UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
| [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2012
Or
| [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to _________
Commission File Number: 333-125121
| VESTIN REALTY MORTGAGE II, INC. |
| (Exact name of registrant as specified in its charter) |
| MARYLAND | | 61-1502451 |
| (State or Other Jurisdiction of | | (I.R.S. Employer |
| Incorporation or Organization) | | Identification No.) |
8880 W. SUNSET ROAD, SUITE 200, LAS VEGAS, NEVADA 89148
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code 702.227.0965
Securities registered pursuant to Section 12(b) of the Act:
| Common Stock, $0.0001 Par Value | | Nasdaq Global Select Market |
| (Title of each class) | | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] |
| | |
| Non-accelerated filer [ ] | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
| Class | | | Market Value as of June 30, 2012 |
| Common Stock, $0.0001 Par Value | | $ | 14,223,145 |
| | | | |
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
| Class | | | Number of Shares Outstanding As of March 28, 2013 |
| Common Stock, $0.0001 Par Value | | | 12,069,805 |
| | | | |
Note Regarding Forward-Looking Statements
This report may contain forward-looking statements. Such forward-looking statements may be identified by the use of such words as “expects,” “plans,” “estimates,” “intend,” “might,” “may,” “could,” “will,” “feel,” “forecasts,” “projects,” “anticipates,” “believes” and words of similar expression. Forward-looking statements are likely to address such matters as our business strategy, future operating results, future sources of funding for real estate loans brokered by us, future economic conditions and pending litigation involving us. Some of the factors which could affect future results are set forth in the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors Affecting Our Operating Results.”
General
Vestin Realty Mortgage II, Inc. (“VRM II”) formerly Vestin Fund II, LLC (“Fund II”) invests in loans secured by real estate through deeds of trust or mortgages (hereafter referred to collectively as “deeds of trust” and as defined in our management agreement (“Management Agreement”) as “Mortgage Assets”). In addition we may invest in, acquire, manage or sell real property or acquire entities involved in the ownership or management of real property. We commenced operations in June 2001. References in this report to the “Company,”“we,”“us,” or “our” refer to Fund II with respect to the period prior to April 1, 2006 and to VRM II with respect to the period commencing on April 1, 2006.
We operated as a real estate investment trust (“REIT”) through December 31, 2011. We are not a mutual fund or an investment company within the meaning of the Investment Company Act of 1940, nor are we subject to any regulation thereunder. As a REIT, we were required to have a December 31 fiscal year end. We announced on March 28, 2012 that we have terminated our election to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), effective for the tax year ending December 31, 2012. Under the Code, we will not be able to make a new election to be taxed as a REIT during the four years following December 31, 2012. Pursuant to our charter, upon the determination by the Board of Directors that we should no longer qualify as a REIT, the restrictions on transfer and ownership of shares set forth in Article VII of our charter ceased to be in effect and, accordingly, shares of the Company’s stock will no longer be subject to such restrictions.
Vestin Group, Inc. (“Vestin Group”), a Delaware corporation, owns a significant majority of Vestin Mortgage, LLC, a Nevada limited liability company, which is our manager (the “manager” or “Vestin Mortgage”). On January 7, 2011, Vestin Mortgage converted from a corporation to a limited liability company. Michael Shustek, the CEO and managing member of our manager and CEO, President and a director of us, wholly owns Vestin Group, which is engaged in asset management, real estate lending and other financial services through its subsidiaries. Our manager, prior to June 30, 2006, also operated as a licensed Nevada mortgage broker and was generally engaged in the business of brokerage, placement and servicing of commercial loans secured by real property. Since February 14, 2011, the business of brokerage and placement of real estate loans have been performed by affiliated or non-affiliated mortgage brokers, including Advant Mortgage, LLC (“MVP Mortgage”), licensed Nevada mortgage broker, which is indirectly wholly owned by Mr. Shustek.
Pursuant to a management agreement, our manager is responsible for managing our operations and implementing our business strategies on a day-to-day basis. Consequently, our operating results are dependent to a significant extent upon our manager’s ability and performance in managing our operations and servicing our loans.
Vestin Mortgage is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”), as the successor by merger to Vestin Fund I, LLC (“Fund I”), and Vestin Fund III, LLC (“Fund III”). These entities were formed to invest in real estate loans. VRM I has investment objectives similar to ours, and Fund III is in the process of an orderly liquidation of its assets.
Our consolidated financial statements include the accounts of VRM II, Vestin TRS II, Inc., our wholly owned subsidiary, 1701 Commerce, LLC and Hawaii Funeral Service, LLC, in which we had a controlling interest through December 1, 2011. Our consolidated financial statements also included the accounts of the funeral merchandise and service trusts, cemetery merchandise and service trusts, and cemetery perpetual care trusts (“Trusts”) in which we had a variable interest and HFS was the primary beneficiary through December 1, 2011. See Note A – Organization of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements of this Report Form 10-K. Intercompany balances and transactions have been eliminated in consolidation.
During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services. Strategix Solutions also provides accounting and financial reporting services to VRM I and Fund III. Our CFO and other members of our accounting staff are employees of Strategix Solutions. Strategix Solutions is managed by LL Bradford and Company, LLC ("LL Bradford"), a certified public accounting firm that has provided non-audit accounting services to us. The principal manager of LL Bradford was a former officer of our manager from April 1999 through January 1, 2005. Strategix Solutions is owned by certain partners of LL Bradford, none of whom are currently or were previously officers of our manager. On January 14, 2013, Eric Bullinger resigned from his position as Chief Financial Officer of Vestin Realty Mortgage I, Inc. and Vestin Realty Mortgage II, Inc and the equivalent of Chief Financial Officer of Vestin Fund III, LLC (hereafter referred to collectively as the “Vestin Entities”). On January 14, 2013, the Board of Directors appointed Tracee Gress as the Chief Financial Officer of the Vestin Entities (or the equivalent thereof in the case of Vestin Fund III, LLC). As used herein, “management” means our manager, its executive officers and the individuals at Strategix Solutions who perform accounting and financial reporting services on our behalf.
Segments
We are currently authorized to operate two reportable segments, investments in real estate loans and investments in real property. As of December 31, 2012, we had not commenced investing in real property.
Our objective is to invest approximately 97% of our assets in real estate loans and real estate investments, while maintaining approximately 3% as a working capital cash reserve. Current market conditions have impaired our ability to be fully invested in real estate loans and real estate investments. As of December 31, 2012, approximately 62% of our assets, net of allowance for loan losses, are classified as investments in real estate loans.
Real Estate Loan Objectives
As of December 31, 2012, our loans were in the following states: California, Michigan, Nevada, Ohio, Utah and Texas. The loans we invest in are selected for us by our manager from among loans originated by affiliated or non-affiliated mortgage brokers. When a mortgage broker originates a loan for us, that entity identifies the borrower, processes the loan application, brokers and sells, assigns, transfers or conveys the loan to us. We believe that our loans are attractive to borrowers because of the expediency of our manager’s loan approval process, which takes about ten to twenty days.
As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans has been higher than those generally experienced in the mortgage lending industry. Because of our willingness to fund riskier loans, borrowers are generally willing to pay us an interest rate that is above the rates generally charged by other commercial lenders. We invest a significant amount of our funds in loans in which the real property, held as collateral, is not generating any income to the borrower. The loans in which we invest are generally riskier because the borrower’s repayment depends on their ability to refinance the loan or develop the property so they can refinance the loan.
Our principal investment objectives are to maintain and grow stockholder value by:
| | · | Producing revenues from the interest income on our real estate loans; |
| | · | Providing cash dividends from the net income generated by our real estate loans; and |
| | · | Reinvesting, to the extent permissible, payments of principal and net proceeds from sales of foreclosed properties. |
Acquisition and Investment Policies
Generally, the collateral on our real estate loans is the real property that the borrower is purchasing or developing, together with a guarantee from the principal owners of the borrower. We sometimes refer to these real properties as the security properties. While we may invest in other types of loans, most of the loans in which we invest have been made to real estate developers.
Our real estate investments are not insured or guaranteed by any governmental agency.
Our manager continuously evaluates prospective investments, selects the loans in which we invest and makes all investment decisions on our behalf. In evaluating prospective real estate loan investments, our manager considers such factors as the following:
| | · | The ratio of the amount of the investment to the value of the property by which it is secured, or the loan-to-value ratio; |
| | · | The potential for capital appreciation or depreciation of the property securing the investment; |
| | · | Expected levels of rental and occupancy rates, if applicable; |
| | · | Potential for rental increases, if applicable; |
| | · | Current and projected revenues from the property, if applicable; |
| | · | The status and condition of the record title of the property securing the investment; |
| | · | Geographic location of the property securing the investment; and |
| | · | The financial condition of the borrowers and their principals, if any, who guarantee the loan. |
Our manager may obtain our loans from affiliated or non-affiliated mortgage brokers. We may purchase existing loans that were originated by third party lenders or brokered by affiliates to facilitate our purchase of the loans. Our manager or any affiliated mortgage broker will sell, assign, transfer or convey the loans to us without a premium, but may include its service fees and compensation.
When selecting real estate loans for us, our manager generally adheres to the following guidelines, which are intended to control the quality of the collateral given for our loans:
1. Priority of Loans. Our policy is to secure most of our loans by first deeds of trust. First deeds of trust are loans secured by a full or divided interest in a first deed of trust secured by the property. We will not invest in any loan that is junior to more than one loan.
