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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
Commission File Number 1-13237
CHARTERMAC
----------
(Exact name of Registrant as specified in its Trust Agreement)
Delaware 13-3949418
- -------------------------------- ---------------------
(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) 317-5700
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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
----- -----
As of April 29, 2005, 51,323,062 shares of the Registrant's shares of beneficial
interest were outstanding.
TABLE OF CONTENTS
CHARTERMAC
FORM 10-Q
PAGE
PART I
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risks 26
Item 4. Controls and Procedures 26
PART II
Item 1. Legal Proceedings 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits 28
SIGNATURES 29
See accompanying notes to condensed consolidated financial statements.
2
ITEM 1. FINANCIAL STATEMENTS
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
March 31, December 31,
2005 2004
----------- -----------
ASSETS
Revenue bonds - at fair value $ 2,198,573 $ 2,100,720
Mortgage servicing rights, net 74,553 32,366
Cash and cash equivalents 95,236 71,287
Cash and cash equivalents - restricted 34,723 25,879
Other investments 151,672 187,506
Deferred costs - net of amortization of $20,732 and $19,635 55,006 57,260
Goodwill 225,771 206,397
Other intangible assets - net of amortization of $25,017 and $20,847 173,349 177,519
Loan to affiliate -- 4,600
Other assets 44,880 40,549
Investments in partnerships of consolidated VIEs 2,630,687 2,527,455
Other assets of consolidated VIEs 311,927 328,559
----------- -----------
Total assets $ 5,996,377 $ 5,760,097
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Financing arrangements $ 1,203,506 $ 1,068,428
Preferred shares of subsidiary (subject to mandatory repurchase) 273,500 273,500
Notes payable 203,146 174,454
Accounts payable, accrued expenses and other liabilities 38,094 35,364
Deferred income 56,937 55,572
Deferred tax liability 27,018 29,898
Distributions payable 38,831 38,859
Notes payable and other liabilities of consolidated VIEs 1,318,903 1,307,093
----------- -----------
Total liabilities 3,159,935 2,983,168
----------- -----------
Minority interest in consolidated subsidiary - convertible SCUs 264,449 267,025
----------- -----------
Minority interest in consolidated subsidiary - CMC -- 4,394
----------- -----------
Preferred shares of subsidiary (not subject to mandatory repurchase) 104,000 104,000
----------- -----------
Partners' interests in consolidated VIEs 1,576,088 1,501,519
----------- -----------
Commitments and contingencies
Shareholders' equity:
Beneficial owners' equity - Convertible CRA Shareholders; no par value
(6,552 shares issued and outstanding in 2005 and 2004) 107,734 108,745
Beneficial owners' equity - special preferred voting shares; no par
value (15,172 shares issued and outstanding in 2005 and 2004) 152 152
Beneficial owners' equity - other common shareholders; no par value
(100,000 shares authorized; 51,540 shares issued and 51,323
outstanding in 2005 and 51,363 shares issued and 51,229 outstanding
in 2004) 767,296 773,165
Restricted shares granted (7,981) (7,922)
Treasury shares of beneficial interest - common, at cost (217 shares
in 2005 and 134 shares in 2004) (4,916) (2,970)
Accumulated other comprehensive income 29,620 28,821
----------- -----------
Total shareholders' equity 891,905 899,991
----------- -----------
Total liabilities and shareholders' equity $ 5,996,377 $ 5,760,097
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
March 31,
--------------------
2005 2004
-------- --------
Revenues:
Revenue bond interest income $ 36,456 $ 31,851
Fee income:
Mortgage banking 4,081 3,116
Fund sponsorship 3,311 6,780
Credit enhancement 2,439 1,897
Other revenues 7,268 2,669
Revenues of consolidated VIEs 4,902 --
-------- --------
Total revenues 58,457 46,313
-------- --------
Expenses:
Interest expense 10,812 6,586
Interest expense of consolidated VIEs 6,889 --
Interest expense - distributions to preferred shareholders of subsidiary 4,724 4,724
Salaries and benefits 16,653 13,882
General and administrative 9,591 6,349
Depreciation and amortization 7,696 6,893
Derivative instrument ineffectiveness -- 3,387
Other expenses of consolidated VIEs 11,294 --
-------- --------
Total expenses 67,659 41,821
-------- --------
(Loss) income before other income (9,202) 4,492
Equity in earnings of investments 524 555
Loss on investments held by consolidated VIEs (49,939) --
Gain on sale of loans 1,704 1,745
Gain (loss) on repayment of revenue bonds (9) 260
-------- --------
(Loss) income before allocations and income taxes (56,922) 7,052
Income allocated to preferred shareholders of subsidiary (1,556) --
Income allocated to Special Common Units of subsidiary (6,065) (2,918)
Income allocated to minority interests -- (105)
Loss allocated to partners of consolidated VIEs 70,963 --
-------- --------
Income before income taxes 6,420 4,029
Income tax benefit 8,365 2,389
-------- --------
Net income $ 14,785 $ 6,418
======== ========
Allocation of net income to:
Common shareholders $ 13,110 $ 5,449
Convertible CRA shareholders 1,675 969
-------- --------
Total for shareholders $ 14,785 $ 6,418
======== ========
Net income per share:
Basic $ 0.26 $ 0.12
======== ========
Diluted $ 0.25 $ 0.12
======== ========
Weighted average shares outstanding:
Basic 57,821 51,591
======== ========
Diluted 58,236 51,839
======== ========
Dividends declared per share $ 0.41 $ 0.37
======== ========
See accompanying notes to condensed consolidated financial statements.
4
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
----------------------
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,785 $ 6,418
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Loss (gain) on repayment of revenue bonds 9 (260)
Depreciation and amortization 7,696 6,893
Income allocated to preferred shareholders of subsidiary 1,556 --
Income allocated to Special Common Units of subsidiary 6,065 2,918
Income allocated to minority interests -- 105
Non-cash compensation expense 1,763 3,784
Other non-cash expense 700 143
Deferred taxes (2,880) (2,022)
Changes in operating assets and liabilities:
Mortgage servicing rights (3,270) (1,317)
Loan to affiliate 4,600 --
Deferred income (10,027) 16
Other assets 7,887 (1,131)
Accounts payable, accrued expenses and other liabilities 682 (15,835)
--------- ---------
Net cash provided by (used in) operating activities $ 29,566 $ (288)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from revenue bonds and notes $ 10,499 $ 27,786
Revenue bond acquisitions and fundings (111,751) (91,065)
Other investments (2,026) 20,981
Acquisitions, net of cash acquired 4,654 (835)
Loan to Capri Capital (6,000) --
Mortgage loans funded (107,908) (89,063)
Mortgage loans sold 87,696 106,102
Advances to partnerships (29,304) (52,492)
Collection of advances to partnerships 25,749 12,813
Mortgage loans repaid 2,700 --
Deferred investment acquisition costs 464 749
Decrease (increase) in cash and cash equivalents -
restricted (8,167) 2,570
--------- ---------
Net cash used in investing activities $(133,394) $ (62,454)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders $ (23,896) $ (18,846)
Distributions to preferred shareholders of subsidiary (1,556) --
Distributions to Special Common Unit holders (8,663) (4,038)
Proceeds from financing arrangements 247,792 127,569
Repayments of financing arrangements (112,715) (38,009)
Increase in notes payable 28,692 21,076
Issuance of common shares 68 --
Retirement of special preferred voting shares -- (10)
Treasury stock purchases (1,946) (1,328)
Deferred financing costs 1 (2,528)
--------- ---------
Net cash provided by financing activities 127,777 83,886
--------- ---------
Net increase in cash and cash equivalents 23,949 21,144
--------- ---------
Cash and cash equivalents at the beginning of the year 71,287 58,257
--------- ---------
Cash and cash equivalents at the end of the period $ 95,236 $ 79,401
--------- ---------
(continued)
See accompanying notes to condensed consolidated financial statements.
5
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
------------------------------
2005 2004
----------- -----------
SUPPLEMENTAL INFORMATION:
Acquisition of CCLP:
- -------------------
Conversion of note receivable $ 70,000
Increase in mortgage servicing rights (40,974)
Increase in cash and cash equivalents - restricted (676)
Decrease in other investments (7,787)
Increase in goodwill (15,826)
Increase in other assets (6,239)
Increase in accounts payable, accrued expenses and other liabilities 2,708
Decrease in deferred income 11,391
-----------
Net cash acquired in acquisition of CCLP $ 12,597
===========
Supplemental disclosure of non-cash activities relating to adoption of FIN 46R:
Increase in revenue bonds $ 33,821
Increase in other assets 4,731
Increase in investments in partnerships of consolidated VIEs (2,173,621)
Decrease in other assets of consolidated VIEs (210,494)
Increase in notes payable and other liabilities of consolidated VIEs 1,047,976
Increase in partners' interests of consolidated VIEs 1,297,587
-----------
$ --
===========
See accompanying notes to condensed consolidated financial statements.
6
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
CharterMac, its wholly owned and majority owned subsidiary statutory trusts,
companies it controls and entities consolidated pursuant to the adoption of FASB
Interpretation No. 46(R) ("FIN 46(R)"). All intercompany accounts and
transactions have been eliminated in consolidation. Unless otherwise indicated,
"the Company", "we" and "us", as used throughout this document, refers to
CharterMac and its consolidated subsidiaries. For the entities consolidated
pursuant to FIN 46(R), the financial information included is as of and for the
three months ended December 31, 2004, the latest practical date available. As we
adopted FIN 46(R) as of March 31, 2004, the operating results for the first
quarter of 2004 do not include those of consolidated Variable Interest Entities
("VIEs").
