayments of repurchase facilities payable (54,169) (56,480) (31,076)
Increase in deferred financing costs -- (669) (43)
Distributions paid to shareholders (11,761) (8,471) (5,566)
Issuance of common shares 27,455 30,882 --
--------- --------- ---------
Net cash provided by financing activities 103,490 74,800 25,345
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (8,376) 9,386 (614)
Cash and cash equivalents at the beginning
of the year 10,404 1,018 1,632
--------- --------- ---------
Cash and cash equivalents at the end of
the year $ 2,028 $ 10,404 $ 1,018
========= ========= =========
Supplemental information:
Interest paid $ 2,546 $ 1,163 $ 1,412
========= ========= =========
Conversion of mortgage loans to debt securities
Increases in debt securities $ 37,444
Decrease in mortgage loans (37,444)
---------
$ --
---------
Conversion of mortgage loans to real estate
owned:
Increase in real estate owned $ 72,748
Decrease in mortgage loans (49,808)
Decrease in notes receivable (6,947)
Increase in mortgage loan on real estate (15,993)
---------
$ --
=========
See accompanying notes to consolidated financial statements.
34
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - General
American Mortgage Acceptance Company (the "Company") was formed on June 11, 1991
as a Massachusetts business trust. The Company elected to be treated as a real
estate investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended (the "Code").
The Company's business plan focuses on originating and acquiring mortgages
secured by multifamily properties, which may take the form of government insured
first mortgages, insured mortgage pass-through certificates or insured mortgage
backed securities, and uninsured mezzanine loans, construction loans, and bridge
loans. Additionally, the Company has indirectly invested in subordinate
commercial mortgage-backed securities and may invest in other real estate
assets, including non-multifamily mortgages. The Company also issues guarantees
of construction and permanent financing and makes standby loan commitments.
The Company is governed by a board of trustees comprised of three independent
trustees and two non-independent trustees who are affiliated with CharterMac, an
American Stock Exchange listed company. The Company has engaged Related AMI
Associates, Inc. (the "Advisor"), an affiliate of CharterMac, to manage its
day-to-day affairs. The Advisor has subcontracted with Related Capital Company
("Related"), a subsidiary of CharterMac, to provide the services contemplated.
Through the Advisor, Related offers the Company a core group of experienced
staff and executive management providing the Company with services on both a
full and part-time basis. These services include, among other things,
acquisition, financial, accounting, tax, capital markets, asset monitoring,
portfolio management, investor relations and public relations services.
Effective November 17, 2003, CharterMac, an affiliate of the Advisor, acquired
Related, which included the Advisor. This acquisition did not affect the
Company's day-to-day operations or the services provided to the Company by the
Advisor. Ownership of the Advisor was transferred to CharterMac, but management
of the Advisor remained unchanged as the principals of Related who managed the
Advisor became executive officers of CharterMac and remain executive officers of
the Advisor.
The consolidated financial statements include the accounts of the Company and
three wholly-owned subsidiaries which it controls: AMAC Repo Seller, LLC,
AMAC/FM Corporation ("AMAC/FM") and AMAC Credit Facility, LLC. All intercompany
accounts and transactions have been eliminated in consolidation. Unless
otherwise indicated, the "Company" as hereinafter used, refers to American
Mortgage Acceptance Company and its subsidiaries.
Effective October 2003, the Company dissolved AMAC/FM due to the assignment of
all rights and obligations under the Fannie Mae loan program to PW Funding Inc.
(see Note 15). AMAC/FM was formed to manage this program.
NOTE 2 - Significant Accounting Policies
a) Basis of Presentation
The consolidated financial statements of the Company are prepared on the accrual
basis of accounting in accordance with accounting principles generally accepted
in the United States of America ("GAAP"). The preparation of financial
statements in conformity with GAAP requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
b) Investments in Mortgage Loans and Notes Receivable
Mortgage loans and notes receivable are intended to be held to maturity and,
accordingly, are carried at cost, net of unamortized loan origination costs and
fees.
The Company's mezzanine investments bear interest at fixed or variable rates,
but certain of these investments also include provisions that allow the Company
to participate in a percentage of the underlying property's excess cash flows
from operations and excess proceeds from a sale or refinancing. At the inception
of each such investment, Company management must determine whether such
investment should be accounted for as a loan, joint venture or as real estate,
using the guidance contained in the Third Notice to Practitioners issued by the
American Institute of Certified Public Accountants ("AICPA"). Although the
accounting methodology does not affect the Company's cash flows from these
investments, this determination affects the balance sheet classification of the
investments as well as the classification, timing and amounts of reported
earnings.
Accounting for the investment as real estate is required if the Company expects
that the amount of profit, whether called interest or another name, such as an
equity kicker, that it expects to receive above a reasonable amount of interest
and fees, is over 50 percent of the property's total expected residual profit.
If a mezzanine investment were to be accounted for as an investment in real
estate, the Company's balance sheet would show the underlying property and its
related senior debt (if such debt was not also held by the Company), and the
income statement would include the property's rental revenues, operating
expenses and depreciation.
If the Company expects that it will receive less than 50 percent of the
property's residual profit, then loan or joint venture accounting is applied.
Loan accounting is appropriate if the borrower has a substantial equity
investment in the property, if the Company has recourse to substantial assets of
the borrower, if the property is generating sufficient cash flow to service
normal loan amortization, or if certain other conditions are met. Under loan
35
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accounting, the Company recognizes interest income as earned and additional
interest from participations as received. Joint venture accounting would require
that the Company only record its share of the net income from the underlying
property.
Company management must exercise judgment in making the required accounting
determinations. For each mezzanine arrangement, the Company projects total cash
flows over the loan's term and the Company's share in those cash flows, and
considers the borrower's equity, the contractual cap, if any, on total yield to
the Company over the term of the loan, market yields on comparable loans,
borrower guarantees, and other factors in making its assessment of the proper
accounting. To date, the Company has determined that all mezzanine investments
are properly accounted for as loans.
The Company accounts for its investments in mortgage loans and notes receivable
under the provisions of Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). Under SFAS 114,
a loan is impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. SFAS No. 114 requires lenders to
measure impaired loans based on: (i) the present value of expected future cash
flows discounted at the loans' effective interest rate; (ii) the loan's
observable market price; or (iii) the fair value of the collateral if the loan
is collateral-dependent. The Company's portfolio of mortgage loans and notes is
periodically evaluated for possible impairment to establish appropriate loan
loss reserves, if necessary. If, in the judgment of Company management, it is
determined that is probable that the Company will not receive all contractually
required payments when they are due, the loan or note would be deemed impaired,
and a loan loss reserve established.
c) Investments in Debt Securities
The Company accounts for its investments in GNMA and FNMA DUS certificates under
the provisions of SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities".
At the date of acquisition, the Company elected to designate its GNMA and FNMA
DUS certificates as available-for-sale debt securities. Available-for-sale
securities are carried at fair value with net unrealized gain (loss) reported as
a separate component of other comprehensive income until realized. The Company
uses third party quoted market prices as its primary source of valuation
information. A decline in the market value of any available-for-sale security
below cost that is deemed other than temporary is charged to earnings resulting
in the establishment of a new cost basis for the security. Premiums and
discounts are amortized or accreted over the life of the related security as an
adjustment to interest income using the effective yield method. Realized gains
and losses on securities are included in earnings and are recorded on the trade
date and calculated as the difference between the amount of cash received and
the amortized cost of the specific GNMA and FNMA DUS certificate, including
unamortized discounts or premiums.
d) Investments in Revenue Bonds
The Company accounts for its investments in revenue bonds as available-for-sale
debt securities under the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Accordingly, the revenue bonds are
carried at their estimated fair values, with unrealized gains and losses
reported in other comprehensive income.
In most cases, the Company has a right to require redemption of the revenue
bonds prior to their maturity, although it can and may elect to hold them up to
their maturity dates unless otherwise modified. As such, SFAS 115 requires the
Company to classify these investments as "available-for-sale." Accordingly,
investments in revenue bonds are carried at their estimated fair values, with
unrealized gains and losses reported in other comprehensive income.
If, in the judgment of the Advisor, it is determined probable that the Company
will not receive all contractual payments required, when they are due, the bond
is deemed impaired and is written down to its then estimated fair value, with
the amount of the write-down accounted for as a realized loss.
Because Revenue Bonds have a limited market, the Company estimates fair value
for each bond as the present value of its expected cash flows using a discount
rate for comparable investments. This process is based upon projections of
future economic events affecting the real estate collateralizing the bonds, such
as property occupancy rates, rental rates, operating cost inflation, market
capitalization rates and upon determination of an appropriate market rate of
interest, all of which are based on good faith estimates and assumptions
developed by the Advisor. Changes in market conditions and circumstances may
occur which would cause these estimates and assumptions to change; therefore,
actual results may vary from the estimates and the variance may be material.
e) Real Estate Owned
Real estate owned consists of properties that the Company took possession of by
exercising its rights under subordinated promissory notes and other documents.
In some cases, the Company also purchased the first mortgage loans on the
properties before foreclosing on the real estate collateral. The Company records
these properties at the lower of fair value of the real estate, less estimated
36
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
disposal costs, or the carrying amount of the loan. The determination of fair
value of the real estate is based on independent appraisals. When the
foreclosure process is complete and the property is owned by the Company, the
net income or loss from operations of the property is included in other income.
It is the Company's intent to sell those properties in the near term.
Accordingly, real estate owned is not depreciated.
f) Investment in ARCap
The Company's preferred equity investment in ARCap Investors, LLC ("ARCap") is
accounted for using the equity method because the Company has the ability to
exercise significant influence, but not control, over ARCap's operating and
financial policies.
g) Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and temporary investments in
short-term instruments with original maturity dates equal to or less than three
months.
h) Loan Origination Costs and Fees
Acquisition fees and other direct expenses incurred for activities performed to
originate mortgage loans have been capitalized and are included in Investment in
Mortgage Loans in the balance sheets, net of any fees received from borrowers
for loan originations. Loan origination costs and fees are being amortized to
interest income using the effective yield method over the lives of the
respective mortgages.
i) Revenue Recognition
The Company derives its revenues from a variety of investments and guarantees,
summarized as follows:
o INTEREST INCOME FROM MORTGAGE LOANS AND NOTES RECEIVABLE - Interest on
mortgage loans and notes receivable is recognized on the accrual basis
as it becomes due. Deferred loan origination costs and fees are
amortized over the life of the applicable loan as an adjustment to
interest income, using the interest method. Interest which was accrued
is reversed out of income if deemed to be uncollectible. Certain
mortgage loans (mezzanine investments) contain provisions that allow
the Company to participate in a percentage of the underlying
property's excess cash flows from operations and excess proceeds from
a sale or refinancing. This income is recognized when received.
o INTEREST INCOME ON DEBT SECURITIES - Interest on GNMA and FNMA DUS
certificates is recognized on the accrual basis as it becomes due.
Interest income also includes the amortization or accretion of
premiums and discounts arising at the purchase date, using the
effective yield method.
o INTEREST INCOME ON TEMPORARY INVESTMENTS - Interest income from
temporary investments, such as cash in banks and short-term
instruments, is recognized on the accrual basis as it becomes due.
o INTEREST INCOME ON REVENUE BONDS - Interest income from revenue bonds
is recognized on the accrual basis as it becomes due.
o EQUITY IN EARNINGS OF ARCAP - The Company's equity in the earnings of
ARCap Investors, LLC ("ARCap") is accrued at the Company's preferred
dividend rate of 12%, unless ARCap does not have earnings and cash
flows adequate to meet this dividend requirement.
o INCOME FROM REAL ESTATE OWNED - Income or loss from the operations of
real estate owned is accrued monthly and included, net, in other
income.
o STANDBY LOAN COMMITMENT FEES - The Company receives fees for issuing
standby loan commitments. If the Company does not expect to fund the
commitment, the commitment fee is recognized, in other income, ratably
over the commitment period. If it is determined that it is possible or
probable that a commitment will be exercised, such fees are deferred
and, if the commitment is exercised, amortized over the life of the
loan as an adjustment to interest income or, if the commitment expires
unexercised, recognized as other income upon expiration of the
commitment.
o STABILIZATION GUARANTEE AND LOAN ADMINISTRATION FEES - The Company
receives fees from borrowers for guaranteeing construction loans made
by third-party lenders. The Company guarantees the loan during the
period between construction completion and funding of the permanent
loan. These fees are received in advance and are deferred and
amortized into other income over the guarantee period. The Company
also receives loan administration fees on these guaranteed loans, on a
monthly basis during the guarantee period. These fees are recognized
in other income as they become due.
37
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o LOSS SHARING/GUARANTEE FEES - The Company received loss
sharing/guarantee fees related to the FNMA DUS program (see Note 14).
These fees were received monthly and recognized in other income as
they become due.
j) Repurchase Facilities Payable
The Company finances its investments in GNMA and FNMA DUS certificates using
repurchase facilities. Under such facilities, the certificates are sold to a
counterparty under an agreement requiring the Company to repurchase such
certificates for a fixed price on a fixed date, generally 30 days from sale
date. These transactions are accounted for as collateralized borrowings.
Accordingly, the certificates remain on the Company's consolidated balance
sheet, with the proceeds from the sales included on the consolidated balance
sheet as "Repurchase Facilities Payable". The difference between the sales
proceeds and the fixed repurchase price is recorded as interest expense ratably
over the period between the sale and repurchase.
k) Fair Value of Financial Instruments
As described above, the Company's debt securities, revenue bonds, and interest
rate derivatives are carried at estimated fair values. The Company has
determined that the fair value of its remaining financial instruments, including
its mortgage loans and cash and cash equivalents, notes receivable, and secured
borrowings approximate their carrying values at December 31, 2003 and 2002. The
fair value of investments in mortgage loans, revenue bonds, notes receivable,
and GNMA and FNMA DUS certificates are based on actual market price quotes or by
determining the present value of the projected future cash flows using
appropriate discount rates, credit losses and prepayment assumptions. Other
financial instruments carry interest rates which are deemed to approximate
market rates.
l) Interest Rate Derivative
The Company accounts for its interest rate swap agreement under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Standards No. 133". At the
inception, the Company designated this interest rate swap as a cash flow hedge
on the variable interest payments in its floating rate financing. Accordingly,
the interest rate swap is recorded at fair market value each accounting period,
with changes in market value being recorded in other comprehensive income to the
extent the hedge is effective in achieving offsetting cash flows. This hedge has
been highly effective, so there has been no ineffectiveness included in
earnings. Net amounts receivable or payable under the swap agreement are
recorded as adjustments to interest expense.
m) Income Taxes
The Company has qualified as a REIT under the Code. A REIT is generally not
subject to federal income tax on that portion of its REIT taxable income
("Taxable Income") which is distributed to its shareholders provided that at
least 90% of Taxable Income is distributed and provided that such income meets
certain other conditions. Accordingly, no provision for federal income taxes is
required. The Company may be subject to state taxes in certain jurisdictions.
During 2003, the Company declared distributions of $1.60 per share. For federal
income tax purposes, the Company's distribution totaled $1.60, all of which was
reported as ordinary income to shareholders for 2003.
n) Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," requires the Company to classify
items of "other comprehensive income", such as unrealized gains and losses on
its investment in GNMA and FNMA DUS certificates, revenue bonds and interest
rate derivatives by their nature in the financial statements and display the
accumulated balance of other comprehensive income (loss) separately from
shareholders' equity in the shareholders' equity section of the balance sheets.
In accordance with SFAS No. 130, cumulative unrealized gains and losses on such
instruments are classified as accumulated other comprehensive income in
shareholders' equity and current period unrealized gains and losses are included
as a component of comprehensive income.
o) Segment Information
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", requires enterprises to report certain financial and descriptive
information about their reportable operating segments, and certain
enterprise-wide disclosures regarding products and services, geographic areas
and major customers. The Company is an investor in mortgage products and
operates in only one reportable segment. The Company's chief operating decision
maker, its president and chief executive officer makes asset allocation
decisions between various real estate lending activities as opportunities are
brought to the Company through its relationship with the Advisor. Each potential
investment is evaluated for its potential return on investment and risks. The
Company does not have or rely upon any major customers. All of the Company's
investments are secured by real estate properties located in the United States;
accordingly, all of its revenues were derived from U.S. operations.
38
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
p) New Accounting Pronouncements
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
SFAS No. 145 among other things, rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and accordingly, the reporting of gains and
losses from the early extinguishments of debt as extraordinary items will only
be required if they meet the specific criteria for extraordinary items included
in Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations". The rescission of SFAS No. 4 became effective January 1, 2003. The
implementation of this statement did not have an impact on the Company's
consolidated financial statements.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 replaces current
accounting literature and requires the recognition of costs associated with exit
or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 became effective January 1,
2003. The implementation of this statement did not have an impact on the
Company's consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantors' Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". The Interpretation elaborates on the disclosures to be
made by a guarantor in its financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The disclosure
provisions of this Interpretation are included in Note 14. The initial
recognition and initial measurement provisions of this Interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123". This statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation" to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. Because the Company accounts for its share options using the fair
value method, implementation of this statement did not have an impact on the
Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which was amended and interpreted
through issuance of FIN 46 (R) in December of 2003. This Interpretation
clarifies the application of existing accounting pronouncements to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The Company has determined that it has no variable
interests in variable interest entities requiring consolidation under FIN 46 or
FIN 46 (R).
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS 149 amends and clarifies
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 149 is
generally effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The implementation
of this statement did not have an impact on the Company's consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that certain financial instruments be classified as liabilities
that were previously considered equity. The implementation of this statement on
July 1, 2003 did not have an impact on the Company's consolidated financial
statements.
q) Reclassifications
Certain amounts in the 2002 and 2001 financial statements have been reclassified
to conform to the 2003 presentation.
39
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Investments in Debt Securities - Available for Sale
Information relating to debt securities owned by the Company as of December 31,
2003 is as follows:
(Dollars in thousands)
Date Purchased/ Amortized
Certificate Final Stated Cost at
Name Number Payment Date Interest Rate December 31, 2003
- ------------------- ----------- --------------- ------------- -----------------
GNMA CERTIFICATES
Western Manor (1) 355540 7/27/94 7.125% $ 2,457
3/15/29
Copper Commons (2) 382486 7/28/94 8.500% --
8/15/29
SunCoast Capital Group,Ltd. (1) G002412 6/23/97 7.000% 232
4/20/27
Elmhurst Village (1) 549391 6/28/01 7.745% 21,594
1/15/42
Reserve at Autumn Creek (1)(3) 448748 6/28/01 7.745% 15,962
1/15/42
Casitas at Montecito (4) 519289 3/11/02 7.300% --
10/15/42
Village at Marshfield (1) 519281 3/11/02 7.475% 21,371
1/15/42
Cantera Crossing (1) 532663 3/28/02 6.500% 6,419
6/1/29
Filmore Park (1) 536740 3/28/02 6.700% 1,432
10/15/42
Northbrooke (1) 548972 5/24/02 7.080% 14,018
8/1/43
Ellington Plaza (1) 585494 7/26/02 6.835% 27,447
6/1/44
Burlington (1) 595515 11/1/02 5.900% 6,814
4/15/31
FNMA DUS CERTIFICATES
Cambridge (1) 385971 4/11/03 5.560% 3,665
3/1/33
Bayforest (1) 381974 4/21/03 7.430% 4,305
10/1/28
Coventry Place (1) 384920 5/9/03 6.480% 791
3/1/32
Rancho de Cieto (1) 385229 5/13/03 6.330% 2,608
9/1/17
Elmwood Gardens (1) 386113 5/15/03 5.350% 5,545
5/1/33
30 West (1) 380751 5/27/03 6.080% 1,362
10/1/16
Jackson Park (1) 386139 5/30/03 5.150% 2,777
6/1/18
Unrealized Earned Applicable
Gain (Loss) at Balance at to the Year Ended
Name December 31, 2003 December 31, 2003 December 31, 2003
- ------------------- ----------------- ----------------- -----------------
GNMA CERTIFICATES
Western Manor (1) $ (22) $ 2,435 $ 193
Copper Commons (2) -- -- 17
SunCoast Capital Group,Ltd. (1) 11 243 25
Elmhurst Village (1) 3,329 24,923 1,675
Reserve at Autumn Creek (1)(3) -- 15,962 1,238
Casitas at Montecito (4) -- -- 70
Village at Marshfield (1) 1,082 22,453 1,439
Cantera Crossing (1) 747 7,166 395
Filmore Park (1) 152 1,584 85
Northbrooke (1) 1,824 15,842 905
Ellington Plaza (1) 2,420 29,867 1,175
Burlington (1) 288 7,102 397
FNMA DUS CERTIFICATES
Cambridge (1) (83) 3,582 142
Bayforest (1) (61) 4,244 178
Coventry Place (1) (24) 767 28
Rancho de Cieto (1) (78) 2,530 79
Elmwood Gardens (1) (145) 5,400 182
30 West (1) (89) 1,273 37
Jackson Park (1) (44) 2,733 82
40
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Date Purchased/ Amortized
Certificate Final Stated Cost at
Name Number Payment Date Interest Rate December 31, 2003
- ------------------- ----------- --------------- ------------- -----------------
Courtwood (1) 386274 6/26/03 4.690% 1,765
6/1/33
Sultana (1) 386259 6/30/03 4.650% 4,104
6/1/23
Buena (1) 386273 6/30/03 4.825% 3,053
6/1/33
Allegro (1) 386324 6/30/03 5.380% 2,574
7/1/33
Village West (1) 386243 6/30/03 4.910% 786
6/1/21
Westwood/Monterey (1) 386421 9/15/03 5.090% 2,720
8/1/33
Euclid (1) 386446 9/15/03 5.310% 2,374
8/1/33
Edgewood (1) 386458 9/15/03 5.370% 2,358
9/1/33
--------
Total $158,533
========
Unrealized Earned Applicable
Gain (Loss) at Balance at to the Year Ended
Name December 31, 2003 December 31, 2003 December 31, 2003
- ------------------- ----------------- ----------------- -----------------
Courtwood (1) (147) 1,618 42
Sultana (1) (293) 3,811 96
Buena (1) (245) 2,808 71
Allegro (1) (42) 2,532 69
Village West (1) (41) 745 19
Westwood/Monterey (1) 80 2,800 46
Euclid (1) 55 2,429 40
Edgewood (1) 53 2,411 40
---------------------------------------------------
Total $ 8,727 $167,260 $8,765
===================================================
(1) These GNMA and FNMA DUS certificates are partially or wholly-pledged as
collateral for borrowings under the repurchase facility (see Note 9).