2. Loan-to-Value Ratio. The amount of our loan combined with the outstanding debt secured by a senior loan on a security property generally does not exceed the following percentage of the appraised value of the security property at origination:
| Type of Secured Property | Loan-to-Value Ratio |
| | |
| Residential | 75% |
| Unimproved Land | 60% (of anticipated as-if developed value) |
| Acquisition and Development | 60% (of anticipated as-if developed value) |
| Commercial Property | 75% (of anticipated as-if developed value) |
| Construction | 75% (of anticipated post- developed value) |
| Leasehold Interest | 75% (of value of leasehold interest) |
We may deviate from these guidelines under certain circumstances. For example, our manager, in its discretion, may increase any of the above loan-to-value ratios if it believes a given loan is supported by credit adequate to justify a higher loan-to-value ratio, including personal guarantees. Occasionally, our collateral may include personal property attached to the real property as well as real property. We do not have specific requirements with respect to the projected income or occupancy levels of a property securing our investment in a particular loan. These loan-to-value ratios will not apply to financing offered to the purchaser of any real estate acquired through foreclosure or to refinance an existing loan that is in default. In those cases, our manager, in its sole discretion, may accept financing terms that it believes are reasonable and in our best interest.
Loan-to-value ratios are initially based on appraisals obtained at the time of loan origination. Such appraisals, which may have been commissioned by the borrower and may precede the placement of the loan with us, are generally dated no greater than 12 months prior to the date of loan origination. Current loan-to-value ratios are generally based on the most recent appraisals and include allowances for loan losses. Recognition of allowance for loan losses will result in a maximum loan-to-value ratio of 100% per loan.
Appraisals may not reflect subsequent changes in value and may be for the current estimate of the “as-if developed” value of the property, which approximates the post-construction value of the collateralized property assuming that such property is developed. “As-if developed” values on raw land loans or acquisition and development loans often dramatically exceed the immediate sales value. Realization of the “as-if-developed” value depends upon anticipated zoning changes and successful development efforts by the borrower. Completion of such development efforts may in turn depend upon the availability of additional financing. As most of the appraisals will be prepared on an “as-if developed” basis, if a loan goes into default prior to development of a project, the market value of the property may be substantially less than the appraised value. As a result, there may be less security than anticipated at the time the loan was originally made. If there is less security and a default occurs, we may not recover the outstanding balance of the loan.
We, or the borrower, retain appraisers who are state certified or licensed appraisers and/or hold designations from one or more of the following organizations: the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the National Association of Review Appraisers, the Appraisal Institute, the National Society of Real Estate Appraisers, American Society of Real Estate Appraisers, or from other appraisers with other qualifications acceptable to our manager. However, appraisals are only estimates of value and cannot be relied on as measures of realizable value. An employee or agent of our manager will review each appraisal report and will generally conduct a physical inspection for each property. A physical inspection includes an assessment of the subject property, the adjacent properties and the neighborhood, but generally does not include entering any structures on the property.
3. Terms of Real Estate Loans. Our loans as of December 31, 2012, had original terms of 2 months to 120 months, excluding extensions. Most of our loans are for an initial term of 12 months. Generally, our original loan agreements permit extensions to the term of the loan by mutual consent. Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take-out financing. Our manager generally grants extensions when a borrower is in compliance with the material terms of the loan, including, but not limited to the borrower’s obligation to make interest payments on the loan. In addition, if circumstances warrant, our manager may extend a loan that is in default as part of a work out plan to collect interest and/or principal. The weighted average term of outstanding loans, including extensions, at December 31, 2012, was 12 months.
As of December 31, 2012 and 2011, most of our loans provided for payments of interest only, some of which have accrued interest, with a “balloon” payment of principal payable in full at the end of the term. In addition, we may invest in real estate loans that require borrowers to maintain interest reserves funded from the principal amount of the loan for a period of time. At December 31, 2012 and 2011, we had no investments in real estate loans that had interest reserves.
4. Escrow Conditions. Our loans will often be funded by us through an escrow account held by a title insurance company, subject to the following conditions:
| | · | Borrowers will obtain title insurance coverage for all loans, providing title insurance in an amount at least equal to the principal amount of the loan. Title insurance insures only the validity and priority of our deed of trust, and does not insure us against loss by other causes, such as diminution in the value of the security property. |
| | · | Borrowers will obtain liability insurance coverage for all loans. |
| | · | Borrowers will obtain fire and casualty insurance for all loans secured by improved real property, covering us in an amount sufficient to cover the replacement cost of improvements. |
| | · | All insurance policies, notes, deeds of trust or loans, escrow agreements, and any other loan documents for a particular transaction will cover us as a beneficiary. |
5. Purchase of Real Estate Investments from Affiliates. We may acquire real estate loans from our affiliates, including our manager, that are accounted for at the principal balance and no gain or loss is recognized by us or any affiliate. These purchases may include allowable fees and expenses, but no other compensation for the loans. Excluding the compensation paid to our manager, all income generated and expense associated with the loans so acquired shall be treated as belonging to us.
6. Note Hypothecation. We may also acquire real estate loans secured by assignments of secured promissory notes. These real estate loans must satisfy our stated investment standards, including our loan-to-value ratios, and may not exceed 80% of the principal amount of the assigned note upon acquisition. For example, if the property securing a note we acquire is a commercial property, the total amount of outstanding debts secured by the property generally must not exceed 75% of the appraised value of the property, and the real estate loan generally will not exceed 80% of the principal amount of the assigned note. For real estate loans secured by promissory notes, we will rely on the appraised value of the underlying property, as determined by an independent written appraisal that was conducted within the then-preceding twelve months. If an appraisal was not conducted within that period, then we will arrange for a new appraisal to be prepared for the property prior to acquisition of the loan.
7. Participation. We participate in loans with other lenders by providing funds for or purchasing an undivided interest in a loan meeting our investment guidelines described above. We participate in loans with our affiliates, subject to our voluntary compliance with the applicable guidelines of the North American Securities Administrators Association (“NASAA Guidelines”). The independent directors on our Board may authorize a departure from such NASAA Guidelines. Typically, we participate in loans if:
| | · | We did not have sufficient funds to invest in an entire loan; |
| | · | We are seeking to increase the diversification of our loan portfolio; or |
| | · | A loan fits within our investment guidelines, however it would constitute more than 20% of our capital or otherwise be disproportionately large given our then existing portfolio. |
Loans in which unaffiliated investors have participated through inter-creditor agreements (“Inter-creditor Agreements”) are accounted for as secured borrowings. The Inter-creditor Agreements provide us additional funding sources for real estate loans whereby an unaffiliated investor (the “Investor”) may participate on a non-paripassu basis in certain real estate loans with us and/or VRM I (collectively, the “Lead Lenders”). In the event of borrower non-performance, the Inter-creditor Agreements generally provide that the Lead Lenders must repay the Investor’s loan amount either by (i) continuing to remit to the Investor the interest due on the participated loan amount; (ii) substituting an alternative loan acceptable to the Investor; or (iii) repurchasing the participation from the Investor for the outstanding balance plus accrued interest.
Additionally, an Investor may participate in certain loans with the Lead Lenders through Participation Agreements. In the event of borrower non-performance, the Participation Agreement may allow the Investor to be repaid up to the amount of the Investor’s investment prior to the Lead Lender being repaid. Real estate loan financing under the Participation Agreements are also accounted for as a secured borrowing. We do not receive any revenues for entering into secured borrowings arrangements.
As of December 31, 2012, 66% of our loans were loans in which we participated with other lenders, most of whom are our affiliates.
8. Diversification. We voluntarily comply with applicable NASAA Guidelines, unless otherwise approved by the independent members of our board of directors, which provide that we neither invest in or make real estate loans on any one property, which would exceed, in the aggregate, an amount equal to 20% of our stockholders’ equity, nor may we invest in or make real estate loans to or from any one borrower, which would exceed, in the aggregate, an amount greater than 20% of our stockholders’ equity.
As of December 31, 2012, we had loans with common guarantors. For additional information regarding loans with common guarantors see Note C – Financial Instruments and Concentrations of Credit Risk of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements of this Report Form 10-K.
9. Reserve Fund. We have established contingency working capital reserves of approximately 3% of our stockholders’ equity to cover our unexpected cash needs.
10. Credit Evaluations. When reviewing a loan proposal, our manager determines whether a borrower has sufficient equity in the security property. An appraisal dated within 12 months of loan origination is required in order to establish the value of the property. Our manager may also consider the income level and creditworthiness of a borrower to determine its ability to repay the real estate loan. This is accomplished by the review of various financial data, which may include financial statements, tax returns and credit reports.
11. Sale of Real Estate Loan Investments. Our manager may sell our real estate loans or interest in our loans to either affiliates or non-affiliated parties when our Manager believes that it is advantageous for us to do so. However, we do not expect that our loans will be generally marketable or that a secondary market will develop for them.
Real Estate Loans to Affiliates
We will not invest in real estate loans made to our manager, Vestin Group or any of our affiliates. However, we may acquire an investment in a real estate loan payable by our Manager when our Manager has assumed the obligations of the borrower under that loan through a foreclosure on the property.
Investment of Loans From our Manager and Its Affiliates
In addition to those loans our manager selects for us, we invest in loans that were originated by affiliates as long as the loan(s) otherwise satisfies all of our lending criteria. However, we will not acquire a loan from or sell a loan to a real estate program in which our manager or an affiliate has an interest except in compliance with applicable NASAA Guidelines or as otherwise approved by the independent members of our board of directors.
Types of Loans We Invest In
We primarily invest in loans that are secured by first or second trust deeds on real property. Such loans fall into the following categories: raw and unimproved land, acquisition and development, construction, commercial property and residential loans. The following discussion sets forth certain guidelines our manager generally intends to follow in allocating our investments among the various types of loans. Our manager, however, may change these guidelines at its discretion, subject to review by our board of directors. Actual investments will be determined by our manager pursuant to the terms of the Management Agreement. The actual percentages invested among the various loan categories may vary as a result of changes in the size of our loan portfolio.
Raw and Unimproved Land Loans
Generally, 15% to 25% of the loans invested in by us may be loans made for the purchase or development of raw, unimproved land. Generally, we determine whether to invest in these loans based upon the appraised value of the property and the borrower’s actual capital investment in the property. We will generally invest in loans for up to 60% of the initial as-if developed appraised value of the property and we generally require that the borrower has invested in the property actual capital expenditures of at least 25% of the property’s value. As-if developed values on raw and unimproved land loans often dramatically exceed the immediate sales value and may include anticipated zoning changes, and successful development by the purchaser, upon which development is dependent on availability of financing.