The accompanying interim financial statements have been prepared without audit.
In the opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial statements of the interim periods. However, given the highly
seasonal nature of our business, the operating results for the interim periods
may not be indicative of the results for the full year.
Certain information and footnote disclosures normally included in the annual
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") have been
condensed or omitted. It is suggested that these condensed consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in our Form 10-K for the year ended
December 31, 2004.
Our annual report on Form 10-K for the year ended December 31, 2004, contains a
summary of our significant accounting policies. There have been no material
changes to these items since December 31, 2004, nor have there been any new
accounting pronouncements pending adoption that would have a significant impact
on our condensed consolidated financial statements.
We are responsible for the unaudited condensed consolidated financial statements
included in this document. Our condensed consolidated financial statements are
prepared on the accrual basis of accounting in accordance with GAAP. The
preparation of financial statements in conformity with GAAP requires us 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.
Certain amounts from prior years have been reclassified to conform to the 2005
presentation.
NOTE 2 - ACQUISITIONS
In the first quarter of 2005, we purchased the 13% of CharterMac Mortgage
Capital Corporation ("CMC") that we had not previously owned and made the final
payments under the terms of the original purchase agreement. The total of these
two items was $7.9 million, $7.5 million of which we paid in cash borrowed
through an acquisition facility. This transaction resulted in $3.6 million of
additional goodwill.
Effective March 1, 2005, we purchased 100% of the ownership interests of Capri
Capital Limited Partnership ("CCLP"). The initial purchase price was $70.0
million plus $1.7 million of acquisition costs, subject to additional
consideration based on the 2004 financial results of CCLP's mortgage banking
business. The total purchase price will not exceed $85.0 million (exclusive of
acquisition costs) and any additional consideration will be paid during the
second quarter of 2005. The initial purchase price of $70.0 million was paid via
conversion of an existing loan to CCLP and its affiliates (collectively "Capri")
(see Note 4). Half of any additional consideration will be paid in cash with the
remainder in equity units of a CharterMac subsidiary.
The acquisition of CCLP was accounted for as a purchase and, accordingly, the
results of operations are included in the condensed consolidated financial
statements from the acquisition date. We allocated our cost of the acquisition
on the basis of the estimated fair values of the assets and liabilities assumed.
The excess of the purchase price over the net of the amounts assigned to the
assets acquired and liabilities assumed was recognized as goodwill of
approximately $15.8 million. Certain allocations are preliminary as of March 31,
2005, including the allocation to goodwill, and will be refined as we gather
further information on fair value and determine the fair values of intangible
assets acquired.
Pro forma financial results for CCLP are not presented as the acquisition was
not material to our assets, revenues or net income.
7
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 3 - REVENUE BONDS
The following table summarizes our revenue bond portfolio:
March 31, December 31,
(In thousands) 2005 2004
- ----------------------------------- ----------- -----------
Unamortized cost basis $ 2,200,172 $ 2,098,944
Gross unrealized gains 47,369 50,716
Gross unrealized losses (17,021) (14,653)
----------- -----------
Subtotal/fair value 2,230,520 2,135,007
Less: eliminations (1) (31,947) (34,287)
----------- -----------
Total fair value per balance sheet $ 2,198,573 $ 2,100,720
=========== ===========
(1)These bonds are recorded as liabilities on the balance sheets of certain
entities consolidated pursuant to FIN 46(R) and are therefore eliminated in
consolidation.
The fair value and gross unrealized losses of our revenue bonds aggregated by
length of time that individual bonds have been in a continuous unrealized loss
position, at March 31, 2005, is summarized in the table below:
Less than 12 Months
(Dollars in thousands) 12 Months or More Total
- ---------------------- --------- --------- ----------
Number of bonds 43 52 95
Fair value $ 393,832 $ 340,237 $ 734,069
Gross unrealized loss $ (5,252) $ (11,769) $ (17,021)
The unrealized losses related to these revenue bonds are due solely to changes
in interest rates, in that we calculate present values based upon future cash
flows from the bonds and discount these cash flows at the current rate on our
recent bond issuances; as rates rise, the fair value of our portfolio decreases.
We have the intent and ability to hold these bonds to recovery and have
therefore concluded that these declines in value are temporary.
The following summarizes the maturity dates of our revenue bonds, all of which
have fixed interest rates:
Weighted
Outstanding Average
(In thousands) Bond Amount Fair Value Interest Rate
- -------------------------- ----------- ----------- -------------
Due in less than one year $ 1,481 $ 1,489 5.82%
Due between one and five
years 34,953 32,960 7.04
Due after five years 2,172,455 2,196,071 6.70
----------- ----------- -------
Total / Weighted Average 2,208,889 2,230,520 6.71%
=======
Less: eliminations (1) (31,082) (31,947)
----------- -----------
Total per balance sheet $ 2,177,807 $ 2,198,573
=========== ===========
(1) These bonds are recorded as liabilities on the balance sheets of certain
entities consolidated pursuant to FIN 46(R) and are therefore eliminated in
consolidation.
8
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
The following table summarizes our acquisition activity and additional fundings
to previously acquired revenue bonds for the three months ended March 31, 2005.
Weighted Weighted
Average Average
Face Construction Permanent
(In thousands) Amount Interest Rate Interest Rate
- -------------------------------------- -------- ------------- -------------
Construction/rehabilitation properties $102,000 5.14% 6.50%
Additional funding of existing bonds $ 9,751 5.55% 6.63%
During the three months ended March 31, 2005, one revenue bond was repaid
generating net proceeds of approximately $459,000. The bond had a net book value
of approximately $468,000, resulting in a loss of approximately $9,000.
At March 31, 2005, $2.1 billion of revenue bonds were securitized or pledged as
collateral for our borrowing facilities. Three of these bonds, with a book value
of approximately $31.0 million, are included in the bonds securitized or pledged
as collateral and are eliminated in consolidation as noted in the tables above.
See Note 14 regarding foreclosure of properties underlying three of our revenue
bonds and other matters regarding underlying properties.
NOTE 4 - OTHER INVESTMENTS
Investments other than revenue bonds consisted of:
March 31, December 31,
(In thousands) 2005 2004
- -------------------------------------------------- -------- ----------
Investment in equity interests in LIHTC properties $ 43,693 $ 40,132
Investment in properties under development 3,152 3,157
Investment in ARCap 19,054 19,054
Capri loan 20,000 84,000
Mortgage loans receivable 53,122 27,480
Other investments 12,651 13,683
-------- --------
Total other investments $151,672 $187,506
======== ========
In July 2004, CM Investor LLC ("CM Investor"), one of our subsidiaries, provided
an interim loan in the principal amount of $84.0 million ("Interim Loan") to
Capri, which bore interest at a rate of 11.5% per year and matured on January
15, 2005. In the first quarter of 2005, we extended and converted the loan,
adding $6.0 million to the loan amount. Upon conversion, we held two
participating loans, one of which allowed us to participate in the cash flows
of, and in turn was convertible into a 100% ownership interest in, CCLP. The
other allows us to participate in the cash flows of, and is convertible into a
49% ownership interest in, Capri Capital Advisors ("CCA"), a pension fund
advisory business. In the first quarter of 2005, we converted the CCLP loan and
acquired the business as an addition to our Mortgage Banking segment (see Note
2). Management currently expects to convert the CCA loan into an equity
ownership prior to the end of the loan term, no later than August 2006.
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS
A. GOODWILL
The following table provides information regarding goodwill by segment:
Fund Mortgage
(In thousands) Management Banking Total
- ----------------------------- ---------- -------- --------
Balance at December 31, 2004 $200,153 $ 6,244 $206,397
Additions (see Note 2) -- 19,374 19,374
-------- -------- --------
Balance at March 31, 2005 $200,153 $ 25,618 $225,771
======== ======== ========
9
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
B. OTHER INTANGIBLE ASSETS
The components of other identified intangible assets are as follows:
Estimated
Useful
Life Gross Accumulated
(In thousands) (in Years) Carrying Amount Amortization Net
- ---------------------------------------- -------- ---------------------- ----------------------- ------------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2005 2004 2005 2004 2005 2004
-------- ----------- -------- ----------- -------- -----------
Amortized identified intangible assets:
Trademarks and trade names 21.0 $ 25,100 $ 25,100 $ 1,637 $ 1,338 $ 23,463 $ 23,762
Partnership service contracts 9.4 47,300 47,300 6,925 5,661 40,375 41,639
Transactional relationships 16.7 103,000 103,000 11,542 9,436 91,458 93,564
General partner interests 9.0 5,100 5,100 776 634 4,324 4,466
Joint venture developer relationships 5.0 4,800 4,800 1,315 1,075 3,485 3,725
Other identified intangibles 9.3 4,427 4,427 2,822 2,703 1,605 1,724
-------- -------- -------- -------- -------- -------- --------
Subtotal/weighted average life 14.5 189,727 189,727 25,017 20,847 164,710 168,880
Unamortized Identified
Intangible Assets:
Mortgage Banking Licenses 8,639 8,639 -- -- 8,639 8,639
-------- -------- -------- -------- -------- --------
Total Identified Intangible
Assets $198,366 $198,366 $ 25,017 $ 20,847 $173,349 $177,519
======== ======== ======== ======== ======== ========
Amortization Expense Recorded $ 4,170 $ 16,684
======== ========
The amortization of "other identified intangibles" (approximately $477,000 per
year) is included as a reduction to revenue bond interest income as they pertain
to the acquisition of such bond investments.