(2) This GNMA certificate was repaid in April 2003 at par. There was no gain or
loss recognized.
(3) In January 2004, the Company received proceeds in the approximate amount of
$14.5 million from HUD in relation to the paydown of the Reserve at Autumn
Creek GNMA certificate. This paydown approximated 90% of the total
outstanding balance of the underlying mortgage loan, which was the initial
payment pursuant to the FHA insurance claim made by the Company when the
borrower missed debt service payments. The remaining balance of
approximately $1.5 million is expected to be received in the second quarter
2004, from the remaining amounts of the insurance and potentially the
guarantee from GNMA.
(4) This GNMA certificate was repaid in March 2003 at par. As a result of the
repayment, the Company realized a loss of approximately $391,000 due to the
unamortized balance of the premium that was recorded when the GNMA
certificate had been purchased.
41
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost, unrealized gain and fair value for the investment in debt
securities at December 31, 2003 and 2002 were as follows:
(Dollars in thousands)
December 31,
-------------------
2003 2002
-------- --------
Amortized cost $158,533 $105,331
Net unrealized gain 8,727 8,703
-------- --------
Fair value $167,260 $114,034
======== ========
For the year ended December 31, 2003, there were gross unrealized gains and
losses of approximately $10,040,000 and approximately $1,313,000 respectively,
on debt securities. For the year ended December 31, 2002, there were gross
unrealized gains and losses of approximately $8,730,000 and approximately
$27,000, respectively, on debt securities.
Due to the complexity of the GNMA and FNMA DUS structure and the uncertainty of
future economic events and other factors that affect interest rates and mortgage
prepayments, it is not possible to predict the effect of future events upon the
yield to maturity or the market value of the debt securities upon any sale or
other disposition or whether the Company, if it chose to, would be able to
reinvest proceeds from prepayments at favorable rates relative to the coupon
rate.
The fair value and gross unrealized losses of the Company's debt securities
aggregated by length of time that individual debt securities have been in a
continuous unrealized loss position, at December 31, 2003, is summarized in the
table below:
(Dollars in thousands)
Less than 12 Months
12 Months or More Total
- -------------------------------------------------------------------------------
Fair value $34,480 -- $34,480
Gross unrealized loss $ 1,313 -- $ 1,313
Of the Company's portfolio of debt securities, 13 are in an unrealized loss
position at December 31, 2003. All of these securities have been in an
unrealized position for less than one year. These unrealized losses are as a
result of increases in interest rates subsequent to the acquisition of these
securities. All of the debt securities are performing according to their terms.
Accordingly, the Company has concluded that these impairments are not other than
temporary.
42
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Investments in Mortgage Loans
Information relating to the Company's investments in
mortgage loans as December 31, 2003 is as follows:
(Dollars in thousands)
Final
Maturity Lifetime
Property Description Date Call Date (A) Interest Rate Interest Cap (C)
- ------- ----------- -------- ------------ ------------- ---------------
FIRST MORTGAGE LOANS:
Stony Brook II
East Haven, CT 125 Units 6/37 12/06 7.625% N/A
Sunset Gardens
Eagle Pass, TX 60 Units 6/04 N/A 11.50% N/A
Alexandrine (H)
Detroit, MI 30 Units 12/03 N/A 11.00% N/A
Desert View (I)
Coolidge, AZ 45 Units 5/04 N/A 11.00% N/A
Subtotal First Mortgage Loans
MEZZANINE LOANS (J):
Stabilized Properties
- ---------------------
Stony Brook II
East Haven, CT 125 Units 6/37 12/06 15.33%(B) 16%
Plaza at San Jacinto (K)
Houston, TX 132 Units 1/43 6/11 11.40%(B) 16%
Subtotal Stabilized Mezzanine Loans
Properties in Lease-Up
- ----------------------
The Hollows (L)
Greenville, NC 184 Units 1/42 1/12 10.00%(B) 16%
Elmhurst Village (M)(N)
Oveido, FL 313 Units 1/42 3/19 10.00%(B) 16%
The Reserve at Autumn Creek (K)(M)(N)
Friendswood, TX 212 Units 1/42 9/14 10.00%(B) 16%
Club at Brazos (L)(O)
Rosenberg, TX 200 Units 5/43 4/13 10.00%(B) 14%
Northbrooke (M)(N)
Harris County, TX 240 Units 8/43 7/13 11.50%(B) 14%
Subtotal Properties in Lease-Up
Properties in Construction/Rehabilitation
- -----------------------------------------
Del Mar Villas
Dallas, TX 260 Units 4/04 N/A LIBOR+4.625% (P)
Mountain Valley
Dallas, TX 312 Units 11/04 N/A LIBOR+4.750% (P)
Villas at Highpoint
Lewisville, TX 304 Units 4/33 TBD 14.57% N/A
Subtotal Properties in Construction/Rehabilitation
Subtotal Mezzanine Loans
Total Mortgage Loans
Share of
Share of Excess Sale or
Excess Operating Refinancing Periodic
Property Cash Flows Proceeds Payment Terms Prior Liens
- ------- ----------------- -------------- ------------- -------------
FIRST MORTGAGE LOANS:
Stony Brook II
East Haven, CT N/A N/A (F) --
Sunset Gardens
Eagle Pass, TX N/A N/A (G) --
Alexandrine (H)
Detroit, MI N/A N/A (G) --
Desert View (I)
Coolidge, AZ N/A N/A (G) --
Subtotal First Mortgage Loans
MEZZANINE LOANS (J):
Stabilized Properties
- ---------------------
Stony Brook II
East Haven, CT 40% 35% (F) --
Plaza at San Jacinto (K)
Houston, TX 50% 50% (G) --
Subtotal Stabilized Mezzanine Loans
Properties in Lease-Up
- ----------------------
The Hollows (L)
Greenville, NC 50% 25% (G) $ 8,880
Elmhurst Village (M)(N)
Oveido, FL 50% 25% (G) 21,594
The Reserve at Autumn Creek (K)(M)(N)
Friendswood, TX 50% 25% (G) 15,993
Club at Brazos (L)(O)
Rosenberg, TX 50% 25% (G) 13,342
Northbrooke (M)(N)
Harris County, TX 50% 50% (G) 13,871
Subtotal Properties in Lease-Up
Properties in Construction/Rehabilitation
- -----------------------------------------
Del Mar Villas
Dallas, TX N/A N/A (G) 5,554
Mountain Valley
Dallas, TX N/A N/A (G) 6,306
Villas at Highpoint
Lewisville, TX N/A N/A (G) 18,800
Subtotal Properties in Construction/Rehabilitation
Subtotal Mezzanine Loans
Total Mortgage Loans
Interest
Outstanding Carrying Earned Applicable
Face Amounts of Unamortized Amount of to the Year Ended
Property Mortgages (D) Costs and Fees Mortgages (E) December 31, 2003
- ------- ---------------- -------------- ------------ -----------------
FIRST MORTGAGE LOANS:
Stony Brook II
East Haven, CT $ -- $ -- $ -- $ 497
Sunset Gardens
Eagle Pass, TX 1,479 -- 1,479 182
Alexandrine (H)
Detroit, MI 342 -- 342 38
Desert View (I)
Coolidge, AZ 960 -- 960 69
---------------------------------------------------------------
Subtotal First Mortgage Loans 2,781 -- 2,781 786
---------------------------------------------------------------
MEZZANINE LOANS (J):
Stabilized Properties
- ---------------------
Stony Brook II
East Haven, CT -- -- -- 527
Plaza at San Jacinto (K)
Houston, TX -- -- -- 39
---------------------------------------------------------------
Subtotal Stabilized Mezzanine Loans -- -- -- 566
---------------------------------------------------------------
Properties in Lease-Up
- ----------------------
The Hollows (L)
Greenville, NC 1,549 (133) 1,416 174
Elmhurst Village (M)(N)
Oveido, FL 2,784 (391) 2,483 320
The Reserve at Autumn Creek (K)(M)(N)
Friendswood, TX -- -- -- 36
Club at Brazos (L)(O)
Rosenberg, TX 1,962 (75) 1,887 200
Northbrooke (M)(N)
Harris County, TX 1,500 (133) 1,367 177
---------------------------------------------------------------
Subtotal Properties in Lease-Up
7,885 (732) 7,153 907
---------------------------------------------------------------
Properties in Construction/Rehabilitation
- -----------------------------------------
Del Mar Villas
Dallas, TX 765 -- 765 46
Mountain Valley
Dallas, TX 776 -- 776 47
Villas at Highpoint
Lewisville, TX 2,574 (185) 2,389 245
---------------------------------------------------------------
Subtotal Properties in Construction/Rehabilitation 4,115 (185) 3,930 338
---------------------------------------------------------------
Subtotal Mezzanine Loans 12,000 (917) 11,083 1,811
---------------------------------------------------------------
Total Mortgage Loans $14,781 $ (917) $13,864 $ 2,597
===============================================================
43
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) Loans are subject to mandatory prepayment at the option of the Company ten
years after construction completion, with one year's notice. Loans with a
call date of "TBD" are still under construction.
(B) Interest on the mezzanine loans is based on a fixed percentage of the
unpaid principal balance of the related first mortgage loans. The amount
shown is the approximate effective rate earned on the balance of the
mezzanine loan. The mezzanine loans also provide for payments of additional
interest based on a percentage of cash flow remaining after debt service
and participation in sale or refinancing proceeds and certain provisions
that cap the Company's total yield, including additional interest and
participations, over the term of the loan.
(C) Lifetime interest cap represents the maximum annual return, including
interest, fees and participations, that can be earned by the Company over
the life of the mezzanine loan, computed as a percentage of the balance of
the first mortgage loan plus the mezzanine loan.
(D) As of December 31, 2003, all interest payments on the mortgage loans are
current, except as noted.
(E) Carrying amounts of the loans are net of unamortized origination costs and
fees and loan discounts.
(F) The Stonybrook II first mortgage loan and mezzanine loan were repaid in
January 2003.
(G) Interest only payments are due monthly, with loan balance due at maturity.
(H) The first mortgage loan, which matured in December 2003, did not pay off
the outstanding balance at the maturity date, which caused the loan to be
in default. The Company is currently in the process of determining the
necessary steps needed to be taken to protect its investment. The Company
has obtained an independent appraisal for the property underlying the
mortgage. The appraisal indicates that the value of the property exceeds
the carrying amount of the first mortgage loan on the property.
Accordingly, the Company has not recorded an allowance for probable losses
on this loan.
(I) Loan purchased in April 2003 in connection with the performance under a
guarantee made by the Company.
(J) The principal balance of the mezzanine loans is secured by the partnership
interests of the entity that owns the underlying property and a third
mortgage deed of trust. Interest payments on the mezzanine loans are
secured by a second mortgage deed of trust and are guaranteed for the first
36 months after construction completion by an entity related to the general
partner of the entity that owns the underlying property.
(K) These mezzanine loans have been reclassified to real estate owned -- see
Note 7.
(L) The Company does not have an interest in the first lien position relating
to this mezzanine loan.
(M) The Company has an interest in the first lien position relating to this
mezzanine loan.
(N) The first mortgage loans related to these properties were converted from
participations in FHA loans to ownership of the GNMA certificates and are
held by the Company - see Note 3.
(O) The funding of this mezzanine loan is based on property level operational
achievements.
(P) Interest cap on these loans is the maximum rate permitted by law.
44
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Further information relating to investments in mortgage loans for the years
ended December 31, 2003, 2002 and 2001 is as follows:
(Dollars in thousands)
2003 2002 2001
-------- -------- --------
Reconciliation of mortgage loans:
Balance at beginning of period $ 22,384 $ 17,799 $ 31,829
Advances made during the period 4,053 4,711 24,813
Conversion of mortgage loans to GNMA certificates -- -- (37,444)
Conversion of mortgage loans to real estate owned (3,181) -- --
Loan origination fees (net of acquisition
expenses) (187) (169) (152)
Proceeds from repayment of mortgage loans (9,463) -- (9,245)
Periodic principal payments of mortgage loans -- (46) (85)
Consolidation of previously unconsolidated subsidiary -- -- 8,374
Excess(deficiency) of proceeds over carrying value of
mortgage loans -- -- (251)
Amortization and accretion -- net 258 89 (40)
-------- -------- --------
Investments in mortgage loans - December 31, $ 13,864 $ 22,384 $ 17,799
======== ======== ========
45
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - Investment in ARCap
The Company owns 800,000 preferred equity units of ARCap, with a face amount of
$25 per unit, representing a 7.41% ownership and voting interest. The preferred
equity units are convertible, at the Company's option, into ARCap common units.
If converted into common units, the conversion price is equivalent to $25 per
unit, subject to certain adjustments. Also, if not already converted, for a
period of sixty days following the fifth anniversary of the first closing date,
which will be August 4, 2005, the preferred equity units are convertible, at the
Company's option, into a three-year note bearing interest at 12% that would be
junior to all of ARCap's then existing indebtedness. The preferred equity units
are also redeemable, at the option of ARCap, up until the fifth anniversary of
the first closing date.
Through the Company's convertible preferred membership interests in ARCap, it
has a substantial indirect investment in commercial mortgage backed securities
("CMBS") owned by ARCap. ARCap was formed in January 1999 by REMICap, an
experienced CMBS investment manager, and Apollo Real Estate Investors, the real
estate arm of one of the country's largest private equity investors. As of
December 31, 2003, ARCap had approximately $1.1 billion in assets, including
investments of approximately $1.0 billion of CMBS. Multifamily properties
underlie approximately one-third of ARCap's CMBS.
The Company's equity in the earnings of ARCap will generally be equal to the
preferred equity rate of 12% , unless ARCap does not have earnings and cash
flows adequate to meet this distribution requirement. ARCap has met its
distribution requirements to the Company to date. Yields on CMBS depend, among
other things, on the rate and timing of principal payments, the pass-through
rate, interest rate fluctuations and defaults on the underlying mortgages. The
Company's interest in ARCap is illiquid and the Company would need to obtain the
consent of the board of managers of ARCap before it could transfer its interest
in ARCap to any party other than a current member. The carrying amount of the
investment in ARCap is not necessarily representative of the amount the Company
would receive upon a sale of the interest.
ARCap has shifted its focus to CMBS fund management, whereby ARCap manages CMBS
investment funds raised from third-party investors. ARCap is generally a
minority investor in these funds. ARCap thereby diversifies its revenue base by
increasing its proportion of revenue derived from fees as opposed to interest
income.
Summarized information for ARCap as of December 31, 2003 and 2002, and the years
then ended is as follows:
2003 2002
----------------- -----------------
($'s in millions) ($'s in millions)
Investment securities - available for sale $ 739 $ --
Investment securities - trading 282 799
Other assets 29 24
------ ------
Total assets $1,050 $ 823
====== ======
Repurchase agreements and long-term debt $ 625 $ 392
Other liabilities 215 206
Members' equity 210 225
------ ------
Total liabilities and equity $1,050 $ 823
====== ======
Total revenues $ 115 $ 96
Total expenses 99 65
------ ------
Net income $ 16 $ 31
====== ======
46
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Bridge Loans/Notes Receivable
The Company's notes receivable are collateralized by equity interests in the
owner of the underlying property and consist of the following as of December 31,
2003:
(Dollars in thousands)
Remaining
Outstanding Committed
Principal Unamortized Carrying Balance to Interest
Property Location Balance Fees Amount Fund (1) Rate Maturity
- ----------------------------------------------------------------------------------------------------------------------------------
Parwood (2) Long Beach, CA $ 2,683 $ 2 $ 2,681 $ 567 11.00% January 2004
Noble Towers (2)(3) Oakland, CA 3,581 30 3,551 3,719 9.75% July 2005
Clarks Crossing (2) Laredo, TX 1,074 -- 1,074 -- 12.00% April 2004
Desert View (2) Coolidge, AZ 20 -- 20 -- 11.00% May 2004
Valley View (2) North LittleRock, AR 400 -- 400 -- 12.00% July 2004
Georgia King (2) Newark, NJ 1,495 25 1,470 5 11.50% May 2004
Reserve at Thornton (2) Thornton, CO 260 9 251 690 11.00% August 2006
Concord at Gessner Land Houston, TX 188 -- 188 -- 8.00% December 2008
Del Mar Villas (4) Dallas, TX 5,554 8 5,546 -- LIBOR + 4.625%(5) April 2004
Mountain Valley (4) Dallas, TX 6,306 30 6,276 -- LIBOR + 4.750%(5) November 2004
Baywoods (4) Antioch, CA 10,990 40 10,950 -- LIBOR + 4.000%(5) March 2005
Oaks of Baytown (4) Baytown, TX 2,337 16 2,321 1,488 LIBOR + 4.500%(5) August 2005
Quay Point (4) Houston, TX 1,223 5 1,218 -- LIBOR + 3.600%(5) August 2005
===============================================
Total $36,111 $165 $35,946 $6,469
===============================================
(1) Funded on an as needed basis.
(2) These loans are to limited partnerships who are affiliated with the Advisor
(see Note 11).
(3) Affiliate of the Advisor has provided a full guarantee on the payment of
principal and interest due on this note.
(4) Pledged as collateral in connection with warehouse facility with Fleet
National Bank (see Note 10).
(5) 30-day LIBOR at December 31, 2003 was 1.12%.
47
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7- Real Estate Owned
The Company foreclosed on several mortgage loans and notes receivable during
2003. The Company's real estate owned at December 31, 2003 consisted of the
following:
(Dollars in thousands)
Carrying Value
as of
Number of December 31,
Units Location 2003
--------- --------------- ---------------
Real estate owned -- subject to sales contracts
- -----------------------------------------------
Concord at Little York (1) 276 Houston, TX $16,274
Concord at Gessner (2) 288 Houston, TX 17,194
Concord at Gulfgate (3) 288 Houston, TX 18,148
------ -------
Total real estate owned -
subject to sales contracts 852 $51,616
====== =======
Real estate owned -- held for sale
- ----------------------------------
Reserve at Autumn Creek (5) 212 Friendswood, TX $17,924
Plaza at San Jacinto (4) 132 La Porte, TX 7,878
------ -------
Total real estate owned -
held for sale 344 $25,802
====== =======
(1) The property underlying the note receivable secured by the Concord at Little
York partnership interests missed required debt service payments beginning with
the May 2003 payment, causing the note to be in default. The Company stopped
accruing interest on the note receivable. During July 2003, the Company
exercised its rights under the subordinated promissory note and other documents
to take possession of the real estate collateral of the Concord at Little York
property. The Company had provided a $3.5 million mezzanine loan to the owner of
the property in February 2002. The Company paid an additional approximate amount
of $11.7 million to purchase the first mortgage loan on the property. On August
4, 2003, the Company acquired the real estate of the property at a foreclosure
auction. Based on an independent appraisal, the Company concluded that the fair
value of the property, less expected disposal costs, was in excess of the
carrying amounts of the loans. As such, the Company believes that no reserve for
impairment is necessary at this time. On October 27, 2003, the Company sold the
property for approximately $16.4 million to a qualified 501(c)(3) entity, which
qualifies for a real estate tax abatement. In order to expedite the closings and
ensure the 501(c)(3) entity would receive the real estate tax abatement prior to
January 1, 2004, the Company provided 100% financing to the 501(c)(3) entity via
a bridge loan, which matures in April 2005. The 501(c)(3) entity will pay the
Company 100% of the property's cash flow until the property is fully leased,
stabilized, and permanent financing is in place. The Company is working with the
501(c)(3) entity to obtain third party permanent financing for the property. If
there is a gap between the permanent mortgage amount and the bridge loan, the
Company intends to provide mezzanine financing. Due to the fact that the Company
provided 100% financing to the buyer, this transaction did not constitute a sale
in accordance with GAAP. Therefore, the Company continues to classify the
property as real estate owned on the consolidated balance sheet. Income from
operations of the property in the approximate amount of $162,000 is recorded in
other income on the 2003 consolidated statement of income.