Acquisition and Development Loans
Generally, 10% to 25% of the loans invested in by us may be acquisition and development loans. Such loans enable borrowers to acquire and/or complete the basic infrastructure and development of their property prior to the construction of buildings or structures. Such development may include installing utilities, sewers, water pipes, and/or streets, together with the costs associated with obtaining entitlements, including zoning, mapping and other required governmental approvals. We will generally invest in loans with an initial face value of up to 60% of the appraised value of the property. Loan-to-value ratios on acquisition and development loans are calculated using as-if developed appraisals. Such appraisals have the same valuation limitations as raw and unimproved land loans, described above.
Construction Loans
Generally, 10% to 70% of our loans may be construction loans. Such loans provide funds for the construction of one or more structures on developed land. Funds under this type of loan will generally not be forwarded to the borrower until work in the previous phase of the project has been completed and an independent inspector has verified certain aspects of the construction and its costs. We will typically require material and labor lien releases by the borrower per completed phase of the project. We will review the appraisal of the value of the property and proposed improvements, and will generally finance up to 75% of the initial appraised value of the property and proposed improvements. Such appraisals have the same valuation limitations as raw and unimproved land loans, described above.
Commercial Property Loans
Generally, 20% to 50% of the loans we invest in may be commercial property loans. Such loans provide funds to allow borrowers to acquire income-producing property or to make improvements or renovations to the property in order to increase the net operating income of the property so that it may qualify for institutional refinancing. Generally, we review the initial property appraisal and generally invest in loans for up to 75% of such appraised value of the property.
Residential Loans
A small percentage of the loans invested in by us may be residential loans. Such loans facilitate the purchase or refinance of one to four family residential property units provided the borrower uses one of the units on the property as such borrower’s principal residence. We will generally invest in loans for up to 75% of the initial value of the property.
Collateral
Each loan is secured by a lien on either a fee simple or leasehold interest in real property as evidenced by a first deed of trust or a second deed of trust.
First Deed of Trust
Historically, most of our loans were secured by first deeds of trust. Thus as a lender, we would have rights as a first priority lender of the collateralized property. As of December 31, 2012, approximately 97% of our loans were secured by first deeds of trust.
Second Deed of Trust
Prior to September 2008, our objective has been that not more than 10% of our loan portfolio would be secured by second deeds of trust; unless our board of directors approves a higher percentage. During September 2008, the board authorized us to allow loans secured by second deeds of trust to constitute up to 15% of our loans, due to loan restructuring and business opportunities. In a second priority loan, the rights of the lender (such as the right to receive payment on foreclosure) will be subject to the rights of the first priority lender. In a wraparound loan, the lender’s rights will be comparably subject to the rights of a first priority lender, but the aggregate indebtedness evidenced by the loan documentation will be the first priority loan plus the new funds the lender invests. The lender would receive all payments from the borrower and forward to the senior lender its portion of the payments the lender receives. As of December 31, 2012, approximately 3% of our loans were secured by a second deed of trust.
Prepayment Penalties and Exit Fees
Generally, the loans we invest in will not contain prepayment penalties but may contain exit fees payable when the loan is paid in full, by the borrower, to our manager or its affiliates as part of their compensation. If interest rates decline, the amount we can charge as interest on our loans will also likely decline. Moreover, if a borrower should prepay obligations that have a higher interest rate from an earlier period, we will likely not be able to reinvest the funds in real estate loans earning that higher rate of interest. In the absence of a prepayment fee, we will receive neither the anticipated revenue stream at the higher rate nor any compensation for its loss. As of December 31, 2012 none of our loans had a prepayment penalty, although one of our loans, totaling approximately $1.0 million, had an exit fee. This loan is considered performing as of December 31, 2012. Depending upon the amount by which lower interest rates are available to borrowers, the amount of the exit fees may not be significant in relation to the potential savings borrowers may realize as a result of prepaying their loans.
Extensions to Term of Loan
Our original loan agreements generally permit extensions to the term of the loan by mutual consent. Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take-out financing. Our manager generally grants extensions when a borrower is in compliance with the material terms of the loan, including, but not limited to the borrower’s obligation to make interest payments on the loan. In addition, if circumstances warrant, our manager may extend a loan that is in default as part of a work out plan to collect interest and/or principal.
Interest Reserves
We may invest in loans that include a commitment for an interest reserve, which is usually established at loan closing. The interest reserve may be advanced by us or other lenders with the amount of the borrower’s indebtedness increased by the amount of such advances.
Balloon Payment
As of December 31, 2012, most of our loans provided for payments of interest only with a “balloon” payment of principal payable in full at the end of the term. There are no specific criteria used in evaluating the credit quality of borrowers for real estate loans requiring balloon payments. Furthermore, a substantial period of time may elapse between the review of the financial statements of the borrower and the date when the balloon payment is due. As a result, there is no assurance that a borrower will have sufficient resources to make a balloon payment when due. To the extent that a borrower has an obligation to pay real estate loan principal in a large lump sum payment, its ability to repay the loan may be dependent upon its ability to sell the property, obtain suitable refinancing or otherwise raise a substantial amount of cash. As a result, these loans can involve a higher risk of default than loans where the principal is paid at the same time as the interest payments.
Repayment of Loans on Sale of Properties
We may require a borrower to repay a real estate loan upon the sale of the property rather than allow the buyer to assume the existing loan. We will generally require repayment if we determine that repayment appears to be advantageous to us based upon then-current interest rates, the length of time that the loan has been held by us, the creditworthiness of the buyer and our objectives.
Variable Rate Loans
Occasionally we may acquire variable rate loans. Variable rate loans may use as indices the one and five year Treasury Constant Maturity Index, the Prime Rate Index and the Monthly Weighted Average Cost of Funds Index for Eleventh District Savings Institutions (Federal Home Loan Bank Board).
It is possible that the interest rate index used in a variable rate loan will rise (or fall) more slowly than the interest rate of other loan investments available to us. If we make variable rate loans, our manager, in conjunction with a mortgage broker we may use, will attempt to minimize this interest rate differential by tying variable rate loans to indices that are sensitive to fluctuations in market rates. Additionally, variable rate loans may contain an interest rate floor.
Variable rate loans generally have interest rate caps. For these loans, there is the risk that the market rate may exceed the interest cap rate. For additional information see Note D – Investments in Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Consolidated Financial Statements of this Annual Report on Form 10-K.
Real Estate Investment Objectives
As of December 31, 2012, we had not purchased any real estate properties. Investments in commercial properties will be primarily in Nevada, Arizona, California, Oregon and Texas or in other areas of the Southwestern and Western part of the United States. Properties acquired may include, but are not limited to, office buildings, shopping centers, business and industrial parks, manufacturing facilities, multifamily properties, warehouses and distribution facilities, motel and hotel properties and recreation and leisure properties. We will not invest in unimproved land or construction or development of properties. We intend to lease properties owned by us and to hold properties until such time as we believe it is the optimal time to capitalize on the capital appreciation of our properties.
We intend to invest principally in properties that generate current income. Potential gain on sale of appreciated properties will be a secondary objective.
ACQUISITION AND INVESTMENT STRATEGIES
Capitalizing on Availability of Properties
We believe that excellent opportunities exist in our target markets in the Southwestern United States to acquire quality properties at significant discounts. Some of these properties should exhibit stable cash flow, but are currently underperforming. We intend to generate value by improving cash flows through aggressive leasing, asset management and repositioning of the property. We will acquire these properties directly from owners, through the foreclosure process, or from financial institutions holding foreclosed real estate.
Maximizing Value of Acquired Properties
We will seek to reposition properties that we acquire through strategic renovation and re-tenanting such properties. Repositioning of properties may be accomplished by (1) stabilizing occupancy; (2) upgrading and renovating existing structures; and (3) investing significant efforts in recruiting tenants whose goods and services meet the needs of the surrounding neighborhood. We currently do not intend to engage in significant development or redevelopment of properties as the costs of development and redevelopment may exceed the cost of properties that we acquire.
Southwestern and Western United States Focus
Our acquisition efforts will occur in the Southwestern and Western United States, primarily in Nevada, California and Arizona. These regions have recently experienced severe economic distress, which has in turn led to significant declines in real estate values. We believe such factors have created a significant pipeline of acquisition opportunities. Despite the recent downturn, we believe these regions have fundamentally diverse and dynamic economies that hold the potential to recover significantly as the overall economy in the United States improves and that such recovery will in turn improve the real estate markets in these regions.
Focus on Strong Property and Submarket Fundamentals
We will seek to acquire properties that present strong characteristics that we believe are essential for a successful real estate investment. These include:
| | · | an attractive location in established markets; |
| | · | desirable physical attributes such as a contemporary design and function, adequate parking, flexible and efficient floor plans and environmentally friendly design; and |
| | · | a strong multi-tenant base with limited exposure to significant tenant concentrations. |
Apply a Disciplined Underwriting Process
We intend to utilize a disciplined underwriting process in our evaluation of potential property acquisitions. In evaluating a property’s cash flow potential, we intend to use conservative assumptions regarding future cash flow, taking into account not only current rents but future rents that may be negotiated at a discount during the current market downturn, the credit worthiness of tenants and other factors that may affect cash flow, which we believe our management team is well positioned to understand. We also intend to utilize assumptions regarding the timing and level of a market recovery that we believe to be conservative. We intend to acquire properties that are able to provide returns, regardless of when a market recovery occurs, with potential for cash flow improvement and capital appreciation.
Leasing
The terms and conditions of any lease we enter into with our tenants may vary substantially. However, we expect that our leases will conform with the standard market practices in the geographic area where the property is located. We expect to execute new tenant leases and tenant lease renewals, expansions and extensions with terms that are dictated by the current market conditions. If it is economically practical, we may verify the creditworthiness of each tenant. If we verify the creditworthiness of each tenant, we may use industry credit rating services for any guarantors of each potential tenant. We may also obtain relevant financial data from potential tenants and guarantors, such as income statements, balance sheets and cash flow statements. We may require personal guarantees from shareholders of our corporate tenants. However, there can be no guarantee that the tenants selected will not default on their leases or that we can successfully enforce any guarantees.