NOTE 6 - FINANCING ARRANGEMENTS AND NOTES PAYABLE
In March 2005, we terminated our $100.0 million fixed rate securitization and
remarketed the borrowings under the Merrill Lynch P-FLOATs/RITESSM program.
Our $75.0 million secured revolving tax-exempt bond warehouse line expired on
March 31, 2005. There was no outstanding balance at December 31, 2004 and there
were no additional borrowings during the three months ended March 31, 2005 on
this warehouse line. We plan on replacing this warehouse line with a new
facility at some point in the future.
NOTE 7 - DERIVATIVE INSTRUMENTS
As of March 31, 2005, we have several interest rate swaps with an aggregate
notional amount of $524.0 million, which are designated as cash flow hedges on
the variable interest payments on our floating rate securitizations. These swaps
are recorded at fair market value, with changes in fair market value recorded in
accumulated other comprehensive income to the extent the hedges are effective in
achieving offsetting cash flows.
We initiated one swap in 2001. We entered into two smaller swaps, each with
notional amounts of $12.0 million and are associated directly with two revenue
bonds. The first swap originated in 2004 and the second originated in January
2005.The remainder had terms that began in January 2005. These new swaps have an
aggregate notional amount of $450 million and we entered into the agreements in
2003 and 2004. During the period between the dates we entered into the swaps and
the effective dates, we measured their effectiveness using the hypothetical swap
method. During the period ended March 31, 2004, we recorded an expense of
approximately $3.4 million representing the ineffective portion of the swaps.
There was no ineffectiveness in the hedging relationship of any of our swaps
during the three months ended March 31, 2005.
We expect all of the swaps will be highly effective in achieving offsetting
changes in cash flow throughout their terms.
At March 31, 2005, those interest rate swaps for which we were in a net
liability position were recorded in accounts payable, accrued expenses and other
liabilities in the amount of $500,000. Those swaps for which we are in a net
10
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
asset position are recorded in other assets in the amount of $3.0 million.
Interest expense for the three months ended March 31, 2005 and 2004, includes
approximately $1.6 million and $638,000 for amounts paid or payable under the
swap agreements.
We estimate that approximately $546,000 of the net unrealized loss included in
accumulated other comprehensive income will be reclassified into interest
expense within the next twelve months.
NOTE 8 - EQUITY
During the three months ended March 31, 2005, we repurchased 83,084 common
shares for a total cost of approximately $1.9 million in conjunction with the
tax withholdings associated with stock based compensation awards to employees.
In addition, we granted approximately 62,700 restricted shares to employees at
fair value of approximately $1.5 million pursuant to our Incentive Share Plan,
which vest over a three-year period, and approximately 3,600 restricted shares
to employees at a fair value of approximately $84,000, which vested immediately.
NOTE 9 - RELATED PARTY TRANSACTIONS
General and administrative expense includes shared services fees paid or payable
to The Related Companies, L.P. ("TRCLP"). These fees totaled $138,000 for the
three months ended March 31, 2005, and $1.3 million for the three months ended
March 31, 2004.
In addition, a subsidiary of TRCLP earned fees for performing property
management services for various properties held in investment funds which we
manage. These fees, which are included in other expenses of consolidated VIEs,
totaled approximately $963,000 for the three months ended March 31, 2005.
We collect asset management, incentive management and expense reimbursement fees
from American Mortgage Acceptance Company ("AMAC"), an affiliated
publicly-traded real estate investment trust. These fees, which are included in
fund sponsorship income, totaled approximately $648,000 and $515,000 for the
three months ended March 31, 2005 and 2004, respectively.
In June 2004, we entered into an unsecured revolving credit facility (the
"Revolving Facility") with AMAC to provide it up to $20.0 million, bearing
interest at LIBOR plus 300 basis points, which is to be used to purchase new
investments. The Revolving Facility has a term of one year with a one year
optional extension. In the opinion of management, the terms of this facility are
consistent with those of transactions with independent third parties. As of
March 31, 2005, there were no outstanding advances to AMAC under this facility.
Interest income earned from this facility for the three months ended March 31,
2005, was approximately $73,000, while there was no interest income for the
comparable period in 2004.
NOTE 10 - COMPREHENSIVE INCOME
Comprehensive income for the three months ended March 31, 2005 and 2004, was as
follows:
Three Months Ended
March 31,
----------------------
(In thousands) 2005 2004
- ------------------------------------------------------------ -------- --------
Net income $ 14,785 $ 6,418
Net unrealized (gain) loss on interest rate derivatives 4,174 (2,292)
Net unrealized loss on revenue bonds:
Unrealized loss during the period (3,366) (17,738)
Reclassification adjustment for net gain included in net
income (9) (260)
-------- --------
Comprehensive income (loss) $ 15,584 $(13,872)
======== ========
NOTE 11 - EARNINGS PER SHARE
Diluted 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 and
unvested share grants is calculated using the treasury stock method. The
dilutive effect of our subsidiary's Special Common Units ("SCUs") is calculated
11
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
using the "if-converted method". The SCUs will always be antidilutive, because
while the shares are convertible on a one-to-one basis, the dividends paid will
always be greater than the dividends paid per common share.
Three Months Ended March 31, 2005 Three Months Ended March 31, 2004
--------------------------------- ---------------------------------
(In thousands, except per share amounts) Income Shares Per Share Income Shares Per Share
- ---------------------------------------- ------- ------- --------- ------- -------- ---------
Basic EPS $14,785 57,821 $ 0.26 $ 6,418 51,591 $ 0.12
======== =======
Effect of dilutive securities -- 415 -- 248
------- ------- ------- --------
Diluted EPS $14,785 58,236 $ 0.25 $ 6,418 51,839 $ 0.12
======= ======= ======== ======= ======== =======
The number of shares includes common and Convertible Community Reinvestment Act
Preferred Shares ("Convertible CRA Shares") as the Convertible CRA Shares have
the same economic benefits as common shares.
NOTE 12 - BUSINESS SEGMENTS
We operate in four business segments:
1. Portfolio Investing, which includes subsidiaries that invest in primarily
tax-exempt first mortgage revenue bonds issued by various state or local
governments, agencies or authorities and other investments designed to
produce federally tax-exempt income. The revenue bonds are used to finance
the new construction, substantial rehabilitation, acquisition, or
refinancing of affordable multifamily housing throughout the United States.
2. Fund Management, which includes:
o Subsidiaries that sponsor real estate equity investment funds that
primarily invest in Low-Income Housing Tax Credit ("LIHTC")
properties. In exchange for sponsoring and managing these funds, we
receive fee income for providing asset management, underwriting,
origination and other services;
o A subsidiary which provides advisory services to AMAC, an affiliated,
publicly traded real estate investment trust; and
o Subsidiaries that participate in credit enhancement transactions,
including guaranteeing mortgage loans and specified returns to
investors in LIHTC equity funds, in exchange for guarantee fees.
3. Mortgage Banking, which includes subsidiaries that originate and service
primarily multifamily mortgage loans on behalf of third parties, primarily:
o the Federal National Mortgage Association ("Fannie Mae");
o the Federal Home Loan Mortgage Corporation ("Freddie Mac");
o the Federal Housing Authority ("FHA"); and
o insurance companies and conduits.
In exchange for these origination and servicing activities, we receive
origination and servicing fees.
4. VIEs, primarily the LIHTC equity funds we sponsor through the Fund
Management segment's subsidiaries, which we are required to consolidate in
accordance with FIN 46(R).
Segment results include all direct and contractual revenues and expenses of each
segment and allocations of indirect expenses based on specific methodologies.
These reportable segments are strategic business units that primarily generate
revenue streams that are distinctly different and are generally managed
separately. In prior years, results from credit enhancement services were
included in Portfolio Investing. We have reclassified the results to Fund
Management to better reflect the management of our businesses.
Additionally, in prior periods we had eliminated intercompany transactions from
the results of the segment earning profits from such transactions. We have
adjusted our presentation to reflect the full operations of each segment to
better reflect the true operations of each business. We have reclassified prior
years' segment results accordingly.
12
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
The following table provides more information regarding our segments:
Three Months Ended
March 31,
----------------------------
(In thousands) 2005 2004
----------- -----------
REVENUES
Portfolio Investing $ 40,000 $ 33,543
Fund Management 17,715 11,641
Mortgage Banking (1) 5,870 3,880
VIEs (2) 4,902 --
Elimination of intersegment transactions (10,030) (2,751)
----------- -----------
Consolidated $ 58,457 $ 46,313
=========== ===========
NET INCOME BEFORE ALLOCATIONS TO EQUITY HOLDERS
Portfolio Investing $ 21,412 $ 15,658
Fund Management (5,221) (8,079)
Mortgage Banking (1) (1,098) 560
VIEs (2) -- --
Elimination of intersegment transactions (1,052) (1,087)
----------- -----------
Consolidated 14,041 7,052
Income allocated to SCUs (6,065) (2,918)
Income allocated to preferred shareholders (1,556) --
Income allocated to minority interests -- (105)
Income tax benefit 8,365 2,389
----------- -----------
Consolidated Net Income $ 14,785 $ 6,418
=========== ===========
DEPRECIATION AND AMORTIZATION
Portfolio Investing $ 961 $ 812
Fund Management 4,598 4,632
Mortgage Banking (1) 2,137 1,449
VIEs (2) -- --
Elimination of intersegment transactions -- --
----------- -----------
Consolidated $ 7,696 $ 6,893
=========== ===========
IDENTIFIABLE ASSETS AT END OF PERIOD
Portfolio Investing $ 5,129,213 $ 4,410,238
Fund Management 824,085 825,305
Mortgage Banking (1) 277,265 65,318
VIEs (2) 2,942,614 2,384,115
Elimination of intersegment balances (3,176,800) (2,706,806)
----------- -----------
Consolidated $ 5,996,377 $ 4,978,170
=========== ===========
(1) Includes CCLP beginning March 1, 2005.