(2) The property underlying the note receivable secured by the Concord at
Gessner partnership interests missed required debt service payments beginning
with the May 2003 payment, causing the note to be in default. The Company
stopped accruing interest on the note receivable. During July 2003, the Company
exercised its rights under the subordinated promissory note and other documents
to take possession of the real estate collateral of the Concord at Gessner
property. The Company had provided a $1.5 million mezzanine loan to the owner of
the property in March 2003. The Company paid an additional approximate amount of
$14.2 million to purchase the first mortgage loan on the property. On August 4,
2003, the Company acquired the real estate of the property at a foreclosure
auction. Based on an independent appraisal, the Company concluded that the fair
value of the property, less expected disposal costs, was in excess of the
carrying amounts of the loans. As such, the Company believes that no reserve for
impairment is necessary at this time. On October 27, 2003, the Company sold the
property for approximately $17.5 million to a qualified 501(c)(3) entity, which
qualifies for a real estate tax abatement. In order to expedite the closings and
ensure the 501(c)(3) entity would receive the real estate tax abatement prior to
January 1, 2004, the Company provided 100% financing to the 501(c)(3) entity via
a bridge loan, which matures in April 2005. The 501(c)(3) entity will pay the
Company 100% of the property's cash flow until the property is fully leased,
stabilized, and permanent financing is in place. The Company is working with the
501(c)(3) entity to obtain third party permanent financing for the property. If
there is a gap between the permanent mortgage amount and the bridge loan, the
Company intends to provide mezzanine financing. Due to the fact that the Company
48
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
provided 100% financing to the buyer, this transaction did not constitute a sale
in accordance with GAAP. Therefore, the Company continues to classify the
property as real estate owned on the consolidated balance sheet. Income from
operations of the property in the approximate amount of $111,000 is recorded in
other income on the 2003 consolidated statement of income. The Company is
funding additional costs to complete the construction of the property. These
costs, estimated to be approximately $1.5 million, of which approximately $1.4
million has been funded through December 31, 2003, are capitalized to real
estate owned.
In connection with the foreclosure of the Concord at Gessner property, the
Company acquired a land parcel which it subsequently sold to an unrelated third
party. The sales price of the land was approximately $224,000, net of closing
costs. The Company provided seller financing, in the form of a bridge note, to
the buyer, in the approximate amount of $187,000. The Company allocated
approximately $206,000 of cost basis to the land parcel resulting from the
Concord at Gessner foreclosure and recognized a gain on the sale of
approximately $18,000.
(3) The property underlying the note receivable secured by the Concord at
Gulfgate partnership interests missed required debt service payments beginning
with the May 2003 payment, causing the note to be in default. The Company
stopped accruing interest on the note receivable. During December 2003, the
Company exercised its rights under the subordinated promissory note and other
documents to take possession of the real estate collateral of the Concord at
Gulfgate property. The Company had provided a $3.5 million mezzanine loan to the
owner of the property in May 2002. The Company paid an additional approximate
amount of $14.1 million to purchase the first mortgage loan on the property. On
December 2, 2003, the Company acquired the real estate of the property at a
foreclosure auction. Based on independent appraisal, the Company concluded that
the fair value of the property, less expected disposal costs, was in excess of
the carrying amounts of the loans. As such, the Company believes that no reserve
for impairment is necessary at this time. On December 9, 2003, the Company sold
the property for approximately $18.1 million to a qualified 501(c)(3) entity,
which qualifies for a real estate tax abatement. In order to expedite the
closings and ensure the 501(c)(3) entity would receive the real estate tax
abatement prior to January 1, 2004, the Company provided 100% financing to the
501(c)(3) entity via a bridge loan, which matures in April 2005. The 501(c)(3)
entity will pay the Company 100% of the property's' cash flow until the property
is fully leased, stabilized, and permanent financing is in place. The Company is
working with the 501(c)(3) entity to obtain third party permanent financing for
the property. If there is a gap between the permanent mortgage amount and the
bridge loan, the Company intends to provide mezzanine financing. Due to the fact
that the Company provided 100% financing to buyer, this transaction did not
constitute a sale in accordance with GAAP. Therefore, the Company continues to
classify the property as real estate owned on the consolidated balance sheet.
Income from operations of the property in the approximate amount of $187,000 is
recorded in other income on the 2003 consolidated statement of income.
(4) On March 7, 2003, the Company exercised its rights under the subordinated
promissory note and other documents to take possession of the real estate
collateral of the Plaza at San Jacinto. The Company had provided a $1.2 million
mezzanine loan to the owner of the Plaza at San Jacinto on May 24, 2001; this
loan was in default. The Company paid an additional approximate amount of $6.7
million to purchase the first mortgage loan on the property. On May 6, 2003, the
Company acquired the real estate at a foreclosure auction. Based on an
independent appraisal, the Company concluded that the value of the property,
less estimated disposal costs, exceeds the amount paid for the first mortgage
loan and the carrying amount of the mezzanine loan. As such, the Company
believes that no reserve for impairment is necessary at this time. However,
there can be no assurance that the Company will be able to sell this property
for an amount greater than or equal to its appraised value. The Company has
reclassified its investment in the Plaza at San Jacinto mezzanine loan, as well
as the balance of the first mortgage, purchased during the first quarter, to
real estate owned on the consolidated balance sheet and ceased accrual of
interest. Income from operations of the property, in the approximate amount of
$152,000, is recorded as other income on the 2003 consolidated statement of
income. The property is held for sale and is not being depreciated. The Company
also incurred approximately $88,000 of costs to effect this foreclosure, which
are included in amortization and other expenses. The Company is currently
focused on increasing the occupancy and the operating income generated from the
property. As operations begin to improve, the property will be marketed for
sale.
(5) Certain required debt service payments have been missed, causing the Reserve
at Autumn Creek mezzanine loan to be in default. As of May 2003, the Company
stopped accruing income on the mezzanine loan. During October 2003, the Company
exercised its rights under the subordinated promissory note and other documents
to take possession of the real estate collateral of the Reserve at Autumn Creek
property, subject to the first mortgage loan. The first mortgage loan, in the
approximate amount of $15,993,000, bears interest at a fixed rate of 8% per
annum and matures January 2042. The Company has obtained an independent
appraisal for the property underlying the mezzanine loan. The appraisal
indicates that the value of the property, less estimated disposal costs, exceeds
the value of the first mortgage outstanding on the property and the Company's
mezzanine loan outstanding. As such, the Company believes that no reserve for
impairment is necessary at this time. The Company has reclassified its
investment in the Reserve at Autumn Creek to real estate owned on the
consolidated balance sheet. The Company has incurred approximately $56,000 of
costs to effect this foreclosure, which are included in amortization and other
expenses.
NOTE 8- Taxable Revenue Bonds
During October 2003, the Company purchased nine taxable revenue bonds at a
discount (99% of par) from CharterMac in the amount of $7.6 million. The nine
taxable revenue bonds, each of which is secured by a first mortgage position,
held by CharterMac, on a multifamily property, carry a weighted average interest
rate of 8.69%. The price paid was determined by an independent third party
valuation of the taxable revenue bonds. This transaction was approved by the
49
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company's Board of Trustees. The Company's estimate of each revenue bond's fair
value was equal to its amortized cost of December 31, 2003.
NOTE 9- Repurchase Facilities
The Company has a repurchase facility with Nomura Securities International Inc.
("Nomura"), which enables the Company to borrow up to 97% of the fair market
value of GNMA and FNMA DUS Certificates owned by the Company. Interest on
borrowings are at 30-day LIBOR plus 0.02%. As of December 31, 2003 and December
31, 2002, the amounts outstanding under this facility were $149.5 and $87.9
million, respectively, and weighted average interest rates were 1.56% and 1.47%,
respectively. Deferred costs relating to the Nomura facility have been fully
amortized. All amounts outstanding at December 31, 2003, had 30-day settlement
terms.
During March 2003, upon management's analysis of the interest rate environment
and the costs and risks of such strategies, the Company entered into an interest
rate swap in order to hedge against increases in the floating interest rate on
its repurchase facility. On March 25, 2003, the Company entered into a five-year
interest rate swap agreement with Fleet National Bank ("Fleet") whereby the
Company has agreed to pay Fleet a fixed 3.48% on a notional amount of $30
million. In return, Fleet will pay the Company a floating rate equivalent to the
30-day LIBOR rate on the same notional amount. This effectively fixes $30
million of the Company's secured borrowings at 3.48%, protecting the Company in
the event the 30-day LIBOR rate rises.
In January 2004, Nomura notified the Company that it intended to terminate the
repurchase facility. Nomura agreed to allow the Company time to find a
replacement repurchase facility, while reducing the amount the Company could
borrow under the existing facility to 93% of the fair market value of the
collateral certificates. In February 2004, the Company executed repurchase
agreements with three counterparties, Greenwich Capital, Bear Stearns, and RBC
Capital Markets, which provides the Company with the capacity to completely
terminate the facility with Nomura. Terms of the three newly executed agreements
offer advance rates between 94% and 97% and borrowing rates between the LIBOR
plus 2 basis points and LIBOR plus 10 basis points. The borrowings are subject
to 30-day settlement terms. In the first week of March 2004, the Company
executed multiple transactions whereby the repurchase transactions outstanding
with Nomura were transferred to the three new trading partners.
NOTE 10- Warehouse Facilities
In October 2002, the Company entered into a mortgage warehouse line of credit
with Fleet National Bank (the "Fleet Warehouse Facility") in the amount of up to
$40 million. Under the terms of the Fleet Warehouse Facility, Fleet will advance
up to 83% of the total loan package, to be used to fund notes receivable, which
the Company will make to its customers for the acquisition/refinancing and minor
renovation of existing, lender-approved multifamily properties. This facility,
which matures April 2006, bears interest at a rate of 30, 60, 90 or 180-day
LIBOR + 200 basis points, or prime, at the discretion of the Company, payable
monthly on the total amounts advanced. Principal is due upon the earlier of
refinance or sale of the underlying project or upon maturity. The Company pays a
fee of 12.5 basis points, paid quarterly, on any unused portion of the facility.
From time to time, the Company will use this facility to finance real estate
owned. As of December 31, 2003 and December 31, 2002, the Company had
approximately $34.9 and $8.8 million, respectively, in borrowings outstanding
under this program.
Included in the $34.9 million of outstanding borrowings under this program at
December 31, 2003 was $14 million borrowed by the Company to repay an
intercompany loan from CharterMac (see Note 11).
50
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11- Related Party Transactions
Pursuant to the amended Advisory Agreement between the Company and the Advisor,
the Advisor receives certain fees, in addition to reimbursements of certain
administrative and other costs incurred by the Advisor on behalf of the Company,
for its ongoing management and operations of the Company:
Fees/Compensation Annual Amount
----------------- -------------
I. Asset management .355% for investments in mortgage loans
fees .355% for certain investment grade investments
.750% for certain non-investment grade investments
1.000% for unrated investments
.625% for investments held prior to the adoption of
the amended Advisory Agreement between the
Company and the Advisor dated April 6, 1999.
II. Annual A) 25% of the dollar amount by which
incentive fees
(1) (a) funds from operations (before the
annual incentive fee) per share based
on the weighted average number of
shares outstanding), plus
(b) gains (or minus losses) from debt
restructuring and sales of property
per share (based on the weighted
average number of shares outstand-
ing), exceed
(2) an amount equal to the greater of:
(a) (i) the weighted average of (x)
$20 (the price per share in the
Company's initial public offer-
ing) and (y) the prices per
share of any secondary offerings
by the Company multiplied by
(ii) the ten year U.S.Treasury Rate
plus 2% per annum; and;
(b) $1.45 multiplied by the weighted
average number of shares out-
standing during such year.
During September 2003, the Company and its Advisor have agreed to amend its
management agreement regarding the payment of an incentive management fee to the
Advisor. Under the terms of the amended agreement, there is no change to the
calculation of the incentive management fee. However, the incentive management
fee is only earned by the Advisor if the Company attains $1.60 in GAAP earnings
per share for the calendar year. Based on the amendment to the agreement and the
Company's 2003 earnings per share of $1.52, the Company has not incurred an
incentive management fee in 2003.
In addition, with respect to new mortgage loans acquired by the Company, the
Advisor will receive origination points paid by borrowers equal to up to 1% of
the principal amount of each mortgage loan and the Company will receive
origination points paid by borrowers in excess of 1%.
During 2002, the Company made an agreement with the Advisor, whereby the Advisor
waived approximately $71,000 in net fees and expense reimbursements, in light of
higher than usual expenses related to the origination of investments that were
never completed.
During 2003, the Advisor agreed to waive approximately $67,000 in asset
management fees relating to additional work the Advisor performed on certain
properties owned by the Company which were acquired as the result of the Company
foreclosing on troubled loans. As the Advisor was paid a fee at the time the
loans were originated, the Advisor agreed to waive certain additional fees to
which it was entitled.
51
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The costs incurred to related parties for the years ended December 31, 2003,
2002 and 2001 were as follows:
(Dollars in thousands)
Years Ended December 31,
------------------------
2003 2002 2001
------ ------ ------
Expense reimbursement $ 725 $ 447 $ 345
Asset management fees 1,087 838 248
Incentive management fee -- 235 --
------ ------ ------
$1,812 $1,520 $ 593
====== ====== ======
Some of the Company's notes receivable (see Note 6), the stabilization loan
guarantees and standby loan commitments (Note 15) are to limited partnerships in
which the general partner is an unaffiliated third party and the limited partner
is itself a limited partnership in which an affiliate of Related is the general
partner.
The Noble Towers notes receivable is guaranteed by an affiliate of the Advisor
(see Note 6).
In September 2003, the Company entered into a letter of agreement with PW
Funding Inc. ("PWF"), a subsidiary of CharterMac, each of which are affiliates
of the Advisor, under which the Company transferred and assigned all of its
rights and obligations to the two loans it originated under this program to PWF.
There was no payment made or received by the Company in connection with this
transfer. CharterMac has agreed to guarantee PWF's performance with regard to
this program, which in turn, allowed for the release of approximately $8.3
million in collateral pledged by the Company to secure its obligations under the
loan program. In turn, the Company indemnified PWF against any losses to Fannie
Mae on the loans and indemnified CharterMac against any obligation under its
guaranty. The maximum aggregate exposure to the Company under this agreement is
approximately $7.5 million. However, the Company believes that it will not be
called upon to fund any of these guarantees and, accordingly, that the fair
value of the guarantees is insignificant.
During October 2003, the Company purchased nine taxable revenue bonds from
CharterMac (see Note 8).
On October 15, 2003, the Company funded a bridge loan to Related Capital
Guaranteed Corporate Partners II, L.P. Series A, an affiliate of the Advisor, in
the approximate amount of $1.3 million. The Company received a fee of $10,000
for funding the loan. The loan was repaid on October 31, 2003.
In December 2003, the Company borrowed approximately $11.3 million from
CharterMac in order to aid in the purchase of the Concord at Gulfgate first
mortgage in the total amount of $14.1 million. CharterMac charged the Company
interest at an annual rate of 3.17% on the borrowings, which was based on LIBOR
plus 2%, which is the same rate paid by the Company on its Fleet Warehouse
Facility. Shortly thereafter, the Company received a loan from Fleet on the
warehouse facility in the amount of $14 million, the proceeds of which were used
to repay the loan to CharterMac.
NOTE 12 - Earnings Per Share
Basic net income per share in the amount of $1.52, $1.61 and $1.35 for the years
ended December 31, 2003, 2002 and 2001, respectively, equals net income for the
periods ($11,884,383, $9,659,362 and $5,187,064, respectively), divided by the
weighted average number of shares outstanding for the periods (7,802,957,
6,017,740 and 3,838,630, respectively).
Diluted net income per share is calculated using the weighted average number of
shares outstanding during the period plus the additional dilutive effect of
common share equivalents. The dilutive effect of outstanding share options is
calculated using the treasury stock method.
Diluted net income per share in the amount of $1.52, $1.61 and $1.35 for the
years ended December 31, 2003, 2002 and 2001, respectively, equals net income
for the periods ($11,884,383, $9,659,362 and $5,187,064, respectively), divided
by the weighted average number of shares outstanding for the periods (7,814,810,
6,017,740 and 3,838,630, respectively).
NOTE 13 - Capital Shares
On February 25, 2002, the Company completed a public offering of 2.5 million
common shares at a price of $13.00 per share. The net proceeds from this
offering, approximately $30.9 million, net of underwriter's discount and
expenses, were used to fund investments.
52
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On April 23, 2003, the Company completed a public offering of 1,955,000 common
shares at a price of $15.00 per share, resulting in proceeds, net of
underwriters' discount and expenses, of approximately $27.5 million. The net
proceeds from this offering have been used to fund investment activity.
The Company applies the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" for its share options issued to non-employees. Accordingly,
compensation cost is accrued based on the estimated fair value of the options
issued, and amortized over the vesting period. Because vesting of the options is
contingent upon the recipient continuing to provide services to the Company
until the vesting date, the Company estimates the fair value of the non-employee
options at each period-end up to the vesting date, and adjusts expensed amounts
accordingly. The fair value of each option grant is estimated using the
Black-Scholes option-pricing model.
In April 2003, in accordance with the Incentive Share Option Plan, the Company's
Compensation Committee granted 190,000 options to employees of Related at an
exercise price of $15.03, which was the market price of the Company's common
shares at the grant date. These options vest equally, in thirds, in April 2004,
2005 and 2006 and expire in 10 years. These options were dilutive for the year
ended December 31, 2003, and were taken into account in the calculation of
diluted earnings per share. At December 31, 2003, these options had a fair value
of $51,300 based on the Black-Scholes pricing model, using the following
assumptions: dividend yield of 9.63%, estimated volatility of 16%, risk free
interest rate of 4.27% and expected lives of 9.41 years. The Company recorded
compensation cost of $22,675, reflected in general and administrative expenses
for the year ended December 31, 2003, relating to these options. No options were
excercised or forfeited during 2003.
In August 2003, the Company's Board of Trustees approved a share repurchase plan
for the Company. The plan enables the Company to repurchase, from time to time,
up to 1,000,000 common shares. The repurchases will be made in the open market,
and the timing will be dependent on the availability of shares and other market
conditions. No repurchases have been made at December 31, 2003.