Financing Sources
We will seek financing from a variety of sources to fund our potential acquisitions. Such sources may include cash on hand, cash flow from operating activities and cash proceeds from any public offering or private placement of equity or debt securities. We may also seek to obtain a revolving credit facility and other secured or unsecured loans to fund acquisitions. We cannot provide any assurance that we will be successful in obtaining any financing for all or any of our potential acquisitions.
Borrowing
We may incur indebtedness to:
| | · | Finance our investments in real estate loans; |
| | · | Prevent a default under real estate loans that are senior to our real estate loans; |
| | · | Discharge senior real estate loans if this becomes necessary to protect our investment in real estate loans; or |
| | · | Operate or develop a property that we acquired under a defaulted loan. |
Our indebtedness should not exceed 70% of the fair market value of our real estate loans. This indebtedness may be with recourse to our assets.
In addition, we may enter into structured arrangements with other lenders in order to provide them with a senior position in real estate loans that we might jointly fund. For example, we might establish a wholly owned special purpose corporation that would borrow funds from an institutional lender under an arrangement where the resulting real estate loans would be assigned to a trust, and the trust would issue a senior certificate to the institutional lender and a junior certificate to the special purpose corporation. This would assure the institutional lender of repayment in full prior to our receipt of any repayment on the jointly funded real estate loans.
Competition
Generally, real estate developers depend upon the timely completion of a project to obtain a competitive advantage when selling their properties. We have sought to attract real estate developers by offering expedited loan processing, which generally provides quick approval and funding of a loan. As a result, we have established a market niche as a non-conventional real estate lender.
We consider our direct competitors to be the providers of real estate loans who offer short-term, equity-based loans on an expedited basis for higher fees and rates than those charged by other financial institutional lenders such as commercial banks. Many of the companies against which we compete have substantially greater financial, technical and other resources than either our company or our manager that may allow them to enjoy significant competitive advantages. Competition in our market niche depends upon a number of factors, including terms and interest rates of a loan, the price of a property, speed of loan processing and closing escrow on properties, cost of capital, reliability, quality of service and support services.
Regulation
We are managed by Vestin Mortgage, subject to the oversight of our board of directors, pursuant to the terms and conditions of our management agreement. Advant Mortgage, an affiliate of Vestin Mortgage, operates as a mortgage broker and is subject to extensive regulation by federal, state and local laws and governmental authorities. Mortgage brokers we may use conduct their real estate loan businesses under a license issued by the State of Nevada Mortgage Lending Division. Under applicable Nevada law, the division has broad discretionary authority over the mortgage brokers’ activities, including the authority to conduct periodic regulatory audits of all aspects of their operations.
We, our manager, and certain affiliates are also subject to the Equal Credit Opportunity Act of 1974, which prohibits creditors from discriminating against loan applicants on the basis of race, color, sex, age or marital status, and the Fair Credit Reporting Act of 1970, which requires lenders to supply applicants with the name and address of the reporting agency if the applicant is denied credit. We are also subject to various other federal and state securities laws regulating our activities. In addition, our manager is subject to the Employee Retirement Income Security Act of 1974.
The NASAA Guidelines have been adopted by various state agencies charged with protecting the interests of investors. Administrative fees, loan fees, and other compensation paid to our manager and its affiliates would be generally limited by the NASAA Guidelines. These Guidelines also include certain investment procedures and criteria, which are required for new loan investments. We are not required to comply with NASAA Guidelines; however, we voluntarily comply with applicable NASAA Guidelines unless a majority of our unaffiliated directors determines that it is in our best interest to diverge from such NASAA Guidelines.
Because our business is regulated, the laws, rules and regulations applicable to us are subject to modification and change. There can be no assurance that laws, rules or regulations will not be adopted in the future that could make compliance much more difficult or expensive, restrict our ability to invest in or service loans, further limit or restrict the amount of commissions, interest and other charges earned on loans, or otherwise adversely affect our business or prospects.
Employees
We have no employees. Our manager has provided and will continue to provide most of the employees necessary for our operations, except as described below regarding Strategix Solutions, LLC. As of December 31, 2012, the Vestin entities had a total of 16 full-time and no part-time employees. Except as hereinafter noted, all employees are at-will employees and none are covered by collective bargaining agreements. John Alderfer, our former CFO, is a party to an employment, non-competition, confidentiality and consulting contract with Vestin Group, Inc., the parent company of our manager, through December 31, 2016.
During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services. Strategix Solutions also provides accounting and financial reporting services to VRM I and Fund III. Our CFO and other members of our accounting staff are employees of Strategix Solutions. Strategix Solutions is managed by LL Bradford and Company, LLC ("LL Bradford"), a certified public accounting firm that has provided non-audit accounting services to us. The principal manager of LL Bradford was a former officer of our manager from April 1999 through January 1, 2005. Strategix Solutions is owned by certain partners of LL Bradford, none of whom are currently or were previously officers of our manager. On January 14, 2013, Eric Bullinger resigned from his position as Chief Financial officer of Vestin Realty Mortgage I, Inc. and Vestin Realty Mortgage II, Inc and the equivalent of Chief Financial Officer of Vestin Fund III, LLC (hereafter referred to collectively as the (“Vestin Entities”). On January 14, 2013, the Board of Directors appointed Tracee Gress as the Chief Financial Officer of the Vestin Entities (or the equivalent thereof in the case of Vestin Fund III. LLC). As of December 31, 2012, Strategix Solutions dedicates to us a total of three full time employees.
Available Information
Our Internet website address is www.vestinrealtymortgage2.com. We make available free of charge through http://phx.corporate-ir.net/phoenix.zhtml?c=193758&p=irol-sec our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practical after such material is electronically filed with or furnished, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, to the United States Securities and Exchange Commission (“SEC”). Further, a copy of this annual report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operations of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov. Information contained on our website does not constitute a part of this Report on Form 10-K.
Our manager shares office facilities through a sublease, in Las Vegas, Nevada, with its parent corporation, Vestin Group. In March 2010, Vestin Group entered into a ten–year lease agreement for office facilities in Las Vegas, Nevada.
Please refer to Note N - Legal Matters Involving The Manager and Note O - Legal Matters Involving The Company in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K for information regarding legal proceedings, which discussion is incorporated herein by reference.
None.
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common stock is traded on the Nasdaq Global Select Market under the symbol VRTB and began trading on May 1, 2006. The price per share of common stock presented below represents the highest and lowest sales price for our common stock on the Nasdaq Global Select Market.
| 2012 | | High | | | Low | |
| | | | | | | |
| First Quarter | | $ | 1.55 | | | $ | 1.09 | |
| Second Quarter | | $ | 1.73 | | | $ | 1.10 | |
| Third Quarter | | $ | 1.68 | | | $ | 1.10 | |
| Fourth Quarter | | $ | 1.58 | | | $ | 1.22 | |
| 2011 | | High | | | Low | |
| | | | | | | |
| First Quarter | | $ | 1.64 | | | $ | 1.01 | |
| Second Quarter | | $ | 1.52 | | | $ | 1.02 | |
| Third Quarter | | $ | 1.65 | | | $ | 1.10 | |
| Fourth Quarter | | $ | 1.40 | | | $ | 1.08 | |
Holders
As of March 28, 2013, there were approximately 1,158 holders of record of 12,069,805 shares of our common stock.
Dividend Policy
During June 2008, our Board of Directors decided to suspend the payment of dividends. No dividends were declared during the years ended December 31, 2012 or 2011. In light of our accumulated loss, we do not expect to pay dividends in the foreseeable future.
Recent Sales of Unregistered Securities
None
Equity Compensation Plan Information
None
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On March 21, 2007, our board of directors authorized the repurchase of up to $10 million worth of our common stock. Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions. We are not obligated to purchase any shares. Subject to applicable securities laws, repurchases may be made at such times and in such amounts, as our manager deems appropriate. As of December 31, 2011 we had a total of 2,276,580 shares of treasury stock of which 189,378 were received as a part of a settlement in the amount of approximately $0.2 million. On this date we retired 2,087,202 shares leaving a balance of 189,378 at a cost of approximately $0.2 million. No shares were purchased pursuant to this plan, however, during 2012 we received and purchased 461,600 shares of treasury stock through settlement agreements and retired 650,978. As of December 31, 2012 we have no treasury stock
The following is a summary of our stock acquisitions during the year ended December 31, 2012, as required by Regulation S-K, Item 703.
| Period | | (a) Total Number of Shares Purchased | | | (b) Average Price Paid per Share | | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | |
| January 1 – January 31, 2012 | | | -- | | | $ | -- | | | | -- | | | $ | 2,461,802 | |
| February 1 – February 29, 2012 | | | -- | | | | -- | | | | -- | | | | 2,461,802 | |
| March 1 – March 31, 2012 | | | -- | | | | -- | | | | -- | | | | 2,461,802 | |
| April 1 – April 30, 2012 | | | -- | | | | -- | | | | -- | | | | 2,461,802 | |
| May 1 – May 31, 2012 | | | 14,374 | | | | 1.53 | | | | -- | | | | 2,447,428 | |
| June 1 – June 30, 2012 | | | -- | | | | -- | | | | -- | | | | 2,447,428 | |
| July 1 – July 31, 2012 | | | -- | | | | -- | | | | -- | | | | 2,447,428 | |
| August 1 – August 31, 2012 | | | 447,226 | | | | 1.40 | | | | -- | | | | 2,000,202 | |
| September 1 – September 30, 2012 | | | -- | | | | -- | | | | -- | | | | 2,000,202 | |
| October 1 – October 31, 2012 | | | -- | | | | -- | | | | -- | | | | 2,000,202 | |
| November 1 – November 30, 2012 | | | -- | | | | -- | | | | -- | | | | 2,000,202 | |
| December 1 – December 31, 2012 | | | -- | | | | -- | | | | -- | | | | 2,000,202 | |
| | | | | | | | | | | | | | | | | |
| Total | | | 461,600 | | | $ | 1.40 | | | | -- | | | $ | 2,000,202 | |
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following is a financial review and analysis of our financial condition and results of operations for the years ended December 31, 2012 and 2011. This discussion should be read in conjunction with our financial statements and accompanying notes and other detailed information regarding us appearing elsewhere in this report on Form 10-K.