(2) Consolidated beginning March 31, 2004, pursuant to FIN 46(R).
13
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 13 - COMMITMENTS AND CONTINGENCIES
FORWARD TRANSACTIONS
At March 31, 2005, our Mortgage Banking subsidiaries had forward commitments of
approximately $283.0 million for mortgages to be funded in 2005 and later. As
each lending commitment has an associated sale commitment, the fair values of
each offset and, as a result, we record no asset or liability for the
commitments. In addition, those subsidiaries had commitments to sell mortgages
totaling $63.7 million. Approximately $53.1 million of this amount was funded as
of March 31, 2005 and are included in Other Investments as Mortgage Loans
Receivable. The balance of approximately $10.6 million is to be funded later in
2005.
We have entered into transactions to purchase revenue bonds. The agreements
require us, at the earlier of stabilization or conversion to permanent
financing, to acquire Series A and Series B revenue bonds at predetermined
prices and interest rates. We are obligated to purchase the revenue bonds only
if construction is completed. We are obligated to buy the Series B revenue bonds
only if, at the date the Series A bonds are stabilized, the property's cash flow
is sufficient to provide debt service coverage of 1.15x for both the Series A
and B bonds. During the construction period, a third party lender will advance
funds to the developer, as needed, at a floating rate. These forward commitments
create derivative instruments under SFAS No. 133, which have been designated as
a cash flow hedge of the anticipated funding of the revenue bonds, and are
recorded at fair value, with changes in fair value recorded in other accumulated
comprehensive income until the revenue bonds are funded. The total potential
amount we could be required to fund is $184.3 million.
Additionally, we have certain other bonds that we fund on an as needed basis.
The remaining balance to be funded on these drawdown bonds is approximately
$15.8 million at March 31, 2005.
MORTGAGE BANKING LOSS SHARING AGREEMENT
Under a master loss sharing agreement with Fannie Mae, we assume responsibility
for a portion of any loss that may result from borrower defaults, based on
Fannie Mae loss sharing formulas. At March 31, 2005, all of our loans sold to
Fannie Mae consisted of Level I loans, meaning that we are responsible for the
first 5% of the unpaid principal balance and a portion of any additional losses
to a maximum of 20% of the original principal balance; Fannie Mae bears any
remaining loss. Pursuant to this agreement, we are responsible for funding 100%
of mortgagor delinquency (principal and interest) and servicing (taxes,
insurance and foreclosure costs) advances until the amounts advanced exceed 5%
of the unpaid principal balance at the date of default. Thereafter, we may
request interim loss sharing adjustments which allow us to fund 25% of such
advances until final settlement under the agreement.
Our maximum exposure at March 31, 2005, pursuant to this agreement, was
approximately $940.4 million although this amount is not indicative of our
actual potential losses. We maintain an allowance for loan losses for loans
originated under the Fannie Mae DUS product line at a level that, in
management's judgment, is adequate to provide for estimated losses. At March 31,
2005, that reserve was approximately $9.5 million, which we believe represents
our actual potential losses at that time. Unlike loans originated for Fannie
Mae, we do not share the risk of loss for loans we originate for Freddie Mac or
FHA.
Our Mortgage Banking subsidiaries maintained, as of March 31, 2005, treasury
notes of approximately $14.2 million and a money market account of approximately
$1.2 million, which is included in cash and cash equivalents-restricted in the
condensed consolidated balance sheet, to satisfy the Fannie Mae collateral
requirements of $14.7 million.
MORTGAGE POOL CREDIT ENHANCEMENT
In December 2001, we completed a credit enhancement transaction with Merrill
Lynch Capital Services, Inc. ("MLCS"). Pursuant to the terms of the transaction,
we assumed MLCS's first loss position on a pool of tax-exempt weekly variable
rate multifamily mortgage loans. TRCLP has provided us with an indemnity
covering 50% of any losses that we incur as part of this transaction. As the
loans mature or prepay, the first loss exposure and the fees we receive are
reduced. The latest maturity date on any loan in the portfolio occurs in 2009.
The remainder of the real estate exposure after the first loss position has been
assumed by Fannie Mae and Freddie Mac. In connection with the transaction, we
have posted collateral, initially in an amount equal to 50% of the first loss
amount, which may be reduced to 40% if certain post closing conditions are met.
Our maximum exposure under the terms of the transaction as of March 31, 2005 is
approximately $19.0 million.
We performed due diligence on each property in the pool, including an
examination of loan-to-value and debt service coverage both on a current and
"stressed" basis. We analyzed the portfolio on a "stressed" basis by increasing
capitalization rates and assuming an increase in the low floater bond rate. As
14
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
of March 31, 2005, the credit enhanced properties are performing according to
their contractual obligations and we do not anticipate any losses to be incurred
on this guaranty. Should our analysis of risk of loss change in the future, a
provision for probable loss might be required pursuant to SFAS No. 5, ACCOUNTING
FOR CONTINGENCIES.
YIELD GUARANTEES
We have entered into several agreements with either IXIS Financial Products,
Inc. ("IXIS") or Merrill Lynch (each a "Primary Guarantor") to guarantee
agreed-upon rates of return for pools of multifamily properties each owned by a
local partnership which in turn, is majority-owned by a fund sponsored by our
subsidiary, Related Capital Company LLC ("RCC"). In return, we have or will
receive guarantee fees, generally at the start of each guarantee period. There
are seven agreements guaranteeing returns through the construction and lease-up
phases of the properties and there are seven other agreements guaranteeing
returns from the completion of the construction and lease-up phases through the
operating phase of the properties.
Total potential exposure pursuant to these guarantees is approximately $460.0
million, assuming there is no return whatsoever by the funds. We have analyzed
the expected operations of the underlying properties and believe there is no
risk of loss at this time as we have never yet been called upon to make payments
under the guarantees. Should our analysis of risk of loss change in the future,
a provision for possible losses might be required pursuant to SFAS No. 5. The
fair value of these guarantees, representing the deferral of the fee income over
the guarantee periods, was $14.9 million as of March 31, 2005. This amount is
included in deferred income on our condensed consolidated balance sheet. Refer
to Note 14 regarding additional transactions entered into after March 31, 2005,
and potential exposure under existing guarantees.
Some of the local partnerships have financed their properties with the proceeds
of our revenue bonds. In these cases, the Primary Guarantor has required that
those revenue bonds be deposited into a trust pursuant to which the revenue
bonds were divided into senior and subordinated interests with approximately 50%
of each revenue bond being subordinated. We have financed the senior trust
interest and a portion of certain of the subordinate trust interests using
credit enhancement from the Primary Guarantor as part of the Merrill Lynch
P-FLOATs/RITESSM program. We use the remaining subordinate trust interests as
collateral in the Merrill Lynch P-FLOATs/RITESSM program. In connection with
these yield guarantee transactions, we have posted $64.5 million as collateral
with a Primary Guarantor in the form of either cash or revenue bonds.
OTHER GUARANTEES
We have entered several transactions pursuant to the terms of which we will
provide credit support to construction lenders for project completion and Fannie
Mae conversion. In some instances, we have also agreed to acquire subordinated
bonds to the extent the construction period bonds do not fully convert.
Up until the point of completion, we will guarantee the construction lender
reimbursement of any draw on its construction letter of credit up to 40% of the
stated amount of the letter of credit. Following completion, up until the
project loan converts to permanent loan status, we will guarantee the full
amount of the letter of credit. We closely monitor these properties, and believe
there is currently no need to provide for any potential loss.
The developer has also issued several guarantees to the construction lender,
each of which would be called upon before our guarantees, and each of which
would be assigned to us should its guarantees be called.
Once the construction loans convert to permanent loans, we are obligated to
acquire subordinated loans for the amount by which each construction loan
exceeds the corresponding permanent loan, if any. The subordinated bonds will
bear interest at 10%. Under Fannie Mae guidelines, the size of the subordinated
bonds will be limited to a 1.0x debt service coverage based on 75% of the cash
flow after the senior debt.
Our maximum exposure, related to these three transactions, is 40% of the stated
amount of the letter of credit of approximately $37.8 million.
We also provide payment, operating deficit, recapture and replacement reserve
guarantees as business requirements for developers to obtain construction
financing. Our maximum exposure relating to these guarantees is approximately
$115.3 million.
To date, we have had minimal exposure to losses under these guarantees and
anticipate no material liquidity requirements in satisfaction of any guarantee
issued.
15
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
OTHER CONTINGENCIES
We are subject to routine litigation and administrative proceedings arising in
the ordinary course of business. Management does not believe that such matters
will have a material adverse impact on our financial position, results of
operations or cash flows.
NOTE 14 - SUBSEQUENT EVENTS
YIELD GUARANTEE TRANSACTION
- ---------------------------
In April 2005, we completed a transaction to guarantee tax benefits to an
investor in a partnership designed to generate Federal LIHTCs. CM Corp. has
agreed to back-up the guarantee of a Primary Guarantor of an agreed upon
internal rate of return to the investor in Related Capital Credit Enhanced
Partners, L.P. - Series B, for which we will receive guarantee fees totaling
approximately $7.6 million in three installments, as well as acquisition,
partnership management and asset management fees amounting to approximately
$10.4 million.
Our total exposure pursuant to this guarantee is $121.6 million, assuming there
is no return whatsoever by the fund, although we currently expect no loss.