53
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - Selected Quarterly Financial Data
2003 Quarter Ended
-------------------------------------------------------
(Dollars in thousands except per share amounts)
(unaudited)
March 31 June 30 September 30 December 31
----------- ----------- ------------ -----------
Revenues:
Interest income:
Debt securities $ 1,872 $ 1,980 $ 2,364 $ 2,549
Mortgage loans 1,407 356 418 416
Notes receivable 918 878 721 649
Revenue bonds -- -- -- 151
Temporary investments 8 7 37 3
Other income 28 82 70 596
----------- ----------- ----------- -----------
Total revenues 4,233 3,303 3,610 4,364
----------- ----------- ----------- -----------
Expenses:
Interest 407 643 693 805
General and administrative 243 182 152 340
Fees to Advisor 443 456 468 445
Amortization and other 157 49 121 49
----------- ----------- ----------- -----------
Total expenses 1,250 1,330 1,434 1,639
----------- ----------- ----------- -----------
Other income:
Equity in earnings of ARCap 600 600 600 600
Net gain (loss) on sale or repayment
of debt securities and land parcel (391) -- -- 18
----------- ----------- ----------- -----------
Total other income 209 600 600 618
----------- ----------- ----------- -----------
Net income $ 3,192 $ 2,573 $ 2,776 $ 3,343
=========== =========== =========== ===========
Net income per share
(basic and diluted) $ 0.50 $ 0.32 $ 0.33 $ 0.40
=========== =========== =========== ===========
Weighted average shares outstanding
Basic 6,363,630 8,144,259 8,338,180 8,338,180
=========== =========== =========== ===========
Diluted 6,363,630 8,158,524 8,346,866 8,350,807
=========== =========== =========== ===========
54
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2002 Quarter Ended
-----------------------------------------------------
(Dollars in thousands except per share amounts)
(unaudited)
March 31 June 30 September 30 December 31
----------- ----------- ------------ -----------
Revenues:
Interest income:
Debt securities $ 1,084 $ 1,370 $ 1,548 $ 1,767
Mortgage loans 401 609 536 504
Notes receivable 487 627 548 608
Temporary investments 11 13 16 10
Other income 60 76 67 116
---------- ---------- ---------- ----------
Total revenues 2,043 2,695 2,715 3,005
---------- ---------- ---------- ----------
Expenses:
Interest 272 307 290 359
General and administrative 121 164 119 281
Fees to Advisor 357 371 318 474
Amortization and other 360 3 -- 16
---------- ---------- ---------- ----------
Total expenses 1,110 845 727 1,130
---------- ---------- ---------- ----------
Other income:
Equity in earnings of ARCap 592 608 600 600
Net gain on repayment of debt securities 614 -- -- --
---------- ---------- ---------- ----------
Total other income 1,206 608 600 600
---------- ---------- ---------- ----------
Net income $ 2,139 $ 2,458 $ 2,588 $ 2,475
========== ========== ========== ==========
Net income per share
(basic and diluted) $ 0.43 $ 0.39 $ 0.41 $ 0.39
========== ========== ========== ==========
Weighted average shares outstanding
Basic 4,960,852 6,363,630 6,363,630 6,363,630
========== ========== ========== ==========
Diluted 4,960,852 6,363,630 6,363,630 6,363,630
========== ========== ========== ==========
NOTE 15 - Commitments and Contingencies
Upon taking possession of the real estate collateral supporting the Concord at
Gulfgate loan, the Company has been named in a lawsuit filed by the limited
partners of partnership that owned the property. Subsequently, the Company has
filed a countersuit against the limited partners seeking to recover unpaid taxes
and misappropriated property receipts. The Company is currently unable to
determine the possible outcome of the litigation, but does not believe it will
have a material impact on the consolidated financial statements.
In the first quarter of 2003, the Company discontinued its loan program with
Fannie Mae, under which Fannie Mae had agreed to fully fund the origination of
$250 million of Delegated Underwriter and Servicer loans ("DUS") for apartment
properties that qualify for low income housing tax credits ("LIHTC") under
Section 42 of the Internal Revenue Code. Under the loan program, the Company
originated and contracted for individual loans of up to $6 million each. The
Company guaranteed a first loss position of the aggregate principal amount of
these loans and also guaranteed construction loans for which it had issued a
forward commitment to originate under this program. Accordingly, the Company
wrote off approximately $358,000 of unamortized deferred costs relating to this
program, which is included in other expenses on the consolidated statement of
income.
In September 2003, the Company entered into a letter of agreement with PW
Funding Inc. ("PWF"), a subsidiary of CharterMac, each of which are affiliates
of the Advisor, under which the Company transferred and assigned all of its
rights and obligations to the two loans it originated under this program to PWF.
There was no payment made or received by the Company in connection with this
transfer. CharterMac has agreed to guarantee PWF's performance with regard to
this program, which in turn, allowed for the release of approximately $8.3
million in collateral pledged by the Company to secure its obligations under the
loan program. In turn, the Company indemnified PWF against any losses to Fannie
55
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mae on the loans and indemnified CharterMac against any obligation under its
guaranty. The maximum aggregate exposure to the Company under the agreement is
approximately $7.5 million. However, the Company believes that it will not be
called upon to fund any of these guarantees and, accordingly, that the fair
value of the guarantees is insignificant.
56
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Standby and Forward Loan and GNMA Commitments
- ---------------------------------------------
The Company has issued the following standby and forward bridge and permanent
loan commitments for the purpose of constructing/rehabilitating certain
multifamily apartment complexes in various locations.
(Dollars in thousands)
STANDBY AND
FORWARD BRIDGE LOAN COMMITMENTS
- ---------------------------------------
MAXIMUM AMOUNT OF COMMITMENTS
----------------------------------------------------
ISSUE DATE PROJECT LOCATION NO. OF APT. UNITS LESS THAN 1 YEAR 1-3 YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
Jan-02 Parwood Long Beach, CA 528 $ 567 (1) $ --
Feb-03 Noble Towers Oakland, CA 195 -- 3,719 (2)
Aug-03 Oaks of Baytown Baytown, TX 248 1,488 --
Nov-03 Georgia King Newark, NJ 422 5 --
Dec-03 Reserve at Thornton Thornton, CO 216 690 --
--------------------------------------------------------------------------
TOTAL STANDBY AND FORWARD BRIDGE LOAN COMMITMENTS 1,609 $2,750 $ 3,719
==========================================================================
STANDBY AND FORWARD MEZZANINE LOAN COM-
MITMENTS
- ----------------------------------------
MAXIMUM AMOUNT OF COMMITMENTS
----------------------------------------------------
ISSUE DATE PROJECT LOCATION NO. OF APT. UNITS LESS THAN 1 YEAR 1-3 YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
April-03 Villas at Highpoint Lewisville, TX 304 $ 26 (3) $ --
April-03 Villas at Highpoint Lewisville, TX -- -- 693
--------------------------------------------------------------------------
TOTAL STANDBY AND FORWARD MEZZANINE LOAN COMMITMENTS 304 $ 26 $ 693
==========================================================================
57
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FORWARD GNMA COMMITMENTS
- ------------------------
MAXIMUM AMOUNT OF COMMITMENTS
-------------------------------------------------------------
DATE PURCHASED PROJECT LOCATION LESS THAN 1 YEAR 1-3 YEARS
- -------------------------------------------------------------------------------------------------------------------------
May-02 Ellington Plaza Washington, DC $10,255 (3) $ --
-------------------------------------------------------------
TOTAL FORWARD GNMA COMMITMENTS $10,255 --
-------------------------------------------------------------
TOTAL STANDBY AND FORWARD LOAN AND GNMA COMMITMENTS $13,031 $ 4,412
=============================================================
(1) Funding has already begun. Remaining amount of commitment is not expected to
be funded.
(2) Fundings will be on an as needed basis to complete rehabilitation of the
property.
(3) Funding has already begun. Amount represents remaining commitment expected
to be funded.
58
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stabilization Loan Guarantees
During 2002, the Company guaranteed the following loans in relation to the
construction of affordable multifamily apartment complexes in various locations.
The stabilization loan guarantees will provide credit support for the properties
after construction completion, up until the date in which permanent financing
takes place.
During October 2002, the Company entered into an agreement with Wachovia Bank,
National Association ("Wachovia") to provide stabilization guarantees for new
construction of multifamily properties under the LIHTC program. Wachovia already
provides construction and stabilization guarantees to Fannie Mae, for loans
Wachovia originates under the Fannie Mae LIHTC forward commitment loan program,
but only for loans within regions of the country Wachovia has designated to be
within its territory. For loans outside Wachovia's territory, the Company has
agreed to issue a stabilization guarantee, for the benefit of Wachovia. The
Company is guarantying that properties which have completed construction will
stabilize and the associated construction loans will convert to permanent Fannie
Mae loans. The Company receives origination and guarantee fees from the
developers for providing the guarantees. If the properties do not stabilize with
enough net operating income for Fannie Mae to fully fund its commitment for a
permanent loan, AMAC may be required to purchase the construction loan from
Wachovia or to fund the difference between the construction loan amount and the
reduced Fannie Mae permanent loan amount.
(Dollars in thousands)
MAXIMUM AMOUNT OF
GUARANTEE
LOAN ADMINIS- STABILIZATION
NO. OF LESS THAN TRATION FEE (1) GUARANTEE
DATE CLOSED PROJECT LOCATION UNITS 1 YEAR 1-3 YEARS (ANNUAL PERCENTAGE) FEE (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Jul-02 Clark's Crossing Laredo, TX 160 $ 4,790 $ -- 0.500% 0.625%
Sept-02 Creekside Apts. Colorado Springs, CO 144 7,500 -- 0.375% --
Oct-02 Village at Meadowbend (3) Temple, TX 138 -- 3,675 0.500% 0.750%
Nov-02 Mapleview Apartments (3) Saginaw, MI 104 -- 3,240 0.625% 0.247%
------------------------------------------------------------------
Total Stabilization Loan Guarantees 546 $ 12,290 $ 6,915 -- --
==================================================================
(1) Loan Administration Fee is paid on a quarterly basis during the guarantee
period.
(2) Stabilization Guarantee Fee is an up-front fee - paid at closing and
amortized over the guarantee period.
(3) Guarantee was made under Wachovia Bank, National Association Guarantee
Agreement.
For each of these guarantees, and for the guarantees issued under the Fannie Mae
program discussed in the first paragraph of this Note 14, the Company monitors
the status of the underlying properties and evaluates its exposure under the
guarantees. To date, the Company has concluded that no accrual for probable
losses is required under SFAS 5.
59
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Disclosure Controls and Procedures
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's Chief
Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as
such term is defined in Rule 15(e) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) as of the end of the period
covered by this report. Based on such evaluation, such officers have
concluded that, as of the end of such period, the Company's disclosure
controls and procedures are effective.
(b) INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any
significant changes in the Company's internal control over financial
reporting during the fiscal quarter to which this report relates that
have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Company.
Incorporated by reference to the Company's definitive proxy statement to be
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
Item 11. Executive Compensation.
Incorporated by reference to the Company's definitive proxy statement to be
filed pursuant to Regulation 14A under the Exchange Act.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the Company's definitive proxy statement to be
filed pursuant to Regulation 14A under the Exchange Act.
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference to the Company's definitive proxy statement to be
filed pursuant to Regulation 14A under the Exchange Act.
Item 14. Principal Accounting Fees and Services
Incorporated by reference to the Company's definitive proxy statement to be
filed pursuant to Regulation 14A under the Exchange Act.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Sequential
Page
----------
(a) 1. Filed Documents
---------------
The following documents are filed as part of this report:
American Mortgage Acceptance Company
------------------------------------
Independent Auditors' Report 29
Consolidated Balance Sheets as of December 31, 2003
and 2002 30
Consolidated Statements of Income for the years
ended December 31, 2003, 2002 and 2001 31
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 2003, 2002
and 2001 32
Consolidated Statements of Cash Flows for the
years ended December 31, 2003, 2002 and 2001 33
Notes to Consolidated Financial Statements 35
60
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(continued)
Sequential
Page
----------
ARCap Investors, LLC
--------------------
Consolidated 2003 financial statements for ARCap Investors,
LLC (see Exhibit 99 (a)) 71
Consolidated 2002 financial statements for ARCap Investors,
LLC (see Exhibit 99 (b)) 84
Consolidated 2001 financial statements for ARCap Investors,
LLC (see Exhibit 99 (c)) 96
(a) 2. Financial Statement Schedules
All schedules have been omitted because they are not
required or because the required information is
contained in the financial statements or notes thereto.
(a) 3. Exhibits
3.4 Second Amended and Restated Declaration of Trust, dated as
of April 6, 1999 (incorporated by reference to Exhibit
3.4(c) in the Company's March 31, 1999 Quarterly Report
on Form 10-Q).
10(a) Amended and Restated Advisory Services Agreement, effective
as of April 6, 1999 (incorporated herein by reference to
Exhibit 10(z) to Form 10-Q dated September 30, 1999
filed with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934 (Commission
File No. 0-23972)).
10(b) First Amendment to Amended and Restated Advisory Services
Agreement between Related AMI Associates, Inc. and the Company
dated November 29, 2001 (incorporated by reference to
Exhibit 10-6 to the Company's Registration Statement on
Form S-2, file number 333-74288 as filed on November 30, 2001).
10(c) Third Amendment to Amended and Restated Advisory Services
Agreement between Related AMI Associates, Inc. and the
Company dated November 12, 2003.
23(a) Consent of Deloitte & Touche LLP with respect to
incorporation by reference of its report in the Company's
Registration Statement on Form S-3 (filed herewith). 68
23(b) Consent of Deloitte & Touche LLP with respect to
incorporation by reference of its report relating to the
financial statements of ARCap Investors, LLC in the
Company's Registration Statement on Form S-3
(filed herewith). 69
23(c) Consent of Ernst & Young LLP with respect to incorporation
by reference of its report relating to the financial
statements of ARCap Investors, LLC in the Company's
Registration Statement on form S-3 (filed herewith). 70
24.1 Power of Attorney (Included on signature page hereto)
31.1 Chief Executive Officer certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 64
31.2 Chief Financial Officer certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 65
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 66
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 67
99. Additional Exhibits
-------------------
99(a) The 2003 Financial Statements of ARCap Investors, LLC
which invests primarily in subordinated commercial
mortgage-backed securities, as required by Regulation S-X,
Rule 3-09 (filed herewith). 71
99(b) The 2002 Financial Statements of ARCap Investors, LLC
which invests primarily in subordinated commercial
mortgage-backed securities, as required by Regulation S-X,
Rule 3-09 (filed herewith). 84
99(c) The 2001 Financial Statements of ARCap Investors, LLC
which invests primarily in subordinated commercial
mortgage-backed securities, as required by Regulation S-X,
Rule 3-09 (filed herewith). 96
(b) Reports on Form 8-K
None.
61
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, thereunto duly authorized.
AMERICAN MORTGAGE ACCEPTANCE COMPANY
(Registrant)
Date: March 15, 2004 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Trustee, Chairman of the Board,
President and Chief Executive Officer
Date: March 15, 2004 By: /s/ Stuart A. Rothstein
-----------------------
Stuart A. Rothstein
Chief Financial Officer
62
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Stuart
J. Boesky, Alan P. Hirmes and Stuart A. Rothstein, and each or either of them,
his true and lawful attorney-in-fact with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report, and to cause
the same to be filed, with all exhibits thereto and other documents in
connection therewith, with the Securities Exchange Commission, hereby granting
to said attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing whatsoever requisite or desirable
to be done in and about the premises, as fully to all intents and purposes as
the undersigned might or could do in person, hereby ratifying and confirming all
acts and things that said attorneys-in-fact and agents, or either of them, or
their substitutes or substitute, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated:
Signature Title Date
- ---------------------- -------------------------------------- --------------
/s/ Stuart J. Boesky
- -------------------- Trustee, Chairman of the Board,
Stuart J. Boesky President and Chief Executive Officer March 15, 2004
/s/ Stanley R. Perla
- --------------------
Stanley R. Perla Trustee March 15, 2004
/s/ Richard M. Rosan
- --------------------
Richard M. Rosan Trustee March 15, 2004
/s/ Alan P. Hirmes
- ------------------
Alan P. Hirmes Trustee March 15, 2004
/s/ Scott M. Mannes
- -------------------
Scott M. Mannes Trustee March 15, 2004
/s/ Stuart A. Rothstein
- -----------------------
Stuart A. Rothstein Chief Financial Officer March 15, 2004
63
Exhibit 31.1
CERTIFICATION
I, Stuart J. Boesky, hereby certify that:
1. I have reviewed this annual report on Form 10-K of American Mortgage
Acceptance Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
in order 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-15 and 15d-15) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure the
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 annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of December 31, 2003 (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors or persons
performing the equivalent functions:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 15, 2004 By: /s/ Stuart J. Boesky
-------------- --------------------
Stuart J. Boesky
Chief Executive Officer
64
Exhibit 31.2
CERTIFICATION
I, Stuart A. Rothstein, hereby certify that:
1. I have reviewed this annual report on Form 10-K of American Mortgage
Acceptance Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
in order 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-15 and 15d-15) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure the
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 annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of December 31, 2003 (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors or persons
performing the equivalent functions:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 15, 2004 By: /s/ Stuart A. Rothstein
-------------- -----------------------
Stuart A. Rothstein
Chief Financial Officer
65
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 Annual Report of American Mortgage Acceptance Company
(the "Company") on Form 10-K for the year ending December 31, 2003, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Stuart J. Boesky, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Chief Executive Officer
March 15, 2004
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
66
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 Annual Report of American Mortgage Acceptance Company
(the "Company") on Form 10-K for the year ending December 31, 2003, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Stuart J. Boesky, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
By: /s/ Stuart A. Rothstein
-----------------------
Stuart A. Rothstein
Chief Financial Officer
March 15, 2004
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
67
EXHIBIT 23(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-42481 of American Mortgage Acceptance Company on Form S-3 of our report
relating to the financial statements of American Mortgage Acceptance Company as
of December 31, 2003 and 2002, and for each of the three years in the period
ended December 31, 2003, dated March 15, 2004, appearing in this Annual Report
on Form 10-K of American Mortgage Acceptance Company for the year ended December
31, 2003.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 15, 2004
68
EXHIBIT 23(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-42481 of American Mortgage Acceptance Company on Form S-3 of our report
relating to the consolidated financial statements of ARCap Investors, L.L.C. as
of December 31, 2001 and for the year then ended, dated January 31, 2002,
appearing in this Annual Report on Form 10-K of American Mortgage Acceptance
Company for the year ended December 31, 2003.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
March 12, 2004
69
EXHIBIT 23 (c)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement (Form S-3
No. 33-42481) of American Mortgage Acceptance Company and in the related
Prospectus of our report dated February 6, 2004 and February 4, 2003 on the
consolidated financial statements of ARCap Investors, L.L.C. included in this
Annual Report (Form 10-K) for the year ended December 31, 2003.
/s/ Ernst & Young LLP
Dallas, Texas
March 5, 2004
70
Exhibit 99 (a)
Report of Independent Auditors
The Board of Managers
ARCap Investors, L.L.C.
We have audited the accompanying consolidated balance sheet of ARCap Investors,
L.L.C. and subsidiaries (the Company) as of December 31, 2003, and the related
consolidated statements of operations, members' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ARCap Investors,
L.L.C. and subsidiaries at December 31, 2003, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
February 6, 2004
71
ARCap Investors, L.L.C. and Subsidiaries
Consolidated Balance Sheet
December 31, 2003
ASSETS
Investment securities - available-for-sale, net (NOTE 3) $ 739,048,867
Investment securities - trading, net (NOTE 3) 282,157,427
Accrued interest receivable 11,433,408
Deferred borrowing costs, net (NOTE 5) 9,331,954
Restricted cash - CBO swap (NOTE 5) 4,376,111
Cash and cash equivalents 2,657,131
Other assets 1,207,425
--------------
Total assets $1,050,212,323
==============
LIABILITIES AND MEMBERS' EQUITY
Liabilities:
Long-term debt (NOTE 5) $ 461,800,000
Repurchase agreements (NOTE 6) 163,011,000
CBO swap liability (NOTE 5) 4,125,000
Accrued interest payable 2,839,836
Deferred compensation (NOTE 10) 3,140,244
Borrowed investment securities and interest rate swap, net (NOTE 4) 2,155,215
Accrued expenses 985,520
--------------
Total liabilities 638,056,815
Commitments and contingencies
Minority interest in consolidated entities 202,589,352
Members' equity:
Series A preferred members 67,367,415
Common members 142,198,741
--------------
Total members' equity 209,566,156
--------------
Total liabilities and members' equity $1,050,212,323
==============
SEE ACCOMPANYING NOTES.
72
ARCap Investors, L.L.C. and Subsidiaries
Consolidated Statement of Operations
Year ended December 31, 2003
Revenues:
Interest income - CMBS $ 100,309,513
Other income 4,602,285
-------------
Total revenues 104,911,798
Expenses:
Interest - long-term debt and repurchase agreements 28,314,158
Interest - borrowed investment securities and interest rate swap, net 8,372,835
Salaries and employee benefits 8,831,993
General and administrative 4,398,268
Financing fee 1,180,000
-------------
Total expenses 51,097,254
-------------
Net margin on CMBS and other income 53,814,544
Other revenue (expense):
Accretion of purchase discount 9,753,013
Loss on investment securities, net (NOTE 7) (37,655,565)
-------------
Deferred compensation expense (NOTE 10) (3,140,244)
-------------
(31,042,796)
Income before minority interest 22,771,748
Minority interest (6,630,611)
-------------
Net income 16,141,137
Other comprehensive income:
Unrealized gain on available-for-sale securities, net of minority
interest of $4,620,290 2,240,385
-------------
Comprehensive income $ 18,381,522
=============
SEE ACCOMPANYING NOTES.