FORWARD-LOOKING STATEMENTS
Certain statements in this report, including, without limitation, matters discussed under this Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with the consolidated financial statements, related notes, and other detailed information included elsewhere in this report on Form 10-K. We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are not historical fact are forward-looking statements. Certain of these forward-looking statements can be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,” or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, which could cause actual results, performance or achievements to differ materially from future results, performance or achievements. These forward-looking statements are based on our current beliefs, intentions and expectations. These statements are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties as discussed in this Annual Report on Form 10-K and in our other securities filings with the Securities and Exchange Commission (“SEC”). Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and involve inherent risks and uncertainties. Our estimates of the value of collateral securing our loans may change, or the value of the underlying property could decline subsequent to the date of our evaluation. As a result, such estimates are not guarantees of the future value of the collateral. The forward-looking statements contained in this report are made only as of the date hereof. We undertake no obligation to update or revise information contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
OVERVIEW
Our primary business objective is to generate income while preserving principal by investing in real estate loans. We believe there is a significant market opportunity to make real estate loans to owners and developers of real property whose financing needs are not met by other real estate lenders. The loan underwriting standards utilized by our manager and the mortgage brokers we utilize are less strict than those used by many institutional real estate lenders. In addition, one of our competitive advantages is our ability to approve loan applications more quickly than many institutional lenders. As a result, in certain cases, we may make real estate loans that are riskier than real estate loans made by many institutional lenders such as commercial banks. However, in return, we seek a higher interest rate and our manager takes steps to mitigate the lending risks such as imposing a lower loan-to-value ratio. While we may assume more risk than many institutional real estate lenders, in return, we seek to generate higher yields from our real estate loans.
Our operating results are affected primarily by: (i) the amount of capital we have to invest in real estate loans, (ii) the level of real estate lending activity in the markets we service, (iii) our ability to identify and work with suitable borrowers, (iv) the interest rates we are able to charge on our loans and (v) the level of non-performing assets, foreclosures and related loan losses which we may experience.
Our operating results have been adversely affected by increases in allowances for loan losses and increases in non-performing assets. This negative trend accelerated sharply during the year ended December 31, 2008 and continues to affect our operations. See Note F – Real Estate Held for Sale and “Non-performing Loans” in Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K.
Non-performing assets, net of allowance for loan losses, totaled approximately $2.9 million or 7% of our total assets as of December 31, 2012, as compared to approximately $20.3 million or 39% of our total assets as of December 31, 2011. See Note F – Real Estate Held for Sale and Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K.
We believe that the current level of our non-performing assets is a direct result of the deterioration of the economy and credit markets several years ago. As the economy weakened and credit became more difficult to obtain, many of our borrowers who develop and sell commercial real estate projects were unable to complete their projects, obtain takeout financing or were otherwise adversely impacted. While the general economy has improved, the commercial real estate markets in many of the areas where we make loans continue to suffer from difficult conditions. Our exposure to the negative developments in the credit markets and general economy has likely been increased by our business strategy, which entails more lenient underwriting standards and expedited loan approval procedures. Moreover, declining real estate values in the principal markets in which we operate has in many cases eroded the current value of the security underlying our loans.
Continued weakness in the commercial real estate markets and constraints on commercial lending may continue to have an adverse impact upon our markets. In addition, even as real estate markets begin to recover, our operating results may be negatively impacted as we work through loans made prior to or during the great recession. This may result in further defaults on our loans, and we might be required to record additional reserves based on decreases in market values, or we may be required to restructure additional loans. This increase in loan defaults has materially affected our operating results and led to the suspension of dividends to our stockholders. For additional information regarding our non-performing loans see “Non-Performing Loans” in Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K.
During the year ended December 31, 2012, we funded 18 loans totaling approximately $23.1 million. During the year ended December 31, 2011, we funded 15 loans totaling approximately $14.3 million. As of December 31, 2012, our loan-to-value ratio was 58.06%, net of allowances for loan losses, on a weighted average basis generally using updated appraisals. Additional increases in loan defaults accompanied by additional declines in real estate values, as evidenced by updated appraisals generally prepared on an “as-is-basis,” will have a material adverse effect on our financial condition and operating results.
As of December 31, 2012, we have provided a specific reserve allowance for one non-performing loan and one performing loan based on updated appraisals of the underlying collateral and our evaluation of the borrower for these loans, obtained by our manager. For further information regarding allowance for loan losses, refer to Note D – Investments in Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Our capital, subject to a 3% reserve, will constitute the bulk of the funds we have available for investment in real estate loans.
As of December 31, 2012, our loans were in the following states: California, Michigan, Nevada, Ohio, Utah and Texas.
At our annual meeting held on December 15, 2011, a majority of the shareholders voted to amend our Bylaws to expand our investment policy to include investments in and acquisition, management and sale of real property or the acquisition of entities involved in the ownership or management of real property. A majority of the shareholders also voted to amend our charter to change the terms of our existence from its expiration date of December 31, 2020 to perpetual existence. As a result, we will begin to acquire, manage, renovate, reposition, sell or otherwise invest in real property or acquire entities involved in the ownership or management of real property.
We announced on May 30, 2012 that we entered into a definitive merger agreement with VRM I pursuant to which our wholly owned subsidiary, VRM Merger Sub would merge with and into VRM I in a stock-for-stock merger, with VRM I surviving the transaction as our wholly owned subsidiary. The merger agreement expired by its terms on December 31, 2012 and the merger did not occur. The Board of Directors may reevaluate a potential merger with VRM I in the future.
SUMMARY OF FINANCIAL RESULTS
The Year Ended December 31, 2012
In 2012, we suffered a net loss of $13,050,000, largely as a result of a non-cash charge of nearly $11 million with respect to a secured, second position loan on the Sheraton Forth Worth Hotel in Texas. We have entered into a contract to sell the property; however, the proposed buyer has sought an extension of time to close the sale and no assurance can be given that the sale will be consummated. If the sale is completed, the bulk of the sales proceeds will be used to satisfy amounts due the senior lender and we might realize a small gain to the extent there are any remaining funds from the sale. See the discussion below under “Discontinued Operations” and Note G to our financial statements.
| Total Revenue: | | 2012 | | | 2011 | | | $ Change | | | % Change | |
| Interest income from investment in real estate loans | | $ | 1,390,000 | | | $ | 1,244,000 | | | $ | 146,000 | | | | 12 | % |
| Gain related to pay off of real estate loan, including recovery of allowance for loan loss | | | 2,861,000 | | | | 249,000 | | | | 2,612,000 | | | | 1049 | % |
| Gain related to pay off of notes receivable, including recovery of allowance for notes receivable | | | 333,000 | | | | 505,000 | | | | (172,000 | ) | | | (34 | %) |
| Other income | | | -- | | | | 89,000 | | | | (89,000 | ) | | | (100 | %) |
| Total | | $ | 4,584,000 | | | $ | 2,087,000 | | | $ | 2,497,000 | | | | 120 | % |
Our revenue from interest income is dependent upon the balance of our investment in real estate loans and the interest earned on these loans. Interest income has been adversely affected by the level of modified loans and the reduction in new lending activity during the first three quarters of 2011. We experienced an increase in new lending activity in the second half of 2011 and first three quarters of 2012 which has produced an overall increase in interest income for 2012. It is premature at this time to predict whether or not the increase in lending activity in the second half of 2011 and first three quarters of 2012 will be sustained in the future. Payments on fully reserved loans resulted in an increase in gain related to payoff of real estate loan and other income. During May 2012, we, VRM I and Fund III sold our portions of a fully reserved loan of $14.0 million, of which our portion was $12.6 million to a third party. We received a payment of approximately $1.0 million. Additionally, we received approximately $1.8 million in recoveries for investments in real estate which previously included allowance for loan loss. Gain related to recovery of allowance for notes receivable decreased in 2012 due to a reduction in receipts on notes receivable.
For additional information see Note D – Investments in Real Estate Loans and Note J - Notes Receivable of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K.
| Operating Expenses: | | 2012 | | | 2011 | | | $ Change | | | % Change | |
| Management fees – related party | | $ | 1,066,000 | | | $ | 1,098,000 | | | $ | (32,000 | ) | | | (3 | %) |
| Provision for loan loss | | | 1,264,000 | | | | 1,028,000 | | | | 236,000 | | | | 23 | % |
| Interest expense | | | 3,000 | | | | 206,000 | | | | (203,000 | ) | | | (99 | %) |
| Professional fees | | | 1,375,000 | | | | 1,419,000 | | | | (44,000 | ) | | | (3 | %) |
| Consulting fees | | | 203,000 | | | | 217,000 | | | | (14,000 | ) | | | (6 | %) |
| Insurance | | | 292,000 | | | | 304,000 | | | | (12,000 | ) | | | (4 | %) |
| Other | | | 165,000 | | | | 310,000 | | | | (145,000 | ) | | | (47 | %) |
| Total | | $ | 4,368,000 | | | $ | 4,582,000 | | | $ | (214,000 | ) | | | (5 | %) |
Operating expenses were 5% lower during the year ended December 31, 2012 than in 2011. Provision for loan losses were lower during 2012 than in 2011 due to values of the collateral securing our loans remaining constant. Interest expense decreased during the year ended December 31, 2012 due to the decreased balance of secured borrowings which were paid off in 2011. Professional fees have modestly decreased due to a decrease in pending litigation due to less non-performing loans and pursuing foreclosures and collections from borrowers. Consulting fees have decreased due to credit review by a third party. Decrease in other operating expense is primarily due to decrease in directors fees and travel costs.