PROPERTY FORECLOSURE
- --------------------
In May 2005, an affiliate of ours foreclosed upon the properties underlying
three of our revenue bonds which had an aggregate carrying value of $33.7
million as of March 31, 2005. We have obtained valuations as of the foreclosure
date indicating fair values of the properties in excess of our carrying amounts.
As a result, management has concluded that there was no impairment related to
the revenue bonds as of March 31, 2005. We are actively marketing the properties
for sale and, as such, the properties will be carried as Real Estate Owned -
Held for Sale from the foreclosure date forward.
PRS
- ---
PRS Companies ("PRS") and Capitol Realty Group ("CRG") are sponsors of certain
LIHTC partnerships for which we hold revenue bonds and/or to which investment
funds we sponsor have contributed equity. Information with respect to these
partnerships is set forth in the table below. A construction company affiliate
of PRS also served as general contractor for those partnerships.
PRS recently approached us to discuss financial difficulties in its construction
company. Upon a thorough review regarding its financial condition, we determined
that the PRS construction company was experiencing significant financial
difficulties, so that the transfer of control of the PRS and CRG partnerships to
entities affiliated with us and the orderly termination of unfulfilled
construction contracts was in our best interest. We could then install new
general contractors to complete construction and capable property managers to
complete leasing. We determined that, if we did not obtain control of the
partnerships, a bankruptcy filing by or against PRS would be adverse to our
interests as it would likely result in the reduction or cessation of bond
payments, could possibly endanger our various tax credit equity investments and
would result in delays in construction completion which could not be quantified.
On April 28, 2005, affiliates of ours acquired by assignment the general
partnership interests owned by PRS in the "PRS Partnerships" indicated in the
table below. On April 28, affiliates of ours also acquired by assignment the
general partnership interests owned by CRG in the "CRG Partnerships" indicated
in the table below. We sought control of the CRG Partnerships because PRS was
the construction general contractor for those partnerships and PRS' financial
difficulties caused construction finance shortfalls that have created liquidity
problems for those partnerships. We have agreed in principle to, among other
things, provide a $5.0 million revolving line of credit to be used to stabilize
the CRG Partnerships which will be collateralized by contractual rights of CRG
and its affiliates to receive fees or other consideration.
In addition to the PRS Partnerships and CRG Partnerships described above, we own
bonds that finance eight other partnerships in which PRS was the general partner
and one other partnership in which CRG is the general partner and PRS was the
construction general contractor. These partnerships are summarized in the table
below. On those deals in which our funds are not the equity sponsor, we will
look to the respective equity investor to take control, complete construction
and stabilize the partnerships. Absent a satisfactory resolution, we will
exercise our available remedies to protect our investments. In those situations,
there is substantial equity in the form of LIHTCs in addition to the real
estate, both of which are our collateral.
There can be no assurance that a bankruptcy by or against PRS or its affiliates
may not give rise to additional claims concerning these partnerships.
16
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
Our potential exposure falls into three categories as follows:
o Cash required to stabilize the properties - Our current estimate of
the maximum amount of cash that may need to be provided to stabilize
the properties, taking into account delays in construction, is
approximately $10.0 million. This estimate is based upon our initial
analyses and information provided by the developer, and may increase
due to unforeseen construction delays and other factors, while the
amount may be reduced by additional contributions by investors (which
may generate additional tax credits), reserves at the property level,
syndication of state tax credits or other factors. Our portion of any
cash requirements may range from nothing to the full amount. Should we
need to make additional loans to the partnerships, they would need to
be assessed for collectibility and the impact on the potential
impairment of existing revenue bonds. Given existing loan-to-value
ratios and the variability of the likelihood of funding, we can not
yet determine whether we will be required to fund any such loans. At
present, we do not anticipate that any such loans would require a
charge to expense.
o Potential impact on revenue bonds - Our current estimate, based on
available information provided by the developer, is that expected cash
flows from the underlying properties are sufficient to provide debt
service. As a result, we do not believe that there is
other-than-temporary impairment of any of the affected bonds.
o Potential cost to provide guaranteed yields - As noted in the table
below, 11 of the parternships in question are part of equity funds for
which we provide yield guarantees. As construction delays are likely
to reduce the expected yields of the properties themselves,
performance of the funds is likely to be impacted as well. The
guarantees, however, provide for expected yields on pools of
properties, some of which are performing above expected levels and the
funds themselves often provide for adjustors that may mitigate the
negative impact that would arise from the construction delays over the
guarantee period. Our current estimate given these factors, and
assuming that the property level partnerships meet their obligations
under existing partnership agreements, is that no exposure under these
guarantees is probable at this time.
As part of the resolution of this situation, affiliates of ours have taken over
general partner interests in the partnerships for which an RCC sponsored fund is
an equity partner, all but two of which give our affiliates operational control
of the partnerships. We will be consolidating those partnerships effective April
2005.
The partnerships in question are summarized as follows:
(In thousands)
CharterMac RCC Loan
Holds or Sponsored Third Amounts Fair Value of
Will Hold Fund is Included in Parties Upon Full Revenue Bonds
Revenue Equity Guaranteed Provided Draw Oustanding at
Number Bond Partner Funds Equity Down March 31, 2005
-------- ---------- --------- ----------- -------- ---------- --------------
PRS Partnerships
Construction 6 6 4 3 2 $ 69,570 $ 55,879
Rehab 1 1 1 1 -- 91,400 88,232
Lease Up 8 7 4 2 4 19,300 16,986
Stabilized 2 2 -- -- 2 18,835 18,816
------------------------------------------------------------------------------------------------------
Subtotal PRS Deals 17 16 9 6 8 199,105 179,913
CRG Partnerships
Construction 2 2 2 -- -- 17,680 --
Rehab 3 3 3 3 -- 8,300 8,018
Lease Up 3 3 3 2 -- 71,650 69,951
Stabilized -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------
Subtotal CRG Deals 8 8 8 5 -- 97,630 77,969
------------------------------------------------------------------------------------------------------
Total 25 24 17 11 8 $ 296,735 $ 257,882
======================================================================================================
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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.
These forward-looking statements are not historical facts, but rather our
beliefs and expectations and are based on our current expectations, estimates,
projections, beliefs and assumptions about our Company and industry. Words such
as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors, some of which are beyond our
control, are difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking statements.
Some of these risks include, among other things:
o adverse changes in the real estate markets including, among other things,
competition with other companies;
o interest rate fluctuations;
o general economic and business conditions, which will, among other things,
affect the availability and credit worthiness of prospective tenants, lease
rents and the terms and availability of financing for properties financed
by revenue bonds owned by us;
o risk of real estate development and acquisition;
o environment/safety requirements;
o changes in applicable laws and regulations;
o our tax treatment, the tax treatment of our subsidiaries and the tax
treatment of our investments; and
o risk of default associated with the revenue bonds and other securities held
by us or our subsidiaries.
These risks are more fully described in our Form 10-K for the year ended
December 31, 2004. We caution you not to place undue reliance on these
forward-looking statements, which reflect our view only as of the date of this
report.
Factors Affecting Comparability
- -------------------------------
Due to our adoption of FIN 46(R) as of March 31, 2004, we now consolidate more
than 90 VIEs (predominantly investment funds we sponsor) in our financial
statements. The operating results for the three months ended March 31, 2005,
include those of these entities, as well as the elimination of transactions
between the entities and our subsidiaries. The operating results for the three
months ended March 31, 2004, do not include comparable operations as we adopted
this accounting standard as of the end of that period.
In addition, we acquired CCLP in March 2005. Operating results prior to the
acquisition date include interest income on a loan made in July 2004. Following
the acquisition, operating results of CCLP are included in our Mortgage Banking
segment.
Results of Operations
- ---------------------
The following is a summary of our operations for the three months ended March
31, 2005 and 2004:
% of % of
(In thousands) 2005 Revenues 2004 Revenues % Change
- --------------------------- ------- -------- ------- -------- --------
Revenues $58,457 100.0% $46,313 100.0% 26.2%
Income before income taxes $ 6,420 11.0% $ 4,029 8.7% 59.3%
Net income $14,785 25.3% $ 6,418 13.9% 130.4%
Compared to 2004, the first quarter of 2005 benefited from the continued
expansion of our Portfolio Investing segment, expansion of the Fund Management
segment and the acquisition of CCLP in the Mortgage Banking segment. In
addition, revenues in 2005 include $4.9 million generated by VIEs that were not
consolidated in 2004. Offsetting the revenue gains is the elimination of $7.6
million of revenues earned by our subsidiaries in transactions with VIEs we have
consolidated beginning April 1, 2004. Although the amounts are eliminated in
consolidation, the expenses recognized by the VIEs in connection with these
transactions are absorbed entirely by the partners of the VIEs; as such, the
elimination in consolidation has no impact on our net income.
The revenue gains and the relatively smaller increase in expenses led to an
increase in income before taxes, while a significantly higher tax benefit also
contributed to the increase in net income.
18
REVENUES
Our revenues were as follows:
For the Three Months Ended March 31,
-------------------------------------
(In thousands) 2005 2004 % Change
- ------------------------------ -------- -------- ---------
Revenue bond interest income $36,456 $31,851 14.5%
Fee income
Mortgage banking 4,081 3,116 31.0
Fund sponsorship 3,311 6,780 (51.2)
Credit enhancement 2,439 1,897 28.6
------- ------- -------
Total fee income 9,831 11,793 (16.6)
Other revenues
Capri loan interest 1,781 -- --
Other interest 1,957 584 235.1
Construction service fee 870 139 525.9
Expense reimbursement 1,342 1,254 7.0
Other 1,318 692 90.5
------- ------- -------
Total other revenues 7,268 2,669 172.3
Revenues of consolidated VIEs 4,902 -- --
------- ------- -------
Total revenues $58,457 $46,313 26.2%
======= ======= =======
The overall growth in our revenues is due to the continued expansion of all of
our businesses, including the acquisition of CCLP in the first quarter of 2005.