73
ARCap Investors, L.L.C. and Subsidiaries
Consolidated Statement of Members' Equity
SERIES A
COMMON PREFERRED
MEMBERS MEMBERS TOTAL
------------- ------------- -------------
BALANCE AT JANUARY 1, 2003 $ 77,779,421 $ 147,340,254 $ 225,119,675
Distributions (10,867,864) (18,135,326) (29,003,190)
Net income -- 16,141,137 16,141,137
Surrender of common units (31,851) -- (31,851)
Costs to raise capital (8,487) 8,487 --
Redemption of preferred units 100,000 (5,000,000) (4,900,000)
Other comprehensive income:
Unrealized gain on available
for - sale securities 396,196 1,844,189 2,240,385
------------- ------------- -------------
BALANCE AT DECEMBER 31, 2003 $ 67,367,415 $ 142,198,741 $ 209,566,156
SEE ACCOMPANYING NOTES.
74
ARCap Investors, L.L.C. and Subsidiaries
Consolidated Statement of Cash Flows
Year ended December 31, 2003
OPERATING ACTIVITIES
Net income $ 16,141,137
Adjustments to reconcile net income to net cash
used in operating activities:
Loss on investment securities, net 37,655,565
Accretion of purchase discount (9,753,013)
Amortization of deferred borrowing costs 1,045,824
Minority interest 6,630,611
Deferred compensation 3,140,244
Changes in operating assets and liabilities:
Investment securities - trading, net (151,017,303)
Accrued interest receivable (2,190,366)
Restricted cash - CBO swap (50,263)
Other assets (517,015)
Accrued interest payable (2,013,921)
Borrowed investment securities and interest
rate swap, net (6,218,328)
Accrued expenses 641,739
-------------
Net cash used in operating activities (106,505,089)
INVESTING ACTIVITIES
Purchases of investment securities - available-for-sale (88,488,096)
FINANCING ACTIVITIES
Distributions to members (28,867,864)
Contributions from minority interest members, net of
capital returned 16,821,400
Operating distributions to minority interest members (17,820,580)
Redemption of preferred units (4,900,000)
Proceeds from repurchase agreements 7,588,000
Proceeds from the issuance of long-term debt 225,800,000
Payment for deferred borrowing costs (5,924,028)
-------------
Net cash provided by financing activities 192,696,928
-------------
Net change in cash and cash equivalents (2,296,257)
Cash and cash equivalents, beginning of year 4,953,388
-------------
Cash and cash equivalents, end of year $ 2,657,131
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest on long-term debt and
repurchase agreements $ 26,062,747
=============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Surrender of common units in exchange for other assets $ 31,851
=============
Accrued distribution on preferred units redemption $ 135,326
=============
SEE ACCOMPANYING NOTES.
75
ARCap Investors, L.L.C. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2003
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Organization
- ------------
ARCap Investors, L.L.C. (the Company) was incorporated in January 1999 and
commenced its operations on March 17, 1999. The Company was organized to invest
primarily in subordinated commercial mortgage-backed securities (CMBS).
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of:
- The Company.
- ARCap REIT, Inc. (ARCap REIT), a majority-owned subsidiary of the
Company.
- ARCap Resecuritization Corporation (ARCap Resecuritization), a wholly
owned subsidiary of ARCap REIT. ARCap Resecuritization owns all the
residual interest in Commercial Resecuritization Trust 2001 ABC-2 (the
Trust) and Commercial Resecuritization Trust 2003-ABC3 (2003-ABC3
Trust).
- ARCap High Yield CMBS Fund, L.L.C. (the High Yield Fund), of which
ARCap REIT owned an approximate 23% controlling interest as of
December 31, 2003. The High Yield Fund owns approximately 60% of ARCap
CMBS Fund REIT, Inc. (the Fund REIT). ARCap 2003-1 Resecuritization,
Inc. (2003-1 Resecuritization), a wholly owned subsidiary of the Fund
REIT, owns all of the equity interest in ARCap 2003-1 Resecuritization
Trust (the 2003-1 Trust).
- ARCap Diversified Risk CMBS Fund, L.L.C. (the Diversified Risk Fund),
of which ARCap REIT owned an approximate 1% controlling interest as of
December 31, 2003. The Diversified Risk Fund owns approximately 40% of
the Fund REIT.
- ARCap Servicing, Inc., a taxable REIT subsidiary wholly owned by ARCap
REIT.
Minority interests primarily represent outside members' approximate 77%
ownership in the High Yield Fund and outside members' approximate 99% ownership
in the Diversified Risk Fund. The Company has consolidated the High Yield Fund
and Diversified Risk Fund as it exercises control (through ARCap REIT, which
acts as the Managing Member of both Funds in accordance with the terms of the
respective LLC agreements) over the operations of these Funds. The Company
records minority interest expense (income) that reflects the portion of the
earnings (losses) of the operations which is applicable to the minority interest
members. As the Managing Member of both the High Yield Fund and the Diversified
Risk Fund, ARCap REIT is entitled to a 20% promote in the event the Funds
achieve a specified investment return. Accordingly, minority interest expense
may not equal the earnings of each of the Funds times the respective outside
members' ownership percentages. Separate books of accounts are maintained for
ARCap REIT, ARCap Resecuritization, the Trust, the High Yield Fund, the Fund
REIT, 2003-1 Resecuritization, the 2003-1 Trust, the Diversified Risk Fund, and
ARCap Servicing, Inc. and are reflected in the accompanying consolidated
financial statements of the Company. All material intercompany transactions and
account balances have been eliminated in consolidation.
Investment Securities
- ---------------------
The Company's investment security transactions are recorded on the trade date
for existing securities and the settlement date for to-be-issued securities. In
October 2003, the Trust reclassified CMBS with a fair value of approximately
$386,000,000 from trading to available-for-sale in connection with the creation
of 2003-ABC3 Trust (see Note 5). The reclassification effectively established a
new basis for financial reporting for the CMBS at the date of transfer. In
August 2003, the Fund REIT reclassified CMBS with a fair value of approximately
$260,000,000 from trading to available-for-sale in connection with the
resecuritization of 64 CMBS securities and the issuance of a collateralized debt
obligation (CDO) (see Note 5). The reclassification effectively established a
new basis for financial reporting for the CMBS at the date of transfer. CMBS
classified as available-for-sale are securities that the Company considers for
possible sales or other dispositions prior to the maturity of the securities.
Available-for-sale securities are carried at their estimated fair value with
unrealized gains and losses reported in other comprehensive income (loss) as a
separate component of members' equity. The Company evaluates unrealized losses
on its available-for-sale CMBS securities to determine if such declines in fair
value are "other than temporary." In the event a decline in the fair value of an
available-for-sale CMBS security is deemed "other than temporary," the decline
in fair value would be recorded as an impairment to the security and charged
through earnings rather than as a component of other comprehensive income.
Approximately $6,598,000 of "other than temporary" impairments has been
recognized for the year ended December 31, 2003.
The Company's CMBS that are designated as trading assets represent securities
the Company is holding for possible sales or other dispositions in the near
term. Such securities are carried at their estimated fair value, with unrealized
gains or losses included in earnings.
The fair value of the Company's portfolio of CMBS is generally estimated by
management based on market prices provided by certain dealers who make a market
in these financial instruments. The market for the Company's CMBS may lack
76
ARCap Investors, L.L.C. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2003
liquidity and have limited market volume. Accordingly, the fair values reported
reflect estimates and may not necessarily be indicative of the amounts that the
Company could realize in a current market exchange.
The yield to maturity on the Company's CMBS depends on, among other things, the
rate and timing of principal payments, the pass-through rate, and interest rate
fluctuations. The subordinated CMBS interests owned by the Company provide
credit support to the more senior interests of the related commercial
securitization. Cash flow from the mortgages underlying the CMBS interests
generally is allocated first to the senior interests, with the most senior
interest having a priority entitlement to cash flow. Remaining cash flow is
allocated generally among the other CMBS interests in order of their relative
seniority. To the extent that there are defaults and unrecoverable losses on the
underlying mortgages that result in reduced cash flows, the most subordinated
CMBS interest will bear this loss first. To the extent that there are losses in
excess of the most subordinated interest's stated entitlement to principal and
interest, then the remaining CMBS interests will bear such losses in order of
their relative subordination.
Revenue Recognition
- -------------------
Interest income and servicing fees are recognized as earned. Accretion of
discounts is computed using the effective-interest method over the expected life
of the securities based on management's estimates regarding the timing and
amount of cash flows from the underlying collateral.
Derivative Financial Instruments
- --------------------------------
Derivative financial instruments are utilized by the Company to reduce interest
rate risk. The Company utilizes interest rate swaps and cap and floor agreements
as a means of hedging the potential financial statement impact of changes in the
fair value of its portfolio of CMBS and variable rate long-term debt due to
changes in interest rates. Risks in these contracts arise from the movements in
interest rates and from the possible inability of counterparties to meet the
terms of their contracts. The Company carries its derivative financial
instruments at fair value with any unrealized gain or loss included in earnings,
in accordance with the provisions of SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES.
Resale and Repurchase Agreements
- --------------------------------
Transactions involving purchases of securities under agreements to resell
(reverse repurchase agreements or reverse repos) or sales of securities under
agreements to repurchase (repurchase agreements or repos) are accounted for as
collateralized financings, except where the Company does not have an agreement
to sell (or purchase) the same or substantially the same securities before
maturity at a fixed or determinable price.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include all highly liquid investments with original
maturity when purchased of three months or less.
Restricted Cash
- ---------------
Restricted cash represents amounts required to be pledged under interest rate
cap and floor agreements (see Note 5).
Deferred Borrowing Costs
- ------------------------
Deferred borrowing costs represent costs incurred in connection with the
issuance of long-term debt. Such amounts are amortized using the
effective-interest method over the term of the related debt (see Note 5). During
2003, the Company paid approximately $228,000 in connection with the issuance of
a long-term repurchase agreement, approximately $4,825,000 in connection with
the High Yield Fund's CDO offering, and approximately $871,000 in connection
with the creation of 2003-ABC3 Trust.
Financing Fee
- -------------
The Company pays an annual rate of 0.50% on $236,000,000 of its existing
long-term debt to a financier to provide credit enhancement of such debt.
Income Taxes
- ------------
The Company has elected to be taxed as a partnership, whereby all income is
taxed at the member level, with the exception of ARCap Servicing, Inc., which is
taxed at the entity level. ARCap REIT has elected to be taxed as a real estate
investment trust for federal income tax purposes. No provision for income taxes
has been made for ARCap Servicing, Inc. for the year ended December 31, 2003, as
ARCap Servicing, Inc. did not generate any taxable income.
77
ARCap Investors, L.L.C. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2003
Use of Estimates
- ----------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect reported amounts of
certain assets, liabilities, revenues, and expenses. Actual results could differ
from those estimates.
Fair Value of Financial Instruments
- -----------------------------------
The estimated fair value amounts herein have been determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data to develop
the estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies could have a material effect on the estimated fair
value amounts.
The Company's portfolio of CMBS and securities borrowed is carried at their
estimated fair values. The Company's management believes that the fair values of
its cash and cash equivalents, restricted cash, long-term debt, and repurchase
agreements approximate their carrying values due to the nature of the
instruments or the fact that their terms approximate current market terms. The
Fixed Rate Notes (see Note 5) with a carrying value of $98,500,000 have an
estimated fair value of approximately $107,313,000 at December 31, 2003. Fair
value was estimated using a discounted cash flow analysis, based on an interest
rate of 5% which management believes is currently available for the issuance of
similarly rated debt.
2. MEMBERS' EQUITY
The Limited Liability Company Agreement (LLC Agreement) establishes two classes
of membership: Series A Preferred members and Common members.
Cash Flows are distributed in the following order of priority:
- - To the Series A Preferred members in an amount equal to the accrued and
unpaid Preferred Distributions (12% per annum of the $25.00 price per
Unit).
- To the Common members in an amount equal to the amount determined by
the Board of Managers, provided that if the amount distributable to
the Common members shall exceed a cumulative annual return on the
Common Units of 12% per annum, the Board of Managers shall notify the
Series A Preferred members 30 days in advance of the record date for
distribution of Cash Flow.
- To the extent that any remaining Cash Flow received during such tax
period is not includable in the income of the Company, to members that
have been allocated Net Profits in excess of amounts actually
distributed to such members, in proportion to such amounts.
Net Profits of the Company are allocated as follows:
- To the Series A Preferred members to the extent of amounts distributed
or distributable to them in such taxable year.
- To the Series A Preferred members to the extent Net Losses previously
allocated to such members exceed undistributed Net Profits previously
allocated to them.
- To the Common members to the extent of amounts distributed or
distributable to them in such taxable year.
- To the Common members to the extent of amounts distributed or
distributable to them in such taxable year.
- To the Common members to the extent Net Losses previously allocated to
such members exceed undistributed Net Profits previously allocated to
them.
- To the members in proportion to their Percentage Interests.
Net Losses of the Company are allocated as follows:
- To the members in an amount equal to undistributed Net Profits
allocated to such members.
- To the Common members pro rata to the extent of their Capital
Accounts.
- To the Series A Preferred members pro rata to the extent of their
Capital Accounts.
78
ARCap Investors, L.L.C. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2003
Series A Preferred Units
- ------------------------
Series A Preferred Units are convertible into Common Units at the Conversion
Price in effect on the Conversion Date. If the Series A Preferred Units have not
been converted within five years of the effective date of the First Amendment to
the LLC Agreement (August 4, 2000), Series A Preferred Units may, at the
holder's option, be converted to a note equal to $25.00 per Unit, plus accrued
and unpaid Preferred Distributions.
Eighteen months after the First Closing Date (February 4, 2002), but no later
than the fifth anniversary of the First Closing Date (August 4, 2005), the
Company may redeem the Series A Preferred Units for $25.00 per unit, plus
accrued and unpaid Preferred Distributions, plus a premium that will provide the
Series A Preferred members with a total pretax internal rate of return of
17.50%.
In addition, upon either a change in control or sale or transfer of all or
substantially all of the assets of the Company, Series A Preferred Units may, at
the holder's option, be redeemed at $25.00 per unit, plus accrued and unpaid
Preferred Distributions.
In December 2003, a Series A Preferred unit holder accepted a redemption of its
200,000 units for consideration of $4,900,000, plus accrued distributions
through the date of redemption. Accrued distributions in connection with the
redemption in the amount of $135,326 are included in accrued expenses in the
accompanying consolidated balance sheet.
At December 31, 2003, there were a total of 5,800,000 Series A Preferred Units
and 4,997,917 Common Units issued and outstanding.
The LLC Agreement contains certain restrictive covenants regarding the amount of
variable rate debt, total debt, and certain financial ratios. Failure to meet
the covenants in successive quarters can result in the Chief Executive Officer
and Chief Operating Officer being removed from the Board of Managers until such
time as the covenants are cured for successive quarters. Management believes
that the Company has not violated the covenants in successive quarters.
3. INVESTMENT SECURITIES
The Company's available-for-sale securities are carried at estimated fair value
and are comprised of the following at December 31, 2003:
FACE ACCRETED COST FAIR VALUE PERCENTAGE
-------------------------------------------------------------------
Subordinated CMBS: Security rating:
BB+ $ 115,969,711 $100,476,507 $100,989,593 13.66%
BB 187,510,690 151,286,305 152,973,681 20.70%
BB- 141,923,565 103,046,413 102,883,384 13.92%
B+ 207,933,210 129,402,233 129,725,184 17.55%
B 239,353,347 130,807,073 126,630,338 17.13%
B- 160,278,326 72,779,789 74,040,639 10.02%
NR 211,411,772 50,987,832 51,806,048 7.02%
-------------------------------------------------------------------
$ 1,264,380,621 $738,786,152 $739,048,867 100.00%
===================================================================
The Company's trading securities are carried at estimated fair value and are
comprised of the following at December 31, 2003:
FACE ACCRETED COST FAIR VALUE PERCENTAGE
-------------------------------------------------------------------
Subordinated CMBS: Security rating:
BB+ $ 83,615,000 $ 67,653,304 $ 69,376,540 24.59%
BB 63,340,512 48,069,924 47,647,477 16.89%
BB- 41,236,511 27,084,333 29,403,288 10.42%
B+ 65,740,512 38,821,364 42,978,057 15.23%
B 45,104,511 23,655,960 25,634,761 9.09%
B- 17,561,512 7,276,006 4,982,478 1.77%
NR 282,727,504 72,543,757 62,134,826 22.01%
-------------------------------------------------------------------
$599,326,062 $285,104,648 $282,157,427 100.00%
===================================================================
At December 31, 2003, the accumulated accretion of purchase discounts on
available-for sale and trading securities, was approximately $2,932,000 and
$6,245,000, respectively.
79
ARCap Investors, L.L.C. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2003
The gross cumulative unrealized gains and losses on the Company's
available-for-sale investment securities were approximately $12,064,000 and
$(5,203,000), respectively, at December 31, 2003 for a total accumulated other
comprehensive income on available for-sale securities of approximately
$6,861,000.
The gross cumulative unrealized gains and losses on the Company's trading
investment securities at December 31, 2003, were approximately $10,941,000 and
$(20,133,000), respectively.
4. BORROWED INVESTMENT SECURITIES AND INTEREST RATE SWAP, NET
The Company's borrowed investment securities and interest rate swap are carried
at estimated fair value and are comprised of the following at December 31, 2003:
COUPON FAIR UNREALIZED
SECURITY DESCRIPTION RATE FACE BASIS VALUE GAIN (LOSS)
- --------------------------------------------------------------------------------------------------------------
U.S. Treasury (08-15-09) 6.000% $ (4,791,000) $ (4,675,342) $ (5,429,550) $ (754,208)
U.S. Treasury (02-15-11) 5.000% (14,850,000) (14,587,658) (15,956,789) (1,369,131)
U.S. Treasury (08-15-11) 5.000% (12,501,000) (12,546,518) (13,385,835) (839,317)
U.S. Treasury (02-15-12) 4.875% (10,845,000) (11,647,608) (11,494,006) 153,602
U.S. Treasury (11-15-12) 4.000% (3,603,000) (3,579,918) (3,570,912) 9,006
-----------------------------------------------------------------------
$ (46,590,000) $ (47,037,044) (49,837,092) $ (2,800,048)
Reverse repurchase agreements 50,945,341
-------------
Borrowed investment securities, net 1,108,249
Interest rate swap (3,263,464)
-------------
Borrowed investment securities and interest rate swap, net $ (2,155,215)
=============
The borrowed U.S. Treasury securities were sold in the open market (i.e., a
"short" security sale). The Company is obligated to return the securities in the
future and is, therefore, exposed to price risk until it repurchases the
securities for delivery to the lender. Short security sales are used by the
Company to modify its interest rate risk. The Company must pay the security
lender the interest earned by the underlying security. Short security sales are
recorded at the estimated fair value of the borrowed securities, and any
unrealized gains (losses) are included in earnings.
Proceeds from short security sales are used to purchase reverse repurchase
agreements of the same security. The transactions are governed by one master
repurchase agreement with rights of offset and, therefore, the values of the
short security sales and reverse repurchase agreements have been offset and
shown as one line item in the accompanying consolidated financial statements. It
has been the Company's practice to settle these transactions on a net basis.
In October 2003, ARCap REIT repurchased approximately $20,300,000 of its U.S.
Treasury securities held against its CMBS for delivery to the lender and sold
all offsetting reverse repurchase agreements, consistent with ARCap REIT's
practice of settling its borrowed investment transactions on a net basis.
Settlement of the transactions resulted in an approximate $1,207,000 realized
loss to ARCap REIT.
In July 2003, the High Yield Fund repurchased approximately $260,000,000 of its
U.S. Treasury securities and, in November 2003, it repurchased the remaining
$19,000,000 of the U.S. Treasury securities held against its CMBS for delivery
to the lender. The High Yield Fund sold all offsetting reverse repurchase
agreements, consistent with the High Yield Fund's practice of settling its
borrowed investment transactions on a net basis. Settlement of the transactions
resulted in an approximate $17,000,000 realized loss to the High Yield Fund, of
which approximately $6,000,000 was attributable to current year earnings.
In June 2003, the Diversified Risk Fund repurchased approximately $18,000,000 of
its U.S. Treasury securities. The Diversified Risk Fund realized a loss of
approximately $600,000 in connection with the transaction.
The Company entered into an interest rate swap agreement with Bear Stearns
Capital Markets (Bear Stearns) with a notional amount at December 31, 2003, of
$27,000,000, on which the Company pays a fixed rate of 6.015% and receives a
variable rate based on six month LIBOR for a term of 10 years ending April 27,
2011. The swap agreement calls for interest to be paid semiannually in arrears.
The Company carries the swap agreement at its estimated fair value, with all
periodic changes in estimated fair value recognized in earnings. The Company was
required under the swap agreement to pledge collateral valued at 1% of the
notional amount of the swap to ensure its performance in the event that the swap
declines in value. At December 31, 2003, the Company pledged CMBS valued at
approximately $9,112,000 as additional collateral against the interest rate
swap.