See “Specific Loan Allowance” in Note D – Investments in Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K.
| Non-operating Income (Loss): | | 2012 | | | 2011 | | | $ Change | | | % Change | |
| Interest income from banking institutions | | $ | 1,000 | | | $ | 7,000 | | | $ | (6,000 | ) | | | (86 | %) |
| Settlement income | | | 90,000 | | | | -- | | | | 90,000 | | | | 100 | % |
| Recovery from settlement with loan guarantor | | | 746,000 | | | | -- | | | | 746,000 | | | | 100 | % |
| Gain on sale of marketable securities | | | 15,000 | | | | -- | | | | 15,000 | | | | 100 | % |
| Discounted professional fees | | | -- | | | | 1,580,000 | | | | (1,580,000 | ) | | | (100 | %) |
| Settlement expense | | | (66,000 | ) | | | -- | | | | (66,000 | ) | | | (100 | %) |
| Total | | $ | 786,000 | | | $ | 1,587,000 | | | $ | (801,000 | ) | | | (50 | %) |
In July, 2012, we along with our Manager, VRM I, Vestin Group, Vestin Originations and Michael Shustek entered into a Settlement Agreement and Mutual Release with the State of Hawaii and The Huntington National Bank as successor trustee to the Rightstar Trusts. We and VRM I were entitled to receive a portion of certain net proceeds from certain claims from third parties through litigation, settlement or otherwise. The agreement resulted in income of $145,000, of which our portion was approximately $90,000. In addition, during January 2011, we, VRM I and Fund III were awarded unsecured claims up to $3.6 million from a bankruptcy settlement with a guarantor of certain loans. Pursuant to the terms of the settlement, we received payment of approximately $543,000 during April 2012 and $203,000 in July 2012. The purchase and subsequent sale of marketable securities occurred during 2012, resulting in a gain of approximately $15,000. No such transactions occurred in 2011. During 2011 we received approximately $1.6 million in discounts related to past legal bills. There was no similar discount received in 2012. During the year ended December 31, 2012 we settled two lawsuits which resulted in an expense of approximately $66,000. In addition, we received from the plaintiff 14,374 shares of the company’s stock that was held as treasury stock, but since retired.
See Note Note O – Legal Matters Involving The Company of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K.
| Discontinued Operations, net of income taxes: | | 2012 | | | 2011 | | | $ Change | | | % Change | |
| Net gain on sale of real estate held for sale | | $ | 50,000 | | | $ | 1,258,000 | | | $ | (1,208,000 | ) | | | (96 | %) |
| Expenses related to real estate held for sale | | | (1,716,000 | ) | | | (867,000 | ) | | | (849,000 | ) | | | (98 | %) |
| Gain from settlement related to asset held for sale | | | -- | | | | 430,000 | | | | (430,000 | ) | | | (100 | %) |
| Write-downs on real estate held for sale | | | (1,469,000 | ) | | | (1,951,000 | ) | | | 482,000 | | | | 25 | % |
| Income (loss) from assets held for sale, net of income taxes | | | (10,917,000 | ) | | | 1,889,000 | | | | (12,806,000 | ) | | | (678 | %) |
| Total | | $ | (14,052,000 | ) | | $ | 759,000 | | | $ | (14,811,000 | ) | | | (1951 | %) |
Expenses related to discontinued operations increased by approximately $14.8 million during 2012 compared to 2011. Discontinued operations relate to properties that have been foreclosed on and are recorded as assets held for sale. This variance is primarily due to the anticipated loss of net assets held for sale based on recent offers of 1701 Commerce. In addition, during 2011 we recorded net gains on sale of real estate held for sale for properties sold in prior periods due to payments on settlement agreements. During 2012 we sold two properties held for sale, which resulted in net gain on sale of approximately $50,000. Expenses related to real estate held for sale increased due to acquiring two properties during 2012. The increase in expenses related to real estate held for sale is due to Attorney fees for the bankruptcy and other operating expenses for 1701 Commerce. During December 2011 we sold our controlling interest in Hawaii Funeral Services which resulted in a gain of approximately $0.4 million. No similar transaction occurred in 2012. Write downs on real estate held for sale were higher during 2011 than they were during 2012. Due to the values of the collateral securing our loans remaining consistent. Income (loss) was received from two different assets held for sale during the years ended 2012 and 2011.
See Note F — Real Estate Held For Sale and Note G – Asset Held For Sale and Discontinued Operations of the Notes to the Financial Statements included in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K.
CAPITAL AND LIQUIDITY
Liquidity is a measure of a company’s ability to meet potential cash requirements, including ongoing commitments to fund lending activities and general operating purposes. Subject to a 3% reserve, we generally seek to use all of our available funds to invest in real estate assets. Distributable cash flow generated from such loans is paid out to our stockholders, in the form of a dividend. We do not anticipate the need for hiring any employees, acquiring fixed assets such as office equipment or furniture, or incurring material office expenses during the next twelve months. We may pay our manager an annual management fee of up to 0.25% of the aggregate capital received by Fund II and us from the sale of shares or membership units.
During the year ended December 31, 2012, net cash flows used in operating activities were approximately $3.3 million. Operating cash flows were used for the payment of normal operating expenses such as management fees, accounting fees, legal bills and expenses related to real estate held for sale. Cash flows related to investing activities consisted of cash used by loan investments in new real estate loans of approximately $23.0 million, an investment in MVP Realty Advisors of approximately $1.5 million, and investment in assets held for sale of approximately $0.1 million. In addition, cash flows related to investing activities consisted of cash provided by loan payoffs and sale of investments in real estate loans to third parties of approximately $22.9 million, proceeds from the sale of REO and nonrefundable extension fees on REO of approximately $6.7 million, proceeds of $0.7 million from unsecured claims awarded from settlement with guarantor and proceeds from notes receivable of approximately $0.3 million. In addition, the Bankruptcy Court issued an order to deny the dismissal of the bankruptcy and required 1701 Commerce to deposit $1 million as additional collateral with the court, of which our portion is $0.9 million. Cash flows used in financing activities consisted of cash for payments on notes payable of approximately $0.2 million to finance our directors and officers insurance policy and purchase of treasury stock for approximately $0.7 million.
At December 31, 2012, we had approximately $10.0 million in cash, $0.6 million in marketable securities – related party and approximately $40.2 million in total assets. We intend to meet short-term working capital needs through a combination of proceeds from loan payoffs, loan sales, sales of real estate held for sale and/or borrowings. We believe we have sufficient working capital to meet our operating needs during the next 12 months.
We have no current plans to sell any new shares. Although a small percentage of our shareholders have elected to reinvest their dividends, we suspended payment of dividends in June 2008 and at this time are not able to predict when dividend payments will resume. Accordingly, we do not expect to issue any new shares through our dividend reinvestment program in the foreseeable future.
When economic conditions permit, we may seek to expand our capital resources through borrowings from institutional lenders or through securitization of our loan portfolio or similar arrangements. No assurance can be given that, if we should seek to borrow additional funds or to securitize our assets, we would be able to do so on commercially attractive terms. Our ability to expand our capital resources in this manner is subject to many factors, some of which are beyond our control, including the state of the economy, the state of the capital markets and the perceived quality of our loan portfolio.
We are considering various other options to enhance the Company’s capital resources. We are seeking to raise funds through the private placement of various classes of promissory notes, some of which would be secured by certain of our real estate owned properties. Our ability to raise any significant funds through such private placements in unknown.
During April 2012, we contributed $1,000 for a 40% interest in MVPRA, the manager of an affiliated REIT. Mr. Shustek, through a wholly owned company named MVP Capital Partners, LLC (“MVPCP”), contributed $1,500 for a 60% interest in MVPRA. We and MVPCP anticipate providing additional funds to MVPRA, either in the form of capital contributions or loans. The amount and nature of such funding arrangements cannot be determined at this time. As of December 31, 2012, we and MVPCP have loaned approximately $1.5 million and approximately $1.6 million, respectively to MVPRA related to MVP REIT, Inc.
We maintain working capital reserves of approximately 3% in cash and cash equivalents, certificates of deposits and short-term investments or liquid marketable securities. This reserve is available to pay expenses in excess of revenues, satisfy obligations of underlying properties, expend money to satisfy our unforeseen obligations and for other permitted uses of working capital. As of March 28, 2013, we have met our 3% reserve requirement.
Investments in Real Estate Loans Secured by Real Estate Portfolio
We offer five real estate loan products consisting of commercial property, construction, acquisition and development, land, and residential loans. The effective interest rates on all product categories range from 6% to 15%. Revenue by product will fluctuate based upon relative balances during the period. We had investments in 17 real estate loans, as of December 31, 2012, with a balance of approximately $27.4 million as compared to investments in 24 real estate loans as of December 31, 2011, with a balance of approximately $58.0 million.
For additional information on our investments in real estate loans, refer to Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K.
Asset Quality and Loan Reserves
As a commercial real estate lender willing to invest in riskier loans, rates of delinquencies, foreclosures or losses on our loans could be higher than those generally experienced in the commercial mortgage lending industry during this period of economic slowdown and recession. Problems in the sub-prime residential mortgage market have adversely affected the general economy and the availability of funds for commercial real estate developers. We believe this lack of available funds has led to an increase in defaults on our loans. Furthermore, problems experienced in U.S. credit markets from 2007 through 2009 reduced the availability of credit for many prospective borrowers. While credit markets have generally improved, the commercial real estate markets in our principal areas of operation have not recovered, thereby resulting in continuing constraints on the availability of credit in these markets. These problems have made it more difficult for our borrowers to obtain the anticipated re-financing necessary in many cases to pay back our loans. Thus, we have had to work with some of our borrowers to either modify, restructure and/or extend their loans in order to keep or restore the loans to performing status. Our manager will continue to evaluate our loan portfolio in order to minimize risk associated with current market conditions.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2012 and 2011 we do not have any interests in off-balance sheet special purpose entities nor do we have any interests in non-exchange traded commodity contracts.