Results in 2005 also include revenues of VIEs that were not consolidated in the
first quarter of 2004, offset by the elimination in consolidation of revenues
associated with VIEs that are now consolidated in our condensed financial
statements. In the first quarter of 2005, approximately $259,000 of revenue bond
interest income, $7.0 million of fund sponsorship fees and $347,000 of other
revenues was eliminated. See also RESULTS BY SEGMENT below.
The Capri loan interest relates to the loans made in July 2004, a large portion
of which has since been converted upon the acquisition of CCLP (see note 2 to
the condensed consolidated financial statements). The increase in "other" is
primarily due to exit fees received within the Mortgage Banking business and
construction service fees and administrative fees in the Fund Management
segment.
EXPENSES
Our expenses were as follows:
For the Three Months Ended March 31,
-----------------------------------
(In thousands) 2005 2004 % Change
- -------------------------------------- -------- -------- --------
Interest expense $10,812 $ 6,586 64.2%
Interest expense - preferred shares of
subsidiary 4,724 4,724 --
Salaries and benefits 16,653 13,882 20.0
General and administrative 9,591 6,349 51.1
Depreciation and amortization 7,696 6,893 11.6
Change in FV of ineffective derivatives -- 3,387 --
------- ------- ------
Subtotal 49,476 41,821 18.3
Interest expense of consolidated VIEs 6,889 -- --
Other expenses of consolidated VIEs 11,294 -- --
------- ------- ------
Total expenses $67,659 $41,821 61.8%
======= ======= ======
The increase in interest expense reflects the higher amount of debt to fund
investments in revenue bonds, our loan to Capri and LIHTC equity investments
inherent in the Fund Management business in 2004. In addition, our average
19
borrowing rate increased as a result of increases in Bond Market Association
("BMA") and LIBOR rates in 2004 and 2005, as well as the impact of new interest
rate swap transactions that went into effect in the first quarter of 2005. Our
average borrowing rate increased to 2.8% in the 2005 quarter as compared to 2.3%
in the 2004 period.
The increases in salaries and benefits expense relates to the growth of our
component businesses as well as the acquisition of CCLP in the first quarter of
2005, which doubled the size of our Mortgage Banking business.
The increase in general and administrative expenses is also due to the expansion
of our businesses and the acquisition of CCLP, particularly with regard to
increased occupancy needs and professional fees.
Depreciation and amortization expenses were higher in the 2005 period, primarily
due to higher amortization of mortgage servicing rights following the CCLP
acquisition.
We did not record the expenses of consolidated VIEs prior to April 1, 2004. The
expenses are not controlled by us, nor do they represent any cash or non-cash
charges to be absorbed by us. The expenses of the VIEs are absorbed entirely by
the partners of the VIEs.
OTHER ITEMS
For the Three Months Ended March 31,
-----------------------------------
(In thousands) 2005 2004 % Change
- -------------------------------------- -------- -------- --------
Derivative instrument ineffectiveness $ -- $ (3,387) --%
(Loss) gain on repayment of revenue bonds $ (9) $ 260 (103.5)%
Gain on sale of loans $ 1,704 $ 1,745 (2.3)%
Equity in earnings of investments $ 524 $ 555 (5.6)%
Income allocated to preferred
shareholders of subsidiary $ (1,556) $ -- --%
Income allocated to Special Common Units
of subsidiary $ (6,065) $ (2,918) 107.8%
Income allocated to minority interests $ -- $ (105) --%
Loss allocated to partners of
consolidated VIEs $ 70,963 $ -- --%
The change in fair value of derivatives represents the portion of the change in
the fair value of swap agreements determined to be ineffective, as measured
using the hypothetical swap method. The amount reversed in the second quarter of
2004 and all swaps have been effective in the current year period.
Gains and losses related to revenue bonds and loans fluctuate in relation to
relative activity levels in the Portfolio Investing and Mortgage Banking
businesses. See RESULTS BY SEGMENT below.
Equity in earnings of investments includes dividends from our investment in
ARCap Investors, LLC, offset in 2005 by losses from tax advantaged investment
vehicles similar to those we sponsor.
The income allocated to preferred shareholders relates to shares we issued in
2004 that differ from previously issued shares in that they are not subject to
mandatory redemption; as such, the distributions are classified as expense
outside of operating earnings. Total income allocated to preferred shareholders
for the three months ended March 31, 2005, including the portion classified as
interest expense, increased as compared to the three months ended March 31,
2004, due to the additional preferred offering consummated in May 2004.
The income allocation to Special Common Units of a subsidiary represents the
proportionate share of income attributable to holders' subsidiary equity as if
they were all converted to common shares. There was no income allocated to
minority interests in the 2005 period as we repurchased all remaining shares of
CMC in the period.
The loss allocation to partners of VIEs represents the full operating losses of
consolidated VIEs for the current period, none of which we have absorbed.
Income Taxes
- ------------
A large majority of our pre-tax income is derived from our Portfolio Investing
businesses, which are structured as partnership entities; as such, income from
those investments is not subject to taxes. Conversely, our businesses that
generate taxable income are corporations operating with financial losses due to
their absorption of most company costs and expenses as well as tax-deductible
20
distributions on their subsidiary equity.
We provide for income taxes for these corporate subsidiaries in accordance with
SFAS No. 109, ACCOUNTING FOR INCOME TAXES ("SFAS No. 109") which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities. The tax benefit disclosed
relates to the book losses of those businesses. As the proportion of our pre-tax
income contributed by the businesses generating taxable income and losses
changes, the resulting tax benefit or provision may appear incongruous with our
consolidated income before income taxes.
The effective tax rate on a consolidated basis for the three months ended March
31, 2005 and 2004 was (130.3)% and (59.3)%, respectively. The effective rate for
our corporate subsidiaries that were subject to taxes was 55.2% and 52.8% for
the three months ended March 31, 2005 and 2004, respectively.
Results by Segment
- ------------------
PORTFOLIO INVESTING
The table below shows selected information regarding our Portfolio Investing
activities:
For the Three Months Ended March 31,
-----------------------------------
(In thousands) 2005 2004
- ------------------------------------------------- ---------- ----------
Revenue bond acquisitions and fundings $ 111,751 $ 91,065
Weighted average permanent interest rate of bonds
acquired 6.51 % 6.60%
Revenue bonds repaid $ 459 $ 23,635
Average portfolio balance $2,191,793 $1,860,481
Weighted average yield of portfolio 6.65 % 6.85%
Revenue bond interest income (1) $ 36,716 $ 31,851
Other revenues (1) 3,284 1,692
---------- ----------
$ 40,000 $ 33,543
========== ==========
Interest expense and securitizations fees (1) $ 10,290 $ 10,791
Gain on repayments of revenue bonds $ 9 $ 260
(1) Prior to intercompany eliminations.
The increase in revenue bond interest income is primarily due to the increased
investment base resulting from new bonds funded during later quarters of 2004
and during 2005, although the rate of investment reflects the challenging market
conditions experienced since 2004 whereby some potential investments did not
meet our underwriting standards.
While the decline in interest rates has gradually lowered the average yield of
our portfolio, from a profit perspective, the low interest rate environment has
been favorable for us. Although increasing lately, the BMA rate, the short-term
tax-exempt index, continues to be low, averaging 1.86% and 0.95% for the three
months ended March 31, 2005 and 2004, respectively. Our weighted average cost of
debt associated with these investments was approximately 2.39% and 1.90% for the
same respective periods, taking into effect our current hedging. We continue to
recognize healthy spreads between our cost of borrowing and the interest rates
on our revenue bonds. The interest rates on our tax-exempt first mortgage bonds
for the three months ended March 31, 2005, had a weighted average permanent
coupon rate of 6.9% and our entire tax-exempt first mortgage bond portfolio had
a weighted average coupon rate of 6.7% for the three months ended March 31,
2005.
Other revenues in this segment is predominantly interest income on investments
other than revenue bonds and intercompany royalty fees eliminated in
consolidation. The increase for the three months ended March 31, 2005, as
compared to the three months ended March 31, 2004, is due largely to Capri loan
interest (see Note 4 to the condensed consolidated financial statements).
21
FUND MANAGEMENT
The table below shows selected information regarding our Fund Management
activities:
For the Three Months Ended March 31,
-----------------------------------
(In thousands) 2005 2004 % Change
- ----------------------------------- -------- -------- --------
Equity raised $ 15,212 $ 28,610 (46.8)%
Equity invested by investment funds $123,942 $ 77,627 59.7%
Fund sponsorship fees (1) $ 11,538 $ 7,982 44.6%
Credit enhancement fees 2,439 1,897 28.6
Other revenues (1) 3,738 1,762 100.9
-------- -------- ------
Total $ 17,715 $ 11,641 50.5 %
======== ======== ======
(1) Prior to intercompany eliminations.
Our Fund Management activities generate origination and acquisition fees
associated with sponsoring tax-credit equity investment funds and for assisting
the funds in acquiring assets, which we recognize when the equity is invested by
the investment fund. We also receive asset management fees for the services we
perform for the funds once they are operating, which we recognize over the
service periods. As many of our revenues are recognized over time following the
sponsorship of a new fund, many of the 2005 increases relate to the funds closed
throughout 2004.