80
ARCap Investors, L.L.C. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2003
5. LONG-TERM DEBT
During August 2003, the Fund REIT contributed 64 CMBS certificates with an
approximate fair value of $260,000,000 to its subsidiary, 2003-1
Resecuritization, for pass-through to the 2003-1 Trust. The 2003-1 Trust
resecuritized the pooled certificates and offered $220,800,000 in senior notes
of Classes A through G with fixed rate coupons ranging from 4.97% to 8.74%. The
Classes A through G notes mature in increments from September 2011 through March
2013. The notes are secured by 64 CMBS certificates which have a carrying value
of approximately $269,000,000 at December 31, 2003. Accrued interest payable at
December 31, 2003, was approximately $1,019,000.
At December 31, 2003, $220,800,000 of the Class A through G senior notes is
issued and outstanding, of which ARCap REIT holds $25,000,000 of Class G senior
notes with a fixed rate coupon of 8.74% as a security, which has been eliminated
in consolidation.
The High Yield Fund capitalized approximately $4,825,000 of deferred borrowing
costs related to the issuance of the collateralized debt obligation notes. The
costs are being amortized using the effective-interest method over the earliest
of the expected lives of the debt, which is eight years (through September
2011). The High Yield Fund amortized approximately $256,000 of deferred
borrowing costs for the year ended December 31, 2003.
During fiscal year 2001, the Company entered into an agreement to sell its
interests in 50 CMBS pass-through certificates (the Pooled Certificates) to its
subsidiary, the Trust. The Trust resecuritized the Pooled Certificates and
offered $98,500,000 Class A-1 Senior Notes with a fixed coupon rate of 7.17%
(Fixed Rate Notes) and $137,500,000 Class A-2 Senior Notes with a variable
coupon rate based on one-month LIBOR plus 115 basis points (Variable Rate Notes)
(together, the Notes). The Notes mature on February 17, 2008.
In October 2003, ARCap REIT sold 10 CMBS securities to ARCap Resecuritization,
which in turn contributed the 10 CMBS securities to the Trust. ARCap
Resecuritization then created a new trust, 2003-ABC3 Trust, for the purpose of
resecuritizing the Trust's pooled certificates. 2003-ABC3 Trust issued
$80,000,000 of Class A Notes (the Class A Notes) bearing interest at 8.6%, and
$15,000,000 of Class B Notes bearing interest at 6% (the Class B Notes)
(together, the CRC3-ABC3 Notes). The CRC3-ABC3 Notes, which mature on February
22, 2008, were then distributed to ARCap REIT through ARCap Resecuritization. On
October 9, 2003, ARCap REIT sold $30,000,000 of the Class A Notes and used the
net proceeds to settle approximately $29,000,000 of repurchase agreements. ARCap
REIT has retained the balances of the Class A Notes and the Class B Notes. The
Notes and the CRC3-ABC3 Notes are secured by the investment securities of the
Company with a carrying value of approximately $382,000,000 at December 31,
2003.
Interest on the Notes and the CRC3-ABC3 Notes is paid monthly. Interest expense
on the Notes and the CRC3-ABC3 Notes was approximately $17,900,000 for the year
ended December 31, 2003, and the related accrued interest payable was
approximately $695,000.
The Company capitalized approximately $5,668,000 of deferred borrowing costs
related to the issuance of the Notes. The deferred borrowing costs are being
amortized using the effective-interest method over the life of the debt, which
is seven years (through February 22, 2008). The Company amortized approximately
$734,000 of deferred costs for the year ended December 31, 2003. Total
accumulated amortization of deferred borrowing costs at December 31, 2003, was
approximately $1,948,000.
The Company capitalized approximately $871,000 of deferred borrowing costs
related to the creation of the 2003-ABC3 Trust. The deferred borrowing costs are
being amortized using the effective-interest method over the life of the debt
through February 22, 2008. The Company amortized approximately $31,000 of
deferred borrowing costs for the year ended December 31, 2003.
In conjunction with the issuance of the Variable Rate Notes, the Company entered
into an interest rate cap agreement and an interest rate floor agreement with
Bear Stearns (CBO Swap) to effectively fix the interest rate on its variable
rate debt at 7.435%. The notional amount for the CBO Swap is $137,500,000. The
agreements call for interest to be paid monthly. The Company carries the CBO
Swap at its estimated fair value, with all periodic changes in estimated fair
value recognized in earnings.
The Company originally deposited $4,125,000 of cash to ensure its performance in
the event that the CBO Swap declines in value. If the market value of the CBO
Swap falls below defined thresholds, the Company may be required to deposit
additional restricted cash. Amounts in excess of the minimum requirements may be
withdrawn by the Company.
6. REPURCHASE AGREEMENTS
The Fund REIT and the Diversified Risk Fund each entered into a credit facility
with Liquid Funding, Ltd., an affiliate of Bear Stearns & Co., to finance a
portion of its CMBS purchases through both short-term variable rate and
long-term fixed rate repurchase agreements.
81
ARCap Investors, L.L.C. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2003
At December 31, 2003, the Diversified Risk Fund has short-term variable rate
repurchase agreements outstanding of $5,031,000, with an interest rate of 2.154%
and a maturity of 32 days. The balance was collateralized by CMBS investments
with a fair value of approximately $8,962,000 at December 31, 2003.
The Diversified Risk Fund has a long-term repurchase agreement outstanding at
December 31, 2003 of $25,367,000, which carries a 4.135% fixed interest rate
from the initial purchase date of June 2003 until final repurchase in June 2008.
The balance was collateralized by CMBS investments with a fair value of
approximately $36,509,000 at December 31, 2003.
The Diversified Risk Fund's combined accrued interest payable under the facility
at December 31, 2003 was approximately $55,000.
The Fund REIT's repurchase agreements outstanding of $65,577,000 have a weighted
average interest rate as of December 31, 2003 of 2.185%, and the average
maturity of the agreements was 32 days. The repurchase agreements are
collateralized by a portion of the Company's portfolio of CMBS investments with
a fair value of approximately $102,773,000 at December 31, 2003. Accrued
interest payable at December 31, 2003 was approximately $56,000.
ARCap REIT entered into short-term repurchase agreements with Bear Stearns & Co.
and its affiliates to finance a portion of its CMBS purchases. The
weighted-average interest rate on $67,036,000 of such borrowings as of December
31, 2003, was 2.269%, and the average maturity of the agreements was 30 days.
The short-term repurchase agreements are collateralized by a portion of the
Company's portfolio of CMBS investments with a fair value of approximately
$125,550,000 at December 31, 2003. Accrued interest payable at December 31,
2003, was approximately $68,000.
7. LOSS ON INVESTMENT SECURITIES, NET
The composition of the Company's gain (loss) on investment securities, net for
the year ended December 31, 2003, is as follows:
DECEMBER 31,
2003
------------
Unrealized gain - borrowed investment securities $ 14,553,693
Unrealized gain - interest rate swap 805,831
Unrealized loss - CMBS (14,825,322)
Realized loss - CMBS, net (12,346,305)
Realized loss - borrowed investment securities, net (19,245,505)
Realized loss - "other than temporary" losses on available-for-sale CMBS (6,597,957)
------------
Loss on investment securities, net $(37,655,565)
============
8. OPERATING LEASES
The Company leases its office space and certain equipment under operating leases
that expire between April 2004 and May 2008. The office leases, as amended,
provide for an annual basic rental of approximately $332,000 during the initial
lease term and contain an option to extend the term of one of the leases for one
extension term of five years, with the basic rental being reset at the then
market rate. Future minimum lease payments under these leases are as follows:
2004 $ 547,000
2005 492,000
2006 278,000
2007 66,000
2008 24,000
----------
Total $1,407,000
==========
Lease expense for the year ended December 31, 2003, was approximately $552,000.
9. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
At times, the Company purchases investment securities at fair value from members
of the Company or their affiliates. These purchases represent transactions that
are in the normal course of business of the Company and the members. During the
year ended December 31, 2003, the Company purchased from such members CMBS with
an approximate face of $325,177,000 at an approximate purchase price of
$168,227,000.
82
ARCap Investors, L.L.C. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2003
The Company has loaned approximately $231,000 to key executives for funding of
tax liabilities associated with units granted under an incentive compensation
arrangement. In June 2003, approximately $32,000 of such loans was satisfied
through the surrender of 1,465 Common Units to the Company. As of December 31,
2003, there is approximately $137,000 outstanding.
These loans are classified as other assets in the consolidated balance sheet.
The loans bear interest at a rate of 7% per annum, and payments are due
quarterly on the distribution date for the Common Units. Payments are due only
to the extent that the quarterly distribution is sufficient to pay them. The
loans become due upon termination of the executives' employment with the
Company, and recourse is limited to the Common Units securing the loans.
10. EMPLOYEE BENEFITS
The Company holds a contributory defined contribution 401(k) plan that covers
substantially all full-time employees. The Company matches participant
contributions up to 3% of each participant's total compensation. Matching
contributions totaled approximately $153,000 for the year ended December 31,
2003.
The Company has a deferred compensation plan for key employees. The Board of
Managers approved the availability of approximately 690,000 phantom appreciation
units and 296,000 phantom grant units for awards to employees, all of which have
been granted.
Grant units granted each have a vesting period, which generally is ratable over
a period of three years. Once vested, employees are entitled to receive
additional compensation in an amount equal to the per Unit amount distributed on
account of the Common Units times the number of grant units vested in the
employee. The employee is entitled to this compensation regardless of whether
the distribution to the holders of Common Units is an ordinary distribution or
an extraordinary distribution. Thus, if the Company is sold or liquidated, the
employee would be entitled to share in the proceeds of the sale or liquidation
on the same basis as the holders of Common Units with respect to vested grant
units.
Appreciation units granted also have a vesting period, which is generally spread
ratably over a three-year period. Once vested, employees begin to "earn" the
right to receive compensation on account of each vested appreciation unit by
being credited with an amount equal to the per Unit distributions made to
holders of Common Units until the amount credited equals the Initial Value
(i.e., the price at which a vested employee could obtain the appreciation unit)
established by the Compensation Committee. Vested employees are entitled to
compensation on account of each vested appreciation unit in an amount equal to
the per Unit distributions made to holders of Common Units only after they have
"earned" credits equal to the Initial Value. In the event of a liquidation or
sale, employees with vested appreciation units are entitled to compensation in
an amount equal to the per Unit proceeds in excess of the Initial Value plus the
credits which have been earned.
The Company accrues the estimated value of deferred compensation under this plan
over the service period, which ends when the units are fully vested. Subsequent
to the final vesting date, changes in the estimated amount of deferred
compensation will be recorded as an increase or decrease to net income in the
period in which such change occurs. For the year ended December 31, 2003, the
Company expensed approximately $3,140,000 of deferred compensation and paid
approximately $359,000 for the year ended December 31, 2003, related to the
vested grant units.
11. SUBSEQUENT EVENT
On January 23, 2004, the Company issued a special distribution in the amount of
$1,443,000 to the Common Unit holders, along with its regular quarterly
distribution.
83
EXHIBIT 99 (b)
INDEPENDENT AUDITORS' REPORT
The Board of Managers
ARCap Investors, L.L.C.
We have audited the accompanying consolidated balance sheet of ARCap Investors,
L.L.C. and subsidiaries (the Company) as of December 31, 2002, and the related
consolidated statements of operations, members' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ARCap Investors,
L.L.C. and subsidiaries at December 31, 2002, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Dallas, Texas
February 4, 2003
84
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
December 31, 2002
-----------------
Investment securities - trading,
net (Note 3) $798,856,791
Accrued interest receivable 9,243,042
Cash and cash equivalents 4,953,388
Deferred borrowing costs, net (Note 5) 4,453,750
Restricted cash - CBO swap (Note 5) 4,325,848
Other assets 722,261
------------
Total assets $822,555,080
============
LIABILITIES AND MEMBERS' EQUITY
Liabilities:
Long-term debt (Note 5) $236,000,000
Repurchase agreements (Note 6) 155,423,000
Accrued interest payable 4,853,757
Borrowed investment securities and
interest rate swap, net (Note 4) 4,487,562
CBO swap liability (Note 5) 4,125,000
Accrued expenses 208,455
------------
Total liabilities 405,097,774
------------
Commitments and contingencies
Minority interest in consolidated entities 192,337,631
Members' equity:
Series A preferred members 147,340,254
Common members 77,779,421
Total members' equity 225,119,675
------------
Total liabilities and members' equity $822,555,080
============
See notes to consolidated financial statements
85
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
December 31, 2002
-----------------
Revenues:
Interest income - CMBS $ 76,306,706
Other investment income 2,175,975
------------
Total revenues 78,482,681
------------
Expenses:
Interest - long-term debt and repurchase agreements 20,527,438
Interest - borrowed investment securities and
interest rate swap, net 7,287,485
Financing fee 1,180,000
Salaries and employee benefits 5,508,718
General and administrative 4,442,601
------------
Total expenses 38,946,242
------------
Net margin on CMBS and other investments 39,536,439
Other revenue (expense):
Accretion of purchase discount 17,137,362
Loss on trading securities, net (Note 7) (11,068,375)
------------
6,068,987
Income before minority interest 45,605,426
Minority interest (14,456,330)
------------
Net income $ 31,149,096
============
See notes to consolidated financial statements
86
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
YEAR EMDED DECEMBER 31, 2002
Series A
Common Preferred
Members Members Total
------------------------------------------------
Balance at January 1, 2002 $ 78,156,400 $145,827,125 $223,983,525
Costs to raise capital of
consolidated subsidiaries (386,470) (863,826) (1,250,296)
Distributions (10,890,994) (17,871,656) (28,762,650)
Net income 10,900,485 20,248,611 31,149,096
------------ ------------ ------------
Balance at December 31, 2002 $ 77,779,421 $147,340,254 $225,119,675
============ ============ ============
See notes to consolidated financial statements
87
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
December 31, 2002
-----------------
OPERATING ACTIVITIES
Net income $ 31,149,096
Adjustments to reconcile net income to net cash
used in operating activities:
Loss on trading securities, net 11,068,375
Accretion of purchase discount (17,137,362)
Amortization of deferred borrowing costs 680,930
Minority interest 14,456,330
Changes in operating assets and liabilities:
Investment securities - trading, net (205,485,635)
Accrued interest receivable (3,410,351)
Restricted cash - CBO swap (73,117)
Other assets (93,381)
Accrued interest payable 1,616,725
Borrowed investment securities and interest rate swap, net (14,765,069)
Accrued expenses (190,995)
-------------
Net cash used in operating activities (182,184,454)
-------------
FINANCING ACTIVITIES
Distributions to members (28,762,650)
Contributions from minority interest members 148,576,742
Distributions to minority interest members (14,093,989)
Costs to raise capital (1,350,296)
Proceeds from repurchase agreements 69,321,000
-------------
Net cash provided by financing activities 173,690,807
-------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (8,493,647)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 13,447,035
-------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,953,388
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest on repurchase agreements
and long-term debt $ 20,489,835
=============
88
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
A) Organization - ARCap Investors, L.L.C. (the Company) was incorporated in
January 1999 and commenced its operations on March 17, 1999. The Company was
organized to invest primarily in subordinated commercial mortgage-backed
securities (CMBS).
B) Principles of Consolidation - The consolidated financial statements include
the accounts of:
- The Company.
- ARCap REIT, Inc. (ARCap REIT), a majority-owned subsidiary of the
Company.
- ARCAP Resecuritization Corporation (ARCap Resecuritization), a wholly
owned subsidiary of ARCap REIT. ARCap Resecuritization owns all the
residual interest in Commercial Resecuritization Trust 2001 ABC-2 (the
Trust).
- ARCap High Yield CMBS Fund, L.L.C. (the High Yield Fund), of which
ARCap REIT owned an approximate 23% controlling interest as of
December 31, 2002. The High Yield Fund owns approximately 60% of ARCap
CMBS Fund REIT, Inc. (the Fund REIT).
- ARCap Diversified Risk CMBS Fund, L.L.C. (the Diversified Risk Fund),
of which ARCap REIT owned an approximate 1% controlling interest as of
December 31, 2002. The Diversified Risk Fund owns approximately 40% of
the Fund REIT.
- ARCap Special Servicing, Inc. (Special Servicing), a taxable REIT
subsidiary wholly owned by ARCap REIT.
Minority interests primarily represent outside members' approximate 77%
ownership in the High Yield Fund and outside members' approximate 99% ownership
in the Diversified Risk Fund. The Company has consolidated the High Yield Fund
and Diversified Risk Fund as it exercises control (through ARCap REIT, which
acts as the Managing Member of both Funds in accordance with the terms of the
respective LLC agreements) over the operations of these Funds. The Company
records minority interest expense (income) that reflects the portion of the
earnings (losses) of the operations which is applicable to the minority interest
members.
Separate books of accounts are maintained for ARCap REIT, ARCap
Resecuritization, the Trust, the High Yield Fund, the Fund REIT, the Diversified
Risk Fund, and Special Servicing and are reflected in the accompanying
consolidated financial statements of the Company. All material intercompany
transactions and account balances have been eliminated in consolidation.
C) Investment Securities - The Company's investment security transactions are
recorded on the trade date for existing securities and the settlement date for
to-be-issued securities. CMBS are designated as trading assets since the Company
is holding the securities for possible sales or other dispositions in the near
term. Such securities are carried at their estimated fair value, with unrealized
gains or losses included in earnings.
The fair value of the Company's portfolio of CMBS is generally estimated by
management based on market prices provided by certain dealers who make a market
in these financial instruments. The market for the Company's CMBS may lack
liquidity and have limited market volume. Accordingly, the fair values reported
reflect estimates and may not necessarily be indicative of the amounts that the
Company could realize in a current market exchange.
The yield to maturity on the Company's CMBS depends on, among other things, the
rate and timing of principal payments, the pass-through rate and interest rate
fluctuations. The subordinated CMBS interests owned by the Company provide
credit support to the more senior interests of the related commercial
securitization. Cash flow from the mortgages underlying the CMBS interests
generally is allocated first to the senior interests, with the most senior
interest having a priority entitlement to cash flow. Remaining cash flow is
allocated generally among the other CMBS interests in order of their relative
seniority. To the extent that there are defaults and unrecoverable losses on the
underlying mortgages that result in reduced cash flows, the most subordinated
CMBS interest will bear this loss first. To the extent that there are losses in
excess of the most subordinated interest's stated entitlement to principal and
interest, then the remaining CMBS interests will bear such losses in order of
their relative subordination.
D) Revenue Recognition - Interest income and special servicing fees are
recognized as earned. Accretion of discounts is computed using the
effective-yield method over the life of the underlying assets.
E) Derivative Financial Instruments - Derivative financial instruments are
utilized by the Company to reduce interest rate risk. The Company utilizes
interest rate swaps and cap and floor agreements as a means of hedging the
potential financial statement impact of changes in the fair value of its
portfolio of CMBS and variable rate long-term debt due to changes in interest
rates. Risks in these contracts arise from the movements in interest rates and
from the possible inability of counterparties to meet the terms of their
contracts. The Company carries its derivative financial instruments at fair
89
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
value with any unrealized gain or loss included in earnings, in accordance with
the provisions of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities.
F) Resale and Repurchase Agreements - Transactions involving purchases of
securities under agreements to resell (reverse repurchase agreements or reverse
repos) or sales of securities under agreements to repurchase (repurchase
agreements or repos) are accounted for as collateralized financings, except
where the Company does not have an agreement to sell (or purchase) the same or
substantially the same securities before maturity at a fixed or determinable
price.
G) Cash and Cash Equivalents - Cash and cash equivalents include all highly
liquid investments with original maturities when purchased of three months or
less.
H) Restricted Cash - Restricted cash represents amounts required to be pledged
under interest rate cap and floor agreements (see Note 5).
I) Deferred Borrowing Costs - Deferred borrowing costs represent costs incurred
in connection with the issuance of long-term debt. Such amounts are amortized
using the effective interest method over the term of the related debt (see Note
5).
J) Financing Fee - The Company pays an annual rate of 0.50% of the face of its
existing long-term debt to a financier to provide credit enhancement of such
debt.
K) Income Taxes - The Company has elected to be taxed as a partnership, whereby
all income is taxed at the member level, with the exception of Special Servicing
which is taxed at the entity level. ARCap REIT has elected to be taxed as a real
estate investment trust for federal income tax purposes.
No provision for income taxes has been made for Special Servicing for the period
April 1, 2002 (inception of Special Servicing) through December 31, 2002 as
Special Servicing did not generate any taxable income.