RELATED PARTY TRANSACTIONS
From time to time, we may acquire or sell investments in real estate loans from/to our manager or other related parties pursuant to the terms of our Management Agreement without a premium. No gain or loss is recorded on these transactions, as it is not our intent to make a profit on the purchase or sale of such investments. The purpose is generally to diversify our portfolio by syndicating loans, thereby providing us with additional capital to make additional loans. For further information regarding related party transactions, refer to Note H – Related Party Transactions in the Notes to our Consolidated Financial Statements in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K.
CRITICAL ACCOUNTING ESTIMATES
Revenue Recognition
Interest income on loans is accrued by the effective interest method. We do not accrue interest income from loans once they are determined to be non-performing. A loan is considered non-performing when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due.
The following table presents a sensitivity analysis, averaging the balance of our loan portfolio at the end of the last six quarters, to show the impact on our financial condition at December 31, 2012, from fluctuations in weighted average interest rate charged on loans as a percentage of the loan portfolio:
| Changed Assumption | | Increase (Decrease) in Interest Income | |
| Weighted average interest rate assumption increased by 1.0% or 100 basis points | | $ | 419,000 | |
| Weighted average interest rate assumption increased by 5.0% or 500 basis points | | $ | 2,091,000 | |
| Weighted average interest rate assumption increased by 10.0% or 1,000 basis points | | $ | 4,182,000 | |
| Weighted average interest rate assumption decreased by 1.0% or 100 basis points | | $ | (419,000 | ) |
| Weighted average interest rate assumption decreased by 5.0% or 500 basis points | | $ | (2,091,000 | ) |
| Weighted average interest rate assumption decreased by 10.0% or 1,000 basis points | | $ | (4,182,000 | ) |
The purpose of this analysis is to provide an indication of the impact that the weighted average interest rate fluctuations would have on our financial results. It is not intended to imply our expectation of future revenues or to estimate earnings. We believe that the assumptions used above are appropriate to illustrate the possible material impact on the consolidated financial statements.
Allowance for Loan Losses
We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment in our investment in real estate loans portfolio. Our manager’s estimate of losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan. Additions to the allowance are provided through a charge to earnings and are based on an assessment of certain factors, which may indicate estimated losses on the loans. Actual losses on loans are recorded as a charge-off or a reduction to the allowance for loan losses. Subsequent recoveries of amounts previously charged off are added back to the allowance or included as income.
The following table presents a sensitivity analysis to show the impact on our financial condition at December 31, 2012, from increases and decreases to our allowance for loan losses as a percentage of the loan portfolio:
| Changed Assumption | | Increase (Decrease) in Allowance for Loan Losses | |
| Allowance for loan losses assumption increased by 1.0% of loan portfolio | | $ | 274,000 | |
| Allowance for loan losses assumption increased by 5.0% of loan portfolio | | $ | 1,369,000 | |
| Allowance for loan losses assumption increased by 10.0% of loan portfolio | | $ | 2,738,000 | |
| Allowance for loan losses assumption decreased by 1.0% of loan portfolio | | $ | (274,000 | ) |
| Allowance for loan losses assumption decreased by 5.0% of loan portfolio | | $ | (1,369,000 | ) |
| Allowance for loan losses assumption decreased by 10.0% of loan portfolio | | $ | (2,738,000 | ) |
Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property. As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the mortgage lending industry. We and our manager generally approve loans more quickly than other real estate lenders and, due to our expedited underwriting process, there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to a borrower and the security.
We may discover additional facts and circumstances as we continue our efforts in the collection and foreclosure processes. This additional information often causes management to reassess its estimates. In recent years, we have revised estimates of our allowance for loan losses. Circumstances that may cause significant changes in our estimated allowance include, but are not limited to:
| | · | Declines in real estate market conditions that can cause a decrease in expected market value; |
| | · | Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes; |
| | · | Lack of progress on real estate developments after we advance funds. We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances. After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances; |
| | · | Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed upon property; and |
| | · | Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property. |
Real Estate Held for Sale
Real estate held for sale includes real estate acquired through foreclosure and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property's estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions. The carrying values of real estate held for sale are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.
RECENT ACCOUNTING PRONOUNCEMENTS
No new accounting pronouncements have been defined that would materially impact our financial statements.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | Page |
| | |
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 23 |
| | |
| CONSOLIDATED FINANCIAL STATEMENTS | |
| Consolidated Balance Sheets | 24 |
| Consolidated Statements of Operations | 25 |
| Consolidated Statements of Other Comprehensive Income (loss) | 26 |
| Consolidated Statements of Equity and Other Comprehensive Loss | 27 |
| Consolidated Statements of Cash Flows | 28 |
| Notes to the Consolidated Financial Statements | 30 |
| | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Vestin Realty Mortgage II, Inc.
We have audited the accompanying consolidated balance sheets of Vestin Realty Mortgage II, Inc. (the “Company”) as of December 31, 2012 and 2011 and the related consolidated statements of operations, other comprehensive income (loss) equity and other comprehensive loss, and cash flows for each of the two years in the period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vestin Realty Mortgage II, Inc. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
/s/ JLK Rosenberger, LLP
Irvine, California
March 28, 2013
VESTIN REALTY MORTGAGE II, INC. | |
| | |
| CONSOLIDATED BALANCE SHEETS | |
| | |
| ASSETS | |
| | | December 31, 2012 | | | December 31, 2011 | |
| | | | | | | |
| Assets | | | | | | |
| Cash | | $ | 10,098,000 | | | $ | 9,226,000 | |
| Investment in marketable securities - related party | | | 592,000 | | | | 592,000 | |
| Interest and other receivables, net of allowance of $2,428,000 at December 31, 2012 and $5,468,000 at December 31, 2011 | | | 22,000 | | | | 14,000 | |
| Notes receivable, net of allowance of $20,700,000 at December 31, 2012 and $17,250,000 at December 31, 2011 | | | -- | | | | -- | |
| Real estate held for sale | | | 2,619,000 | | | | 10,767,000 | |
| Investment in real estate loans, net of allowance for loan losses of $2,500,000 at December 31, 2012 and $26,247,000 at December 31, 2011 | | | 24,880,000 | | | | 31,777,000 | |
| Due from related parties | | | 333,000 | | | | 110,000 | |
| Investment in and note receivable from MVP Realty Advisors, LLC | | | 1,534,000 | | | | -- | |
| Other assets | | | 127,000 | | | | 149,000 | |
| Total assets | | $ | 40,205,000 | | | $ | 52,635,000 | |
| LIABILITIES AND EQUITY | |
| Liabilities | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 1,080,000 | | | $ | 753,000 | |
| Notes payable | | | 25,000 | | | | 25,000 | |
| Deferred gain on sale of HFS | | | 6,000 | | | | 102,000 | |
| Total liabilities | | | 1,111,000 | | | | 880,000 | |
| | | | | | | | | |
| Commitments and contingencies | | | | | | | | |
| | | | | | | | | |
Equity Stockholders’ equity | | | | | | | | |
| Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued | | | -- | | | | -- | |
| Treasury stock, at cost, 0 shares at December 31, 2012 and 189,378 at December 31, 2011 | | | -- | | | | (190,000 | ) |
| Common stock, $0.0001 par value; 100,000,000 shares authorized; 12,069,805 shares issued and outstanding at December 31, 2012, and 12,720,783 shares issued and 12,531,405 outstanding at December 31, 2011 | | | 1,000 | | | | 1,000 | |
| Additional paid-in capital | | | 270,150,000 | | | | 271,005,000 | |
| Accumulated deficit | | | (231,066,000 | ) | | | (219,070,000 | ) |
| Accumulated other comprehensive income | | | 9,000 | | | | 9,000 | |
| Total stockholders’ equity | | | 39,094,000 | | | | 51,755,000 | |
| | | | | | | | | |
| Total liabilities and equity | | $ | 40,205,000 | | | $ | 52,635,000 | |
VESTIN REALTY MORTGAGE II, INC. | |
| | |
| CONSOLIDATED STATEMENTS OF OPERATIONS | |
| | | For the Year Ended | |
| | | 12/31/2012 | | | 12/31/2011 | |
| | | | | | | |
| Revenues | | | | | | |
| Interest income from investment in real estate loans | | $ | 1,390,000 | | | $ | 1,244,000 | |
| Gain related to pay off of real estate loan, including recovery of allowance for loan loss | | | 2,861,000 | | | | 249,000 | |
| Gain related to pay off of notes receivable, including recovery of allowance for notes receivable | | | 333,000 | | | | 505,000 | |
| Other income | | | -- | | | | 89,000 | |
| Total revenues | | | 4,584,000 | | | | 2,087,000 | |
| Operating expenses | | | | | | | | |
| Management fees - related party | | | 1,066,000 | | | | 1,098,000 | |
| Provision for loan loss | | | 1,264,000 | | | | 1,028,000 | |
| Interest expense | | | 3,000 | | | | 206,000 | |
| Professional fees | | | 1,375,000 | | | | 1,419,000 | |
| Consulting fees | | | 203,000 | | | | 217,000 | |
| Insurance | | | 292,000 | | | | 304,000 | |