We earn Organization and Offering ("O&O") service and partnership management
fees based upon the level of equity we raise for tax-credit equity funds. Fees
earned for O&O services decreased approximately 47% to $152,000 compared to
$286,000 in the 2004 quarter due to the decrease in equity raised. Fees earned
for partnership management services are amortized over a five-year period. These
fees increased approximately 400% to $838,000 compared to $167,000 compared to
the same period in 2004. This increase is primarily the result of ongoing
revenues for fund sponsorships completed after the first quarter of 2004.
We earn property acquisition fees and acquisition allowance fees based upon the
level of fund equity invested. Fees earned for property acquisition and equity
origination services associated with tax credit equity fund sponsorship
increased to approximately $5.0 million in 2005, representing an approximate 45%
increase compared to the prior year results. While these fees are earned based
on investment activity, the increase fell short of the percentage increase in
investments due to the rate of fees realized as a result of the lower proportion
of proprietary (single-investor) funds in the total mix of fund equity invested
in 2005 as compared to 2004.
Also during 2005, RCC acted as advisor for $116.9 million of investment
originations by CharterMac entities and others, compared to $122.7 million of
such originations for the three months ended March 31, 2004. We recognize
acquisition fees in this segment for such services, which approximated the fees
recognized for the three months ended March 31, 2004.
Partnership and asset management fees increased to $4.3 million for the three
months ended March 31, 2005, representing an increase of approximately 48% over
the 2004 quarter, attributable to the higher level of assets under management
and the improvement of the cash position of certain investment funds allowing us
to collect management fees in 2005 which we did not previously recognize until
collectibility was determined.
The increase in credit enhancement fees relates to acceleration of the credit
enhancement business. The increase for the three months ended March 31, 2005, as
compared to the 2004 period is due to additional credit enhancement transactions
completed over the course of 2004, the fees for which are recognized over
periods of up to 20 years.
22
MORTGAGE BANKING
The table below shows selected information regarding our Mortgage Banking
activities:
For the Three Months Ended March 31,
----------------------------------------
(In thousands) 2005 2004 % Change
- ------------------------------ ---------- ---------- ---------
Originations $ 123,461 $ 132,988 (7.2)%
Mortgage portfolio at March 31 $9,339,038 $4,099,998 127.8%
Mortgage servicing fees $ 3,323 $ 2,315 43.6%
Mortgage origination fees 757 801 (5.5)
Other revenues 1,790 764 134.3
---------- ---------- -----
$ 5,870 $ 3,880 51.3%
========== ========== =====
The increase in the servicing portfolio and servicing fees is a result of the
CCLP acquisition. Excluding the impact of the acquisition, servicing fee income
in 2005 increased approximately 1.0% over the first quarter of 2004.
The lower volume of originations in 2005 resulted from a significant decline in
Fannie Mae and conduit originations due to heightened competition. This decline
was partially offset by a higher level of assumption lending for which we
receive assumption fees rather than origination fees. Originations for the
three-months ended March 31 are broken down as follows:
(In thousands) 2005 % of total 2004 % of total
- ---------------- -------- ---------- -------- ----------
Fannie Mae $ 42,268 34.2% $ 78,011 58.6%
Freddie Mac 9,265 7.5 8,500 6.4
Conduit - Bank 12,814 47.9 21,504 16.2
Assumptions 59,114 10.4 24,973 18.8
-------- ----- -------- -----
Total $123,461 100.0% $132,988 100.0%
======== ===== ======== =====
Other revenues in this segment pertains to interest earned on mortgages prior to
their sale date, exit fees for early repayments and fees earned for loan
assumptions. The increase in the 2005 period is primarily a result of the CCLP
acquisition.
VIES
The results of VIEs reflected in our financial statements are those of entities
we are considered to control according to the definitions of FIN 46(R), but in
which we have no equity interest. Our Fund Management segment earns fees from
the entities, however, and our Portfolio Investing business earns interest on
several revenue bonds for which VIEs are the obligors. The VIEs are primarily
tax-credit equity investment funds we sponsor and manage.
The results we reported in 2005 reflect three months of operations for the VIEs
we consolidate while the quarter ended March 31, 2004, does not include any
comparable operating results as we consolidated these entities as of the end of
that period.
As third party investors hold all the equity partnership interests in these
entities, we allocate all results of operations to those partners. As a result,
these VIEs have no impact on our net income.
Inflation
- ---------
Inflation did not have a material effect on our results for the periods
presented.
Liquidity and Capital Resources
- -------------------------------
We fund our ongoing business (including investments) primarily with cash
provided by operations, securitization of investments and revolving or warehouse
credit facilities. Our primary sources of capital to meet long-term liquidity
needs (including acquisitions) are debt and various types of equity offerings,
including equity of our subsidiaries. We believe that our financing capacity and
cash flow from current operations are adequate to meet our current and projected
liquidity requirements. Nonetheless, as business needs warrant, we may issue
other types of debt or equity in the future.
23
DEBT AND SECURITIZATIONS
- ------------------------
Short-term liquidity provided by operations comes primarily from interest income
from revenue bonds and promissory notes in excess of the related financing
costs, mortgage origination and servicing fees, and fund management fees. We
typically generate funds for investment purposes from corresponding financing
activities.
We have the following debt and securitization facilities to provide short-term
and long-term liquidity:
o $100.0 million, used for mortgage banking needs, which is renewable
annually;
o $90.0 million, used to acquire equity interests in property ownership
entities prior to the inclusion of these equity interests into investments
funds, which matures on October 28, 2005, with a one year extension at our
option;
o $91.0 million, used to provide the interim loan to Capri, which matures in
July 2005;
o $40.0 million, established in connection with the CMC acquisition, which
expires December 31, 2006;
o $650.0 million in MBIA credit enhancement through 2011, under which we can
complete up to $425.0 million of floating rate securitizations and $225.0
million of auction rate securitization; and
o Securitization through the Merrill Lynch P-FLOATs/RITESSM program of a
specified percentage of the fair value of revenue bonds not otherwise
securitized, credit enhanced by either Merrill Lynch or IXIS.
As of March 31, 2005, we had approximately $262.6 million available to borrow
under these debt and securitization facilities without exceeding limits imposed
by debt covenants and our trust agreement.
Liquidity Requirements after March 31, 2005
- -------------------------------------------
During May 2005, distributions of approximately $23.7 million ($0.41 per share)
will be paid to holders of common and Convertible CRA Shares and $8.6 million
paid to SCU holders, all of which were declared in March 2005.
Also during May 2005, we expect to pay the remainder of the purchase price for
CCLP, 50% of which will be paid in cash. The maximum amount to be paid in cash
is $7.5 million.
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.
Summary of Cash Flows
- ---------------------
The net increase in cash and cash equivalents during 2005 was higher than the
increase in 2004, primarily due to increased operating and financing inflows,
which offset the higher level of financing activity in 2005 as compared to 2004.
Operating cash flows were higher in the 2005 period by a margin of $29.9
million. This increase resulted from a higher level of earnings exclusive of
non-cash expenses and the repayment of advances we had made to AMAC.
Additionally, the timing of receipts and payments in operating asset and
liability accounts contributed to this increase.
Investing outflows increased by $69.9 million in 2005 as compared to 2004. A
higher level of revenue bond acquisition and funding activity, coupled with
lower repayment activity, and a net outflow from mortgage originations was
partially offset by a net decrease in our funds invested in partnerships in the
current year period. The funds paid to acquire the portion of CMC that we had
not owned previously was offset by a net cash inflow at the time of the CCLP
acquisition, as the majority of the CCLP purchase price was paid in the form of
a loan in the third quarter of 2004.
Financing inflows in the 2005 period were higher than in 2004 by $42.5 million.
The primary reason for the higher inflows in 2005 was the level of
securitization borrowings, a portion of which was the remarketing of borrowings
under the fixed rate securitization that terminated in the current year quarter.
Commitments, Contingencies and Off Balance Sheet Arrangements
- -------------------------------------------------------------
Note 13 to the condensed consolidated financial statements contains a summary of
the Company's guarantees and off-balance sheet arrangements.
Subsequent Events
- -----------------
See Note 14 to the condensed consolidated financial statements regarding actions
taken in May 2005 in response to the financial difficulties experienced by
sponsors of certain properties underlying revenue bonds and investment funds we
sponsor as well as the foreclosure upon certain other underlying properties.
24
The following table reflects our maximum exposure and carrying amount as of
March 31, 2005, for guarantees we and our subsidiaries have entered into:
Maximum Carrying
(In thousands) Exposure Amount
- ------------------------------------------- ---------- ----------
Payment guarantees (1) $ 45,471 $ --
Completion guarantees (1) 37,773 --
Operating deficit guarantees (1) 1,629 --
Recapture guarantees (1) 66,366 --
Replacement reserve (1) 1,792 --
Mortgage pool credit enhancement (2) 19,000 --
LIHTC guarantees (2) 459,971 14,885
Mortgage banking loss sharing agreement (3) 940,356 9,455
---------- ----------
$1,572,358 $ 24,340
========== ==========
(1) These guarantees generally relate to business requirements for developers
to obtain construction financing. As part of our role as co-developer of
certain properties, we issue these guarantees in order to secure properties
as assets for the funds we manage. To date, we have had minimal exposure to
losses under these guarantees and anticipate no material liquidity
requirements in satisfaction of any guarantee issued.
(2) We see these guarantees as opportunities to expand our Fund Management
business by offering broad capital solutions to customers. To date, we have
had minimal exposure to losses under these guarantees and anticipate no
material liquidity requirements in satisfaction of any guarantee issued.
The carrying values disclosed above relate to the fees we earn for the
guarantees, which we recognize as the fair value of the guarantee.