L) Use of Estimates - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect reported
amounts of certain assets, liabilities, revenues, and expenses. Actual results
could differ from those estimates.
M) Fair Value of Financial Instruments - The estimated fair value amounts herein
have been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
material effect on the estimated fair value amounts.
The Company's portfolio of CMBS and securities borrowed is carried at their
estimated fair values. The Company's management believes that the fair values of
its cash and cash equivalents, restricted cash, and repurchase agreements
approximate their carrying values due to the nature of the instruments or the
fact that their terms approximate current market terms.
NOTE 2. MEMBERS' EQUITY
The Limited Liability Company Agreement (LLC Agreement) establishes two classes
of membership: Series A Preferred members and Common members.
Cash Flows are distributed in the following order of priority:
- To the Series A Preferred members in an amount equal to the accrued
and unpaid Preferred Distributions (12% per annum of the $25.00 price
per Unit).
- To the Common members in an amount equal to (a) during the 18-month
period that ended February 4, 2002, the amount determined by the Board
of Managers, but no more than a cumulative return on the Common Units
at the rate of 10% per annum on an established value of $21.74 per
unit, and (b) subsequent to such 18-month period, the amount
determined by the Board of Managers, provided that if the amount
distributable to the Common members shall exceed a cumulative annual
return on the Common Units of 12% per annum, the Board of Managers
shall notify the Series A Preferred members 30 days in advance of the
record date for distribution of Cash Flow.
90
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
- To the extent that any remaining Cash Flow received during such tax
period is not includable in the income of the Company, to members that
have been allocated Net Profits in excess of amounts actually
distributed to such members, in proportion to such amounts.
Net Profits of the Company are allocated as follows:
- To the Series A Preferred members to the extent of amounts distributed
or distributable to them in such taxable year.
- To the Series A Preferred members to the extent Net Losses previously
allocated to such members exceed undistributed Net Profits previously
allocated to them.
- To the Common members to the extent of amounts distributed or
distributable to them in such taxable year.
- To the Common members to the extent Net Losses previously allocated to
such members exceed undistributed Net Profits previously allocated to
them.
- To the members in proportion to their Percentage Interests.
Net Losses of the Company are allocated as follows:
- To the members in an amount equal to undistributed Net Profits
allocated to such member.
- To the Common members pro rata to the extent of their Capital
Accounts.
- To the Series A Preferred members pro rata to the extent of their
Capital Accounts.
Series A Preferred Units
- ------------------------
Series A Preferred Units are convertible into Common Units at the Conversion
Price in effect on the Conversion Date. If the Series A Preferred Units have not
been converted within five years of the effective date of the First Amendment to
the LLC Agreement (August 4, 2000), Series A Preferred Units may, at the
holder's option, be converted to a note equal to $25.00 per Unit, plus accrued
and unpaid Preferred Distributions.
Eighteen months after the First Closing Date (February 4, 2002), but no later
than the fifth anniversary of the First Closing Date (August 4, 2005), the
Company may redeem the Series A Preferred Units for $25.00 per unit, plus
accrued and unpaid Preferred Distributions, plus a premium that will provide the
Series A Preferred members with a total pretax internal rate of return of
17.50%.
In addition, upon either a change in control or sale or transfer of all or
substantially all of the assets of the Company, Series A Preferred Units may, at
the holder's option, be redeemed at $25.00 per unit, plus accrued and unpaid
Preferred Distributions.
At December 31, 2002, there were a total of 6,000,000 Series A Preferred Units
and 4,999,382 Common Units issued and outstanding.
The LLC Agreement contains certain restrictive covenants regarding the amount of
variable rate debt, total debt, and certain financial ratios. Failure to meet
the covenants in successive quarters can result in the Chief Executive Officer
and Chief Operating Officer being removed from the Board of Managers until such
time as the covenants are cured for successive quarters. Management believes
that the Company has not violated the covenants in successive quarters.
91
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
NOTE 3. INVESTMENT SECURITIES
The Company's trading securities are carried at estimated fair value and are
comprised of the following at December 31, 2002:
Face Cost Fair Value Percentage
----------------------------------------------------------
Subordinated CMBS:
Security rating:
BB+ $ 115,923,711 $ 91,176,800 $103,776,027 12.99%
BB 170,077,178 127,903,052 141,264,695 17.68%
BB- 134,295,076 90,149,121 99,793,698 12.49%
B+ 215,067,722 127,005,619 137,774,880 17.25%
B 264,721,814 151,661,428 144,486,471 18.09%
B- 161,254,347 79,612,839 70,601,239 8.84%
NR 420,501,779 110,757,808 101,159,781 12.66%
--------------- ------------- ------------ -------
$ 1,481,841,627 $ 778,266,667 $798,856,791 100.00%
=============== ============= ============ =======
The Company accretes purchase discounts using the effective yield method over
the life of the CMBS. The accumulated accretion of purchase discounts at
December 31, 2002, was approximately $30,627,000.
The gross cumulative unrealized gains and losses on the Company's trading
investment securities at December 31, 2002, were approximately $41,709,000 and
($51,746,000), respectively.
NOTE 4. BORROWED INVESTMENT SECURITIES AND INTEREST RATE SWAP, NET
The Company's borrowed investment securities and interest rate swap are carried
at estimated fair value and are comprised of the following at December 31, 2002:
Security Coupon Cost Fair Unrealized
Description Rate Face Basis Value Gain (Loss)
- ------------------------------------------------------------------------------------------------------
U.S. Treasury (08-15-09) 6.000% $ (11,239,000) $ (10,974,728) $( 13,072,362) $ (2,097,634)
U.S. Treasury (02-15-11) 5.000% (17,818,000) (17,523,195) (19,591,448) (2,068,253)
U.S. Treasury (08-15-11) 5.000% (136,603,000) (138,334,790) (149,900,450) (11,565,660)
U.S. Treasury (02-15-12) 4.875% (85,300,000) (91,513,064) (92,697,111) (1,184,047)
U.S. Treasury (11-15-12) 4.000% (20,468,000) (20,336,877) (20,775,020) (438,143)
-------------- -------------- -------------- ------------
$(271,428,000) $( 278,682,654) (296,036,391) $(17,353,737)
============== =============== =============
Reverse repurchase agreements 295,618,149
-------------
Borrowed investment securities, net (418,242)
Interest rate swap (4,069,320)
-------------
Borrowed investment securities and
interest rate swap, net $ (4,487,562)
==============
The borrowed U.S. Treasury securities were sold in the open market (i.e., a
"short" security sale). The Company is obligated to return the securities in the
future and is therefore exposed to price risk until it repurchases the
securities for delivery to the lender. Short security sales are used by the
Company to modify its interest rate risk. The Company must pay the security
lender the interest earned by the underlying security. Short security sales are
recorded at the estimated fair value of the borrowed securities, and any
unrealized gains (losses) are included in earnings.
Proceeds from short security sales are used to purchase reverse repurchase
agreements of the same security. The transactions are governed by one master
repurchase agreement with rights of offset and, therefore, the values of the
short security sales and reverse repurchase agreements have been offset and
shown as one line item in the accompanying consolidated financial statements. It
has been the Company's practice to settle these transactions on a net basis.
At December 31, 2002, the Company pledged CMBS valued at approximately
$10,363,000 as additional collateral against the borrowed investment securities
outstanding as of December 31, 2002.
92
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
The Company entered into an interest rate swap agreement with Bear Stearns
Capital Markets (Bear Stearns) with a notional amount at December 31, 2002, of
$27,000,000, on which the Company pays a fixed rate of 6.015% and receives a
variable rate based upon a six-month LIBOR for a term of 10 years ending April
27, 2011. The swap agreement calls for interest to be paid semiannually in
arrears. The Company carries the swap agreement at its estimated fair value,
with all periodic changes in estimated fair value recognized in earnings. The
Company was required under the swap agreement to pledge collateral valued at 1%
of the notional amount of the swap to ensure its performance in the event that
the swap declines in value. At December 31, 2002, the Company pledged CMBS
valued at approximately $14,611,000 as additional collateral against the
interest rate swap outstanding as of December 31, 2002.
NOTE 5. LONG-TERM DEBT
During fiscal year 2001, the Company entered into an agreement to sell its
interests in 50 CMBS pass-through certificates (the Pooled Certificates) to its
subsidiary, the Trust.
The Trust resecuritized the Pooled Certificates and offered $98,500,000 Class
A-1 Senior Notes with a fixed coupon rate of 7.17% (Fixed Rate Notes) and
$137,500,000 Class A-2 Senior Notes with a variable coupon rate based on
one-month LIBOR plus 115 basis points (Variable Rate Notes) (together, the
Notes). The Notes are secured by the investment securities of the Company with a
carrying value of approximately $345,512,000 at December 31, 2002. The Company
capitalized $5,667,580 of deferred borrowing costs related to the issuance of
the Notes. The deferred borrowing costs are being amortized, using the
effective-interest method, over the life of the debt, which is seven years
(through February 22, 2008). The Company amortized $680,930 of deferred costs
for the year ended December 31, 2002. Total accumulated amortization of deferred
borrowing costs at December 31, 2002, was $1,213,830.
In conjunction with the issuance of the Variable Rate Notes, the Company entered
into an interest rate cap agreement and an interest rate floor agreement with
Bear Stearns (CBO Swap) to effectively fix the interest rate on its variable
rate debt at 7.435%. The notional amount for the CBO Swap is $137,500,000. The
agreements call for interest to be paid monthly. The Company carries the CBO
Swap at its estimated fair value, with all periodic changes in estimated fair
value recognized in earnings. The Company originally deposited $4,125,000 of
cash to ensure its performance in the event that the CBO Swap declines in value.
If the market value of the CBO Swap falls below defined thresholds, the Company
may be required to deposit additional restricted cash. Amounts in excess of the
minimum requirements may be withdrawn by the Company.
Interest on the Notes is paid monthly. Interest expense on the Notes was
approximately $17,238,000 for the year ended December 31, 2002, and the related
accrued interest payable at December 31, 2002, was approximately $480,000.
NOTE 6. REPURCHASE AGREEMENTS
The Company entered into repurchase agreements to finance a portion of its CMBS
purchases. The weighted-average interest rate as of December 31, 2002, was
2.73%, and the average maturity of the agreements was 30 days. The repurchase
agreements are collateralized by a portion of the Company's portfolio of CMBS
investments with a fair value of approximately $284,943,000 at December 31,
2002. Accrued interest payable at December 31, 2002, was approximately $209,000.
NOTE 7. LOSS ON TRADING SECURITIES, NET
The composition of the Company's gain (loss) on trading securities, net for the
year ended December 31, 2002, is as follows:
Unrealized loss - borrowed investment securities $(17,594,455)
Unrealized loss - interest rate swap (3,395,007)
Unrealized loss - CBO Swap (1,408,400)
Unrealized gain - CMBS 12,443,165
Realized loss - CMBS (1,086,698)
Realized loss - borrowed investment securities (26,980)
-------------
Loss on trading securities, net $(11,068,375)
=============
93
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
NOTE 8. OPERATING LEASES
The Company leases its office space and certain equipment under operating leases
that expire between April 2004 and January 2007. The office lease, as amended,
provides for an annual basic rental of $206,244 during the initial lease term
and contains an option to extend the term of the lease for one extension term of
five years, with the basic rental being reset at the then market rate. Future
minimum lease payments under these leases are as follows:
2003 $313,851
2004 243,455
2005 207,384
2006 206,244
2007 17,187
--------
Total $988,121
========
Lease expense for the year ended December 31, 2002 was approximately $316,000.
NOTE 9. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
At times, the Company purchases investment securities from members of the
Company or their affiliates. These purchases represent transactions that are in
the normal course of business of the Company and the members. During the year
ended December 31, 2002, the Company purchased from such members CMBS with an
approximate face of $387,327,000 at an approximate purchase price of
$210,382,000.
The Company has loaned approximately $231,000 to key executives for funding of
tax liabilities associated with units granted under an incentive compensation
arrangement. As of December 31, 2002, there is approximately $190,000
outstanding.
These loans are classified as other assets in the consolidated balance sheet.
The loans bear interest at a rate of 7% per annum, and payments are due
quarterly on the distribution date for the Common Units. Payments are due only
to the extent that the quarterly distribution is sufficient to pay them. The
loans become due upon termination of the executives' employment with the
Company, and recourse is limited to the Common Units securing the loans.
Under a fee arrangement, ARCap REIT paid C.P. Eaton & Associates, Inc. a monthly
retainer fee and an incentive fee to assist ARCap REIT in raising capital for
fund operations with respect to which ARCap REIT acts as the Managing Member.
The total costs incurred under this fee arrangement are allocated
proportionately (based on total dollars raised) to all funds for which capital
dollars are raised.
NOTE 10. EMPLOYEE BENEFITS
The Company holds a contributory defined contribution 401(k) plan that covers
substantially all full-time employees. The Company matches participant
contributions up to 3% of each participant's total compensation. Matching
contributions totaled approximately $75,000 for the year ended December 31,
2002.
The Company has a deferred compensation plan for key employees. The Board of
Managers approved the availability of approximately 690,000 phantom appreciation
units and 296,000 phantom grant units for future awards to employees. In order
to grant these awards, the Compensation Committee must recommend that they be
granted, and the Compensation Committee's recommendation must be approved by the
Board of Managers. As of December 31, 2002, the Company has granted
approximately 551,000 and 193,000 appreciation units and grant units,
respectively. The Board of Managers approved the Compensation Committee's
recommendations to grant additional appreciation units and grant units of
approximately 138,000 and 95,000, respectively, effective January 1, 2003.
Grant units granted each have a vesting period, which generally is ratable over
a period of three years. Once vested, employees are entitled to receive a bonus
in an amount equal to the per Unit amount distributed on account of the Common
Units times the number of grant units vested in the employee. The employee is
entitled to this compensation regardless of whether the distribution to the
holders of Common Units is an ordinary distribution or an extraordinary
distribution. Thus, if the Company is sold or liquidated, the employee would be
entitled to share in the proceeds of the sale or liquidation on the same basis
as the holders of Common Units with respect to vested grant units.
Appreciation units granted also have a vesting period which is generally spread
ratably over a three year period. Once vested, employees begin to "earn" the
right to receive compensation on account of each vested appreciation unit by
being credited with an amount equal to the per Unit distributions made to
holders of Common Units until the amount credited equals the Initial Value (i.e.
the price at which a vested employee could obtain the appreciation unit)
established by the Compensation Committee. Vested employees are entitled to
compensation on account of each vested appreciation unit in an amount equal to
the per Unit distributions made to holders of Common Units only after they have
"earned" credits equal to the Initial Value. In the event of a liquidation or
94
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
sale, employees with vested appreciation units are entitled to compensation in
an amount equal to the per Unit proceeds in excess of the Initial Value plus the
credits which have been earned.
The amount actually received by employees on account of the vested grant and
appreciation units is compensation. For the year ended December 31, 2002, the
Company expensed approximately $157,000 relating to compensation paid on account
of vested grant units.
95
Exhibit 99 (c)
INDEPENDENT AUDITORS' REPORT
To the Members of
ARCap Investors, L.L.C.:
We have audited the accompanying consolidated balance sheet of ARCap Investors,
L.L.C. and subsidiaries (the "Company") as of December 31, 2001, and the related
consolidated statements of income, members' equity and cash flows for each of
the two years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of ARCap Investors, L.L.C. and
subsidiaries as of December 31, 2001, and the results of their operations and
their cash flows for each of the two years ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
January 31, 2002
96
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
December 31, 2001
-----------------
Investment securities - trading (Notes 3 and 5) $ 564,877,324
Borrowed investment securities and interest rate swap,
net (Note 4) 1,763,811
Cash and cash equivalents 13,447,035
Restricted cash - CBO swap (Note 5) 4,252,731
Accrued interest receivable 5,832,691
Deferred borrowing costs, net (Note 5) 5,134,680
Other assets 628,880
-------------
Total $ 595,937,152
=============
LIABILITIES AND MEMBERS' EQUITY
Liabilities:
Long-term debt (Note 5) $ 236,000,000
Repurchase agreements (Note 6) 86,102,000
CBO swap liability (Note 5) 2,716,600
Accrued interest payable 3,237,032
Accrued expenses 499,447
-------------
Total liabilities 328,555,079
-------------
Commitments and contingencies
Minority Interests in consolidated entities 43,398,548
Members' equity 223,983,525
-------------
Total $ 595,937,152
=============
See notes to consolidated financial statements.
97
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
December 31, 2001
-----------------
Revenues:
Interest income - CMBS $ 51,730,450
Accretion of purchase discount 10,172,033
Other investment income 882,160
Gain on sale of real estate 224,482
-------------
Total revenues 63,009,125
-------------
Expenses:
Loss on trading securities, net (Note 7) 24,281,841
Interest - long-term debt and repurchase agreements 17,151,723
Interest - borrowed investment securities and interest
rate swap, net 2,079,629
Financing fee 1,015,054
General and administrative 3,616,430
Salaries and employee benefits 3,286,376
-------------
Total expenses 51,431,053
-------------
Income before minority interests 11,578,072
Minority interests 1,781,987
-------------
Net income $ 13,360,059
=============
See notes to consolidated financial statements.
98
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
YEAR ENDED DECEMBER 31, 2001
----------------------------------------------------------------
Accumulated
Series A Other
Common Preferred Comprehensive
Members Members Income Total
----------------------------------------------------------------
Balance, January 1, 2001 $ 88,219,621 $ 85,703,753 $ 3,103,845 $ 177,027,219
Proceeds from issuance of
membership units -- 61,743,525 -- 61,743,525
Costs to raise capital (71,856) (1,620,153) -- (1,692,009)
Distributions (10,873,542) (12,462,367) -- (23,335,909)
Repurchase of members'
equity (Note 9) (15,515) -- -- (15,515)
Net income 897,692 12,462,367 -- 13,360,059
Transfer of available for sale
to trading securities (Note 3) -- -- (3,103,845) (3,103,845)
------------- ------------- ------------- -------------
Balance, December 31, 2001 $ 78,156,400 $ 145,827,125 $ -- $ 223,983,525
============= ============= ============= =============
See notes to consolidated financial statements.
99
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
December 31, 2001
-----------------
OPERATING ACTIVITIES:
Net income $ 13,360,059
Adjustments to reconcile net income to net cash used in
operating activities:
Loss on trading securities, net 24,281,841
Accretion of purchase discount (10,172,033)
Gain on sale of real estate (224,482)
Amortization of deferred borrowing costs 532,900
Minority interest (1,781,987)
Increase (decrease) in cash for changes in operating
assets and liabilities:
Restricted cash (3,569,211)
Investment securities - trading, net (292,096,310)
Securities purchased under agreement to resell and
proceeds rom borrowed security, net (5,028,069)
Accrued interest receivable (2,667,514)
Other assets (5,944,087)
Accrued expenses (47,259)
Accrued interest payable 33,600
Receivable for sold security 13,372,667
-------------
Net cash used in operating activities (269,949,885)
-------------
INVESTING ACTIVITIES - Proceeds from sale of real estate
and net cash provided by investing activities 224,482
-------------
FINANCING ACTIVITIES:
Contributions from members 61,743,525
Distributions to members (23,335,909)
Contributions from minority interest members 45,355,985
Distributions to minority interest members (2,721)
Repurchase of members' equity (15,515)
Payment of issuance costs (1,692,009)
Payment of issuance costs by minority interest members (174,950)
Proceeds from issuance of long-term debt 236,000,000
Payment of repurchase agreements (37,381,443)
-------------
Net cash provided by financing activities 280,496,963
-------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,771,560
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,675,475
-------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 13,447,035
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash payments for interest $ 16,816,163
=============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES - Transfer of securities from
available for sale to trading $ 76,092,175
=============
See notes to consolidated financial statements.
100
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2001
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
A) Organization - ARCap Investors, L.L.C. (the "Company") was incorporated in
January 1999 and commenced its operations on March 17, 1999. The Company was
organized to invest primarily in subordinated commercial mortgage-backed
securities ("CMBS").
B) Principles of Consolidation - The consolidated financial statements include
the accounts of:
- The Company;
- ARCap REIT, Inc., its majority-owned subsidiary;
- ARCap Resecuritization Corporation ("ARCap Resecuritization"), a
wholly owned subsidiary of ARCap REIT, Inc.;
- Commercial Resecuritization Trust 2001 ABC-2 (the "Trust"), in which
ARCap Resecuritization owns all of the residual interest; and
- ARCap High Yield CMBS Fund, L.L.C. (the "Fund"), of which ARCap REIT,
Inc. owned approximately 48% as of December 31, 2001. The Fund is the
majority-owner of ARCap CMBS Fund REIT, Inc. (the "Fund REIT").
Minority interests primarily represent outside members' approximate 52%
ownership in the Fund. The Company has consolidated this entity as it exercises
control (through ARCap REIT, Inc.) over the operations of the Fund REIT (subject
to provisions of the Fund Limited Liability Company Agreement). The Company
records minority interest income (expense) that reflects the portion of the
earnings (losses) of the operations which are applicable to the minority
interest members.
Separate books of accounts are maintained for ARCap REIT, Inc.; ARCap
Resecuritization; the Trust; the Fund; and the Fund REIT and are reflected in
the accompanying consolidated financial statements of the Company. All material
intercompany transactions and account balances have been eliminated in
consolidation.
C) Investment Securities - The Company's investment security transactions are
recorded on the trade date. CMBS are designated as trading assets since the
Company is holding the securities for possible sales or other dispositions in
the near term. Such securities are carried at their estimated fair value, with
unrealized gains or losses included in earnings.
Interest income is recognized as earned and includes amortization of premiums
and accretion of discounts, computed using the effective yield method over the
expected life of the underlying assets.
D) Derivative Financial Instruments - Derivative financial instruments are
utilized by the Company to reduce interest rate risk. The Company utilizes
interest rate swap, cap and floor agreements as a means of hedging the potential
financial statement impact of changes in the fair value of its portfolio of CMBS
and variable rate long-term debt due to changes in interest rates. Risks in
these contracts arise from the movements in interest rates and from the possible
inability of counterparties to meet the terms of their contracts. The Company
carries its derivative financial instruments at fair value with any unrealized
gain or loss included in earnings.
E) Resale and Repurchase Agreements and Securities Lending Agreements -
Transactions involving purchases of securities under agreements to resell
(reverse repurchase agreements or reverse repos) or sales of securities under
agreements to repurchase (repurchase agreements or repos) are accounted for as
collateralized financings, except where the Company does not have an agreement
to sell (or purchase) the same or substantially the same securities before
maturity at a fixed or determinable price.
F) Cash and Cash Equivalents - Cash and cash equivalents include all highly
liquid investments with original maturities of three Months or less.
G) Restricted Cash - Restricted cash represents amounts required to be pledged
under an interest rate swap agreement and amounts required to be pledged under
the interest rate cap and floor agreements (see Notes 4 and 5).
H) Deferred Borrowing Costs - Deferred borrowing costs represent costs incurred
in connection with the issuance of long-term debt. Such amounts are amortized
using the effective interest method over the term of the related debt (see Note
5).
I) Financing Fee - The Company pays an annual rate of 0.50% of the face of its
existing long-term debt to a financier to provide credit enhancement of such
debt.
J) Income Taxes - The Company has elected to be taxed as a partnership, whereby
all income is taxed at the member level.
K) Use of Estimates - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
reported amounts of certain assets, liabilities, revenues and expenses. Actual
results could differ from those estimates.
L) Fair Value of Financial Instruments - The estimated fair value amounts herein
have been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is required
101
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2001
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
material effect on the estimated fair value amounts.
The Company's portfolio of CMBS and securities borrowed are carried at their
estimated fair values. The Company's management believes that the fair values of
its cash and cash equivalents, restricted cash and repurchase agreements
approximate their carrying values due to the nature of the instruments or the
fact that their terms approximate current market terms.
M) Change in Accounting Standard - Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended, was adopted by the Company on January 1, 2001. This standard
requires that all derivative financial instruments be recognized as either
assets or liabilities on the balance sheet at their fair values and that
accounting for the changes in fair values is dependent upon the intended use of
the derivatives and their resulting designations. The adoption of this standard
did not have a material effect on the Company's consolidated financial
statements.
N) New Accounting Standards - In September 2000, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 140, ("SFAS 140") Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS 140 replaces SFAS No. 125 ("SFAS 125") Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. It revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, but it carries over most
of SFAS 125's provisions without reconsideration. The statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. The Company has made the required disclosures
relating to securitization transactions and collateral for the year ended
December 31, 2000. The Company adopted the remaining requirements of SFAS 140 on
April 1, 2001, as required.
During 1999, the FASB issued Emerging Issues Task Force ("EITF") No. 99-20,
Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets. Effective the second
quarter of 2001, EITF No. 99-20 provides guidance on the recognition of interest
income from, and measurement of retained beneficial interests. The
implementation of EITF No. 99-20 did not have a material effect on the Company's
consolidated financial statements.
O) Reclassifications - Certain reclassifications have been made to the
prior-year amounts to conform to the current-year presentation.
NOTE 2. MEMBERS' EQUITY
On August 4, 2000, the Company amended and restated its Limited Liability
Company Agreement (the "LLC Agreement"). Capitalized terms in this footnote are
defined in the LLC Agreement.
The LLC Agreement established two classes of membership: Series A Preferred
members and Common members. The LLC Agreement calls for distributions of Cash
Flows as follows:
- - To the Series A Preferred members in an amount equal to the accrued and
unpaid Preferred Distributions (12% per annum of the $25.00 price per
Unit).
- - To the Common members in an amount equal to (a) during the 18-month period
that ends February 4, 2002, the amount determined by the Board of Managers,
but no more than a cumulative return on the Common Units at the rate of 10%
per annum, and (b) subsequent to such 18-month period, the amount
determined by the Board of Managers, provided that if the amount
distributable to the Common members shall exceed a cumulative annual return
on the Common Units of 12% per annum, the Board of Managers shall notify
the Series A Preferred members 30 days in advance of the record date for
distribution of Cash Flow.
- - To the extent that any remaining Cash Flow received during such tax period
is not includable in the income of the Company, to members that have been
allocated Net Profits in excess of amounts actually distributed to such
members, in proportion to such amounts.
Net Profits of the Company are allocated as follows:
- - To the Series A Preferred members to the extent of amounts distributed or
distributable to them in such taxable year.
- - To the Series A Preferred members to the extent Net Losses previously
allocated to such members exceed undistributed Net Profits previously
allocated to them.
- - To the Common members to the extent of amounts distributed or distributable
to them in such taxable year.
102
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2001
- - To the Common members to the extent Net Losses previously allocated to such
members exceed undistributed Net Profits previously allocated to them.
- - To the members in proportion to their Percentage Interests.
Net Losses of the Company are allocated as follows:
- - To the members in an amount equal to undistributed Net Profits allocated to
such member.
- - To the Common members pro rata to the extent of their Capital Accounts.
- - To the Series A Preferred members pro rata to the extent of their Capital
Accounts.
Series A Preferred Units
- ------------------------
Series A Preferred Units are convertible into Common Units at the Conversion
Price in effect on the Conversion Date. If the Series A Preferred Units have not
been converted within five years of August 4, 2000, Series A Preferred Units
may, at the holder's option, be converted to a note equal to $25.00 per Unit,
plus accrued and unpaid Preferred Distributions.
Eighteen months after the First Closing Date (February 4, 2002), but no later
than the fifth anniversary of the First Closing Date (August 4, 2005), the
Company may redeem the Series A Preferred Units for $25.00 per unit, plus
accrued and unpaid Preferred Distributions, plus a premium that will provide the
Series A Preferred members with a total pretax internal rate of return of
17.50%.
In addition, upon either a change in control or sale or transfer of all or
substantially all of the assets of the Company, Series A Preferred Units may, at
the holder's option, be redeemed at $25.00 per unit, plus accrued and unpaid
Preferred Distributions.
Subsequent to the Company's amendment and restatement of its LLC Agreement, the
Company circulated an amended Private Placement Memorandum (the "PPM") for
5,739,741 units of Series A Preferred Membership Interests representing the
balance of such interests available for subscription in the Company's offering.
As of December 31, 2001, 5,739,741 units have been issued pursuant to the
Company's offering for total capital contributions of $143,493,525.
At December 31, 2001, there were a total of 6,000,000 and 4,999,382 Series A
Preferred Units and Common Units, respectively, issued and outstanding.
NOTE 3. INVESTMENT SECURITIES
The Company's trading securities are carried at estimated fair value and
comprise the following at December 31, 2001:
Face Cost Fair Value Percentage
-------------- -------------- -------------- ----------
Subordinated CMBS:
Security rating:
BB+ $ 70,399,711 $ 54,261,102 $ 55,566,874 9.84%
BB 88,938,033 65,393,924 66,145,766 11.71
BB- 99,764,931 67,278,474 67,543,265 11.96
B+ 172,749,308 102,104,976 100,908,791 17.86
B 219,851,296 129,013,634 124,843,334 22.10
B- 141,994,347 71,886,492 66,223,972 11.72
NR 339,813,225 83,926,063 83,645,322 14.81
-------------- -------------- -------------- ----------
$1,133,510,851 $ 573,864,665 $ 564,877,324 100.00%
============== ============== ============== ==========
The fair value of the Company's portfolio of CMBS is generally estimated by
management based on market prices provided by certain dealers who make a market
in these financial instruments. The market for the Company's CMBS may lack
liquidity and have limited market volume. Accordingly, the fair values reported
reflect estimates and may not necessarily be indicative of the amounts that the
Company could realize in a current market exchange.
The Company accretes purchase discounts using the effective yield method over
the life of the CMBS. The accumulated accretion of purchase discounts at
December 31, 2001, was approximately $13,491,000.
The yield to maturity on the Company's CMBS depends on, among other things, the
rate and timing of principal payments, the pass-through rate and interest rate
fluctuations. The subordinated CMBS interests owned by the Company provide
credit support to the more senior interests of the related commercial
securitization. Cash flow from the mortgages underlying the CMBS interests
generally is allocated first to the senior interests, with the most senior
103
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2001
interest having a priority entitlement to cash flow. Remaining cash flow is
allocated generally among the other CMBS interests in order of their relative
seniority. To the extent that there are defaults and unrecoverable losses on the
underlying mortgages that result in reduced cash flows, the most subordinated
CMBS interest will bear this loss first. To the extent that there are losses in
excess of the most subordinated interest's stated entitlement to principal and
interest, then the remaining CMBS interests will bear such losses in order of
their relative subordination.
The gross cumulative unrealized gains and losses on the Company's trading
investment securities at December 31, 2001, were approximately $6,900,000 and
$29,378,000, respectively.
On January 1, 2001, the Company transferred all of its available for sale CMBS
to the trading category. This resulted in the reclassification of the related
$3,103,845 unrealized gain in accumulated other comprehensive income to loss on
trading securities, net in the accompanying statement of income.
NOTE 4. BORROWED INVESTMENT SECURITIES AND INTEREST RATE SWAP, NET
The Company's borrowed investment securities and interest rate swap are carried
at estimated fair value and are comprised of the following at December 31, 2001:
Security Coupon Cost Fair Unrealized
Description Rate Face Basis Value Gain (Loss)
- ------------------------ ------ ------------- ------------- ------------ ------------
U.S. Treasury (08-15-09) 6.000% $ 11,239,000 $ 10,974,728 $ 11,981,828 $ (1,007,100)
U.S. Treasury (02-15-11) 5.000 17,818,000 17,523,195 17,765,103 (241,908)
U.S. Treasury (08-15-11) 5.000 97,378,000 98,609,087 97,119,363 1,489,724
------------- ------------- ------------ ------------
$ 126,435,000 $ 127,107,010 126,866,294 $ 240,716
============= ============= ============
Reverse repurchase agreements 129,304,395
------------
Borrowed investment securities, net 2,438,101
Interest rate swap (674,290)
-------------
Borrowed investment securities and interest rate swap, net $ 1,763,811
=============
As of December 31, 2001, the Company had borrowed agency and U.S. Treasury
securities with face amounts totaling $126,435,000. The fair value of these
borrowed agency and U.S. Treasury securities at December 31, 2001, was
$126,866,294. The U.S. Treasury securities were sold in the open market (i.e., a
"short" security sale). The Company is obligated to return the securities in the
future and is therefore exposed to price risk until it repurchases the
securities for delivery to the lender. Short security sales are used by the
Company to modify its interest rate risk. The Company must pay the security
lender the interest earned by the underlying security. Short security sales are
recorded at the estimated fair value of the borrowed securities, and any
unrealized gains (losses) are included in earnings. The cumulative unrealized
loss on the short securities at December 31, 2001, was $240,716, which is
included in borrowed investment securities and interest rate swap, net, in the
accompanying consolidated financial statements.
Proceeds from short security sales are used to purchase reverse repurchase
agreements of the same security. The transactions are governed by one master
repurchase agreement with rights of offset, and therefore, the values of the
short security sales and reverse repurchase agreements have been offset and
shown as one line item in the accompanying consolidated financial statements. It
has been the Company's practice to settle these transactions on a net basis.
In April 2001, the Company entered into an interest rate swap agreement with
Bear Stearns Capital Markets ("Bear Stearns") with a notional amount of
$30,956,000, on which the Company pays a fixed rate of 6.015% and receives a
variable rate based upon a six-month LIBOR for a term of 10 years ending April
27, 2011. In December 2001, the Company terminated $3,956,000 of the original
notional amount, which resulted in a realized loss of approximately $82,000. The
swap agreement with Bear Stearns has a notional amount of $27,000,000 at
December 31, 2001. The swap agreement calls for interest to be paid semiannually
in arrears. The Company carries the swap agreement at its estimated fair value,
with all periodic changes in estimated fair value recognized in earnings. The
Company was required under the swap agreement to pledge collateral valued at 1%
of the notional amount of the swap to ensure its performance in the event that
the swap declines in value. At December 31, 2001, the Company pledged CMBS
valued at approximately $1,107,000. The fair value and cumulative unrealized
loss on this interest rate swap agreement at December 31, 2001, was $674,290,
which is included in borrowed investment securities and interest rate swap, net,
in the accompanying consolidated financial statements.
In February 2001, the Company terminated an interest rate swap agreement with
Bear Stearns with a notional amount of $31,321,000, on which the Company paid a
fixed rate of 5.952% and received a variable rate based upon a six-month LIBOR
for a term of 10 years ending April 9, 2009. The termination resulted in a
realized loss of approximately $145,000.
104
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2001
NOTE 5. LONG-TERM DEBT
On February 22, 2001, the Company entered into an agreement to sell its
interests in 50 CMBS passthrough certificates (the "Pooled Certificates") to its
subsidiary, the Trust.
The Trust resecuritized the Pooled Certificates and offered $98,500,000 Class
A-1 Senior Notes with a fixed coupon rate of 7.17% ("Fixed Rate Notes") and
$137,500,000 Class A-2 Senior Notes with a variable coupon rate based on
one-month LIBOR plus 115 basis points ("Variable Rate Notes") (together, the
"Notes"). The Notes are secured by the investment securities of the Company with
a carrying value of approximately $349,855,000 at December 31, 2001. The Company
capitalized $5,667,580 of deferred borrowing costs related to the issuance of
the Notes. The deferred borrowing costs are being amortized, using the effective
interest method, over the life of the debt, which is seven years (through
February 22, 2008). The Company amortized $532,900 of deferred costs in year
ended December 31, 2001.
In conjunction with the issuance of the Variable Rate Notes, the Company entered
into an interest rate cap agreement and an interest rate floor agreement with
Bear Stearns ("CBO Swap") to effectively fix the interest on its variable rate
debt. The notional amount for the CBO Swap is $137,500,000. With the interest
rate cap, the Company receives a variable rate based on one-month LIBOR plus 115
basis points if it is greater than 7.435%. With the interest rate floor, the
Company pays a variable rate based on one month LIBOR plus 115 basis points if
it is less than 7.435%. The agreements call for interest to be paid monthly. The
Company carries the CBO Swap at its estimated fair value, with all periodic
changes in estimated fair value recognized in earnings. The Company deposited
$4,125,000 of cash to ensure its performance in the event that the CBO Swap
declines in value. If the market value of the CBO Swap falls below defined
thresholds, the Company may be required to deposit additional restricted cash.
Amounts in excess of the minimum requirements may be withdrawn by the Company.
Interest on the Notes is to be paid monthly. Interest expense on the Notes was
approximately $14,550,000 for the year ended December 31, 2001, and the related
accrued interest payable at December 31, 2001, was approximately $528,000. The
LLC Agreement contains certain restrictive covenants regarding the amount of
variable rate debt, total debt, and certain financial ratios. Management
believes that the Company is in compliance with such covenants.
NOTE 6. REPURCHASE AGREEMENTS
The Company has entered into repurchase agreements to finance a portion of its
CMBS purchases. As of December 31, 2001, the Company had entered into repurchase
obligations in the amount of $86,102,000. The weighted average maturity of the
agreements as of December 31, 2001, was 32 days, and the weighted average
interest rate was 3.90%. The repurchase agreements are collateralized by a
portion of the Company's portfolio of CMBS investments with a fair value of
approximately $206,700,000 at December 31, 2001. Interest expense on the
repurchase agreements was approximately $2,599,000 for the year ended December
31, 2001, and the related accrued interest payable at December 31, 2001, was
approximately $124,000.
NOTE 7. LOSS ON TRADING SECURITIES, NET
The composition of the Company's gain (loss) on trading securities, net for the
year ended December 31, 2001, follows:
Realized gain - borrowed investment security $ 2,965,698
Realized loss - borrowed investment security (719,668)
Realized loss - interest rate swap (227,240)
Realized gain - CMBS sold 1,683,516
Realized loss - CMBS sold (1,238,190)
Unrealized gain - borrowed investment security 1,124,884
Unrealized loss - interest rate swap (674,290)
Unrealized loss - CBO Swap (2,716,600)
Unrealized loss - CMBS (27,583,796)
Unrealized gain - CMBS, transferred from other comprehensive income 3,103,845
$ (24,281,841)
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ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2001
NOTE 8. OPERATING LEASES
The Company leases its office space and certain equipment under operating leases
that expire between October 2002 and December 2005. The office lease provides
for an annual basic rental of $180,504 during the initial lease term and
contains an option to extend the term of the lease for one extension term of
five years, with the basic rental being reset at the then market rate. Future
minimum lease payments under these leases are as follows:
Year ending December 31:
2002 $ 280,977
2003 270,568
2004 199,958
2005 166,602
Lease expense for the year ended December 31, 2001, was approximately $273,000.
NOTE 9. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
At times, the Company purchases investment securities from members of the
Company or their affiliates. These purchases and sales represent transactions
that are in the normal course of business of the Company and the members. During
the year ended December 31, 2001, the Company purchased from such members CMBS
with face values totaling approximately $457,200,000 for a purchase price of
approximately $229,300,000 and sold CMBS to such members with face values
totaling approximately $58,400,000 for proceeds of approximately $25,000,000.
The Company has loaned approximately $310,000 to key executives for funding of
tax liabilities associated with units granted under an incentive compensation
arrangement. As of December 31, 2001, there is approximately $214,000
outstanding, with approximately $77,000 satisfied through the transfer of 3,567
Common Units to the Company and approximately $19,000 repaid by the employees.
During the year ended December 31, 2001, the Company purchased 5,343 common
units from a key executive for approximately $116,000. The key executive had
members' equity of $15,515 at the date of repurchase.
These loans are classified as other assets in the consolidated balance sheet.
The loans bear interest at a rate of 7% per annum, and payments are due
quarterly on the distribution date for the Common Units. Payments are due only
to the extent that the quarterly distribution is sufficient to pay them. The
loans become due upon termination of the executives' employment with the
Company, and recourse is limited to the Common Units securing the loans.
NOTE 10. EMPLOYEE BENEFITS
During 2001, the Company implemented a contributory defined contribution 401(k)
plan that covers substantially all full-time employees. Under the plan,
participants may contribute up to 15% of their total compensation. The Company
matches up to 3% of each participant's total compensation. Matching
contributions totaled $71,000 for year ended December 31, 2001.
Effective January 1, 2001, the Company adopted a deferred compensation plan for
key employees. The Board of Managers approved the availability of approximately
690,000 phantom appreciation units and 296,000 phantom grant units for future
awards to employees. In order to grant these awards, the Compensation Committee
must recommend that they be granted, and the Compensation Committee's
recommendation must be approved by the Board of Managers.
As of December 31, 2001, the Company granted approximately 279,000 and 105,000
of appreciation units and grant units, respectively. Prior to December 31, 2001,
the Board of Managers approved the Compensation Committee's recommendations to
grant additional appreciation units and grant units of approximately 269,000 and
88,000, respectively, effective January 1, 2002.
For the appreciation units, compensation is measured as the amount by which the
cumulative per common unit distribution exceeds the value specified under the
plan and is expensed over the performance of the related services. For the grant
units, compensation is equal to the per common unit distributions times the
number of vested grant units. Compensation is measured at the date of declared
distribution. As of December 31, 2001, the Company has expensed approximately
$57,000 relating to compensation expense for the grant units.
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