(3) The loss sharing agreement with Fannie Mae is a normal part of the DUS
lender program and affords a higher level of fees than we earn for other
comparable funding sources. The carrying value disclosed above is our
estimate of potential exposure under the guarantees, although any funding
requirements for such exposure is based on the contractual requirements of
the underlying loans we sell to Fannie Mae, which vary as to amount and
duration, up to a maximum of 30 years.
The maximum exposure amount is not indicative of our expected losses under the
guarantees.
CONTRACTUAL OBLIGATIONS
The following table provides our commitments as of March 31, 2005, to make
future payments under our debt agreements and other contractual obligations:
Payments due by period
----------------------------------------------------------------------
Less than More than
(In thousands) Total 1 year 1-3 years 3-5 years 5 years
- ---------------------------------------- ----------- ----------- ---------- ---------- ------------
Notes payable (1) $ 203,146 $ 184,744 $ 5,452 $ 12,950 $ --
Notes payable of consolidated VIEs (2) 480,258 140,578 175,470 23,846 140,364
Operating lease obligations 70,305 4,431 11,642 12,136 42,096
Unfunded loan commitments 200,070 133,515 66,555 -- --
Financing arrangements (1) 1,203,506 1,203,506 -- -- --
Preferred shares of subsidiary (subject
to mandatory repurchase) 273,500 -- -- -- 273,500
----------- ----------- ---------- ---------- ------------
Total $ 2,430,785 $ 1,666,774 $ 259,119 $ 48,932 $ 455,960
=========== =========== ========== ========== ============
(1) The amounts reflect the current expiration, reset or renewal date of each
facility or security certificate. Management has the ability and intent to
renew, refinance or remarket the borrowings beyond their current due dates.
(2) Of the notes payable of consolidated VIEs, $407.1 million is guaranteed by
certain equity partners of the investment funds. Per partnership
agreements, the equity partners are also obligated to pay the principal and
interest on the notes. The remaining balance of $73.2 million is
collateralized with the underlying properties of the consolidated operating
partnerships. All of this debt is non-recourse to us.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest in certain financial instruments, primarily revenue bonds and other
bond related investments that are subject to various forms of market risk,
including interest rate risk. We seek to prudently and actively manage such
risks to earn sufficient compensation to justify the undertaking of such risks
and to maintain capital levels which are commensurate with the risks we
undertake.
The assumptions related to the following discussion of market risk involve
judgments involving future economic market conditions, future corporate
decisions and other interrelating factors, many of which are beyond our control
and all of which are difficult or impossible to predict with accuracy. Although
we believe that the assumptions underlying the forward-looking information are
reasonable, any of the assumptions could be inaccurate and, therefore, there can
be no assurance that the forward-looking information included herein will prove
to be accurate. Due to the significant uncertainties inherent in forward-looking
information, the inclusion of such information should not be regarded as our
representation that our objectives and plans would be achieved.
INTEREST RATE RISK
- ------------------
The nature of our investments and the instruments used to raise capital for
their acquisition expose us to income and expense volatility due to fluctuations
in market interest rates. Market interest rates are highly sensitive to many
factors, including governmental policies, domestic and international economic
and political considerations and other factors beyond our control. Our exposure
to interest rates is twofold:
o the potential increase in interest expense on our variable rate debt; and
o the impact of interest rate on the value of our assets.
IMPACT ON EARNINGS
Our investments in revenue bonds generally bear interest at fixed rates, or pay
interest according to the cash flows of the underlying properties, which do not
fluctuate with changes in market interest rates.
In contrast, payments required under our floating rate securitization programs
vary based on market interest rates based on the BMA municipal swap index and
are re-set weekly or every 35 days. In addition, we have floating rate debt
related to our acquisition financing and our warehouse facilities. Other
long-term sources of capital, such as the preferred shares of our Equity Issuer
subsidiary, carry a fixed dividend rate and, as such, are not impacted by
changes in market interest rates.
Excluding $524.0 million of debt hedged via interest rate swap agreements, the
full amount of our liabilities labeled as Financing Arrangements and Notes
Payable are variable rate debts. We estimate that an increase of 1.0% in
interest rates would decrease our annual net income by approximately $8.8
million.
We manage this risk through the use of interest rate swaps, interest rate caps
and forward bond origination commitments, as described in the notes to our
financial statements. In addition, we manage our exposure by striving for
diversification in our businesses to include those not susceptible to interest
rate changes and by managing our leverage.
IMPACT ON VALUATION OF ASSETS
Changes in market interest rates would also impact the estimated fair value of
our portfolio of revenue bonds. We estimate the fair value for each revenue bond
as the present value of its expected cash flows, using a discount rate for
comparable tax-exempt investments. Therefore, as market interest rates for
tax-exempt investments increase, the estimated fair value of our revenue bonds
will generally decline, and a decline in interest rates would be expected to
result in an increase in their estimated fair values. For example, we estimate,
using the same methodology used to estimate the portfolio fair market value
under SFAS 115, that a 1% increase in market rates for tax-exempt investments
would decrease the estimated fair value of our portfolio of revenue bonds from
its March 31, 2005, value of approximately $2.2 billion to approximately $2.1
billion. A 1% decline in interest rates would increase the value of the March
31, 2005, portfolio to approximately $2.3 billion. Changes in the estimated fair
value of the revenue bonds do not impact our reported net income, earnings per
share, distributions or cash flows, but are reported as components of other
accumulated comprehensive income and affect reported shareholders' equity, and
may affect our borrowing capability to the extent that collateral requirements
are sometimes based on our asset values.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains
disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that the Company files
or submits under the Securities and Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC's
rules and forms, and that such information is accumulated and communicated
to the Company's management, including its Chief Executive Officer and
26
Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures.
As of the end of the period covered by this Quarterly Report on Form 10-Q,
the Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to the
Securities and Exchange Act Rule 13a-15. Based upon this evaluation as of
March 31, 2005, the Chief Executive Officer and Chief Financial Officer
conclude that the Company's disclosure controls and procedures are not
effective due to the unremediated material weaknesses in the Company's
internal control over financial reporting identified during the Company's
evaluation pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 as of
the year ended December 31, 2004. To remediate these control weaknesses,
the Company performed additional analysis and performed other procedures
(detailed in item 4b below) in order to prepare the unaudited quarterly
consolidated financial statements in accordance with generally accepted
accounting principles in the United States of America. Accordingly,
management believes that the consolidated financial statements included in
this Quarterly Report on Form 10-Q fairly present, in all material
respects, our financial condition, results of operations and cash flows for
the periods presented.
(b) INTERNAL CONTROL OVER FINANCIAL REPORTING. To remediate the material
weaknesses in internal controls identified during the Company's evaluation
pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 as of the year
ended December 31, 2004, during the first quarter of 2005, we have:
(i) taken steps to remediate the errors in our tax accounting through
increased use of third-party tax service providers for the more
complex areas of our tax accounting and increased formality and rigor
of controls and procedures over accounting for income taxes;
(ii) strengthened our due diligence procedures in reviewing acquisition
candidates to ensure that any required recharacterizations are
identified on a timely basis; and
(iii)strengthened our analytical procedures with regard to the preparation
and review of all consolidation eliminations.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to routine litigation and administrative proceedings
arising in the ordinary course of business. Management does not believe
that such matters will have a material adverse impact on our financial
position, results of operations or cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities
(a) (b) (c) (d)
Total number
of shares
Total purchased as part Maximum number
number of Average of publicly of shares that may yet
shares price paid announced plans or be purchased under the
Period purchased per share programs plans or programs
- --------------------- ----------- ------------ -------------------- ------------------------
January 1 - 31, 2005 25,645 $23.75 --
February 1 - 28, 2005 -- -- --
March 1 - 31, 2005 57,439 23.05 --
-------- ------- -------
Total 83,084 $23.40 -- 1,291,273
======== ======= ======= ==========
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS
31.1 Chief Executive Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
31.2 Chief Financial Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
32.1 Chief Executive Officer and Chief Financial Officer certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
* Filed herewith
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHARTERMAC
(Registrant)
Date: May 10, 2005 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Managing Trustee and Chief Executive Officer
Date: May 10, 2005 By: /s/ Alan P. Hirmes
------------------
Alan P. Hirmes
Managing Trustee, Chief Financial Officer and
Chief Operating Officer
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Stuart J. Boesky, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period
ending March 31, 2005 of CharterMac;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principals;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors or persons performing the equivalent
functions:
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 10, 2005 By: /s/Stuart J. Boesky
-------------------
Stuart J. Boesky
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Alan P. Hirmes, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period
ending March 31, 2005 of CharterMac;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principals;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors or persons performing the equivalent
functions:
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 10, 2005 By: /s/ Alan P. Hirmes
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Alan P. Hirmes
Chief Financial Officer
Exhibit 32.1
CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(UNITED STATES CODE, TITLE 18, CHAPTER 63, SECTION 1350)
ACCOMPANYING QUARTERLY REPORT ON FORM 10-Q OF
CHARTERMAC FOR THE QUARTER ENDED MARCH 31, 2005
In connection with the Quarterly Report on Form 10-Q of CharterMac for the
quarterly period ending March 31, 2005, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), Stuart J. Boesky, as
Chief Executive Officer of our Company, and Alan P. Hirmes, as Chief Financial
Officer of our Company, each hereby certifies, pursuant to 18 U.S.C. Section
1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d), as applicable, 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 our Company.
By: /s/ Stuart J. Boesky By: /s/ Alan P. Hirmes
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Stuart J. Boesky Alan P. Hirmes
Chief Executive Officer Chief Financial Officer
May 10, 2005 May 10, 2005