| Other | | | 165,000 | | | | 310,000 | |
| Total operating expenses | | | 4,368,000 | | | | 4,582,000 | |
| Income (loss) from operations | | | 216,000 | | | | (2,495,000 | ) |
| Non-operating income (loss) | | | | | | | | |
| Interest income from banking institutions | | | 1,000 | | | | 7,000 | |
| Recovery from settlement with loan guarantor | | | 746,000 | | | | -- | |
| Gain on sale of marketable securities | | | 15,000 | | | | -- | |
| Settlement income | | | 90,000 | | | | -- | |
| Discounted professional fees | | | -- | | | | 1,580,000 | |
| Settlement expense | | | (66,000 | ) | | | -- | |
| Total other non-operating income, net | | | 786,000 | | | | 1,587,000 | |
| Provision for income taxes | | | -- | | | | -- | |
| Income (loss) from continuing operations | | | 1,002,000 | | | | (908,000 | )) |
| Discontinued operations, net of income taxes | | | | | | | | |
| Net gain on sale of real estate held for sale | | | 50,000 | | | | 1,258,000 | |
| Expenses related to real estate held for sale | | | (1,716,000 | ) | | | (867,000 | ) |
| Write-downs on real estate held for sale | | | (1,469,000 | ) | | | (1,951,000 | ) |
| Gain related to HFS settlement | | | -- | | | | 430,000 | |
| Income (loss) from assets held for sale, net of income taxes | | | (10,917,000 | ) | | | 1,889,000 | |
| Total income (loss) from discontinued operations | | | (14,052,000 | ) | | | 759,000 | |
| | | | | | | | | |
| Net loss | | | (13,050,000 | ) | | | (149,000 | ) |
| Allocation to non-controlling interest – related party | | | 1,054,000 | | | | (718,000 | ) |
| | | | | | | | | |
| Net loss attributable to common stockholders | | $ | (11,996,000 | ) | | $ | (867,000 | ) |
| Basic and diluted loss per weighted average common share | | | | | | | | |
| Continuing operations | | $ | 0.08 | | | $ | (0.07 | ) |
| Discontinued operations | | | (1.05 | ) | | | 0.00 | |
| Total basic and diluted loss per weighted average common share | | $ | (0.97 | ) | | $ | (0.07 | ) |
| Dividends declared per common share | | $ | -- | | | $ | -- | |
| Weighted average common shares outstanding | | | 12,354,428 | | | | 12,984,982 | |
VESTIN REALTY MORTGAGE II, INC. |
| |
| CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS) |
| |
| | | For The Year Ended | |
| | | 12/31/2012 | | | 12/31/2011 | |
| | | | | | | |
| Net loss | | $ | (13,050,000 | ) | | $ | (149,000 | ) |
| | | | | | | | | |
| Unrealized holding gain on available-for-sale securities – related party | | | -- | | | | 46,000 | |
| | | | | | | | | |
| Comprehensive loss | | | (13,050,000 | ) | | | (103,000 | ) |
| Net (income) loss attributable to noncontrolling interest | | | 1,054,000 | | | | (718,000 | ) |
| | | | | | | | | |
| Comprehensive loss attributable to Vestin Realty Mortgage II, Inc. | | $ | (11,996,000 | ) | | $ | (821,000 | ) |
| | | | | | | | | |
VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED STATEMENTS OF EQUITY AND OTHER COMPREHENSIVE LOSS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Treasury Stock | | | Common Stock | | | | | | | | | | | | | | | | | | | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Additional Paid-in- Capital | | | Accumulated Deficit | | | Accumulated Other Comprehensive Loss | | | Common shares held by trusts related to assets held for sale | | | Noncontrolling Interest – Related Party | | | Total | |
| Stockholders' Equity at December 31, 2010 | | | 1,857,850 | | | $ | (6,907,000 | ) | | | 13,139,513 | | | $ | 1,000 | | | $ | 278,550,000 | | | $ | (218,203,000 | ) | | $ | (37,000 | ) | | $ | (648,000 | ) | | $ | 5,379,000 | | | $ | 58,135,000 | |
| Net Income (Loss) | | | | | | | | | | | | | | | | | | | | | | | (867,000 | ) | | | | | | | | | | | 718,000 | | | | (149,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized Gain on Marketable Securities - Related Party | | | | | | | | | | | | | | | | | | | | | | | | | | | 46,000 | | | | | | | | | | | | 46,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (103,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Distributions – Related Party | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (440,000 | ) | | | (440,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Disposition of Assets Held for Sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 648,000 | | | | (5,657,000 | ) | | | (5,009,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Retire Treasury Stock | | | (2,276,580 | ) | | | 7,545,000 | | | | | | | | -- | | | | (7,545,000 | ) | | | | | | | | | | | | | | | | | | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Purchase of Treasury Stock | | | 608,108 | | | | (828,000 | ) | | | (608,108 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | (828,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stockholders' Equity at December 31, 2011 | | | 189,378 | | | $ | (190,000 | ) | | | 12,531,405 | | | $ | 1,000 | | | $ | 271,005,000 | | | $ | (219,070,000 | ) | | $ | 9,000 | | | $ | -- | | | $ | -- | | | $ | 51,755,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Loss | | | | | | | | | | | | | | | | | | | | | | | (11,996,000 | ) | | | | | | | | | | | (1,054,000 | ) | | | (13,050,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized Gain on Marketable Securities - Related Party | | | | | | | | | | | | | | | | | | | | | | | | | | | -- | | | | | | | | | | | | -- | |
| Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (13,050,000 | ) |
| Write-off of Assets Held for Sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,054,000 | | | | 1,054,000 | |
| Retire Treasury Stock | | | (650,978 | ) | | | 855,000 | | | | | | | | -- | | | | (855,000 | ) | | | | | | | | | | | | | | | | | | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Purchase of Treasury Stock | | | 461,600 | | | | (665,000 | ) | | | (461,600 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | (665,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stockholders' Equity at December 31, 2012 | | | -- | | | $ | -- | | | | 12,069,805 | | | $ | 1,000 | | | $ | 270,150,000 | | | $ | (231,066,000 | ) | | $ | 9,000 | | | $ | -- | | | $ | -- | | | $ | 39,094,000 | |
The accompanying notes are an integral part of these consolidated financial statements.
VESTIN REALTY MORTGAGE II, INC. | |
| | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |
| | |
| | | For the Year Ended | |
| | | 12/31/2012 | | | 12/31/2011 | |
| Cash flows from operating activities: | | | | | | |
| Net loss | | $ | (13,050,000 | ) | | $ | (149,000 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Write-downs on real estate held for sale | | | 1,469,000 | | | | 1,951,000 | |
| Gain on sale of real estate held for sale | | | (50,000 | ) | | | (1,258,000 | ) |
| Gain related to recovery from settlement with loan guarantor | | | (746,000 | ) | | | -- | |
| Gain on proceeds from settlement | | | (90,000 | ) | | | -- | |
| Gain on sale of marketable securities | | | (15,000 | ) | | | -- | |
| Loss from assets held for sale | | | 10,917,000 | | | | -- | |
| Recovery of allowance for doubtful notes receivable included in other income | | | (333,000 | ) | | | (505,000 | ) |
| Gain related to recovery of allowance for loan loss | | | (2,861,000 | ) | | | (249,000 | ) |
| Provision for loan loss | | | 1,264,000 | | | | 1,028,000 | |
| Amortized interest income | | | -- | | | | (26,000 | ) |
| Change in operating assets and liabilities: | | | | | | | | |
| Interest and other receivables | | | (6,000 | ) | | | 2,105,000 | |
| Assets held for sale, net of liabilities | | | -- | | | | (590,000 | ) |
| Due to/from related parties, net | | | (223,000 | ) | | | 601,000 | |
| Deferred gain on sale of Hawaii Funeral Services, LLC | | | (96,000 | ) | | | -- | |
| Other assets | | | 241,000 | | | | 220,000 | |
| Accounts payable and accrued liabilities | | | 325,000 | | | | (3,860,000 | ) |
| Net cash used in operating activities | | $ | (3,254,000 | ) | | $ | (732,000 | ) |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Investments in real estate loans | | $ | (23,069,000 | ) | | $ | (14,337,000 | ) |
| Purchase of investments in real estate loans from: | | | | | | | | |
| VRM I | | | (370,000 | ) | | | -- | |
| Proceeds from loan payoffs | | | 18,316,000 | | | | 6,416,000 | |
| Sale of investments in real estate loans to: | | | | | | | | |
| VRM I | | | 1,000,000 | | | | -- | |
| Other related parties | | | -- | | | | 500,000 | |
| Third parties | | | 3,622,000 | | | | 2,743,000 | |
| Proceeds related to real estate held for sale | | | 6,737,000 | | | | 479,000 | |
| Proceeds from settlement income | | | 90,000 | | | | -- | |
| Investment in and note receivable from MVP Realty Advisors, LLC | | | (1,534,000 | ) | | | -- | |
| Investment in assets held for sale | | | (900,000 | ) | | | -- | |
| Proceeds on nonrefundable extension fees on real estate held for sale | | | 24,000 | | | | 89,000 | |
| Proceeds from sale of asset held for sale | | | -- | | | | 9,369,000 | |
| Proceeds from note receivable | | | 333,000 | | | | 505,000 | |
| Proceeds from settlement with loan guarantor | | | 746,000 | | | | -- | |
| Sale of marketable securities | | | 1,026,000 | | | | -- | |
| Purchase of marketable securities | | | (1,011,000 | ) | | | -- | |
| Purchase of marketable securities – related party | | | -- | | | | (6,000 | ) |
| Net cash provided by investing activities | | $ | 5,010,000 | | | $ | 5,758,000 | |
| Cash flows from financing activities: | | | | | | | | |
| Principal payments on notes payable | | $ | (219,000 | ) | | $ | (1,518,000 | ) |
| Distributions to holder of noncontrolling interest – related party | | | -- | | | | (440,000 | ) |
| Cash used for pay down on secured borrowings | | | -- | | | | (1,088,000 | ) |
| Purchase of treasury stock at cost | | | (665,000 | ) | | | (638,000 | ) |
| Net cash used in financing activities | | $ | (884,000 | ) | | $ | (3,684,000 | ) |
| | | | | | | | | |
| NET CHANGE IN CASH | | | 872,000 | | | | 1,342,000 | |
| Cash, beginning of period | | | 9,226,000 | | | | 7,884,000 | |
| Cash, end of period | | $ | 10,098,000 | | | $ | 9,226,000 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | |
| Supplemental disclosures of cash flows information: | | | | | | |
| Interest paid | | $ | 3,000 | | | $ | 206,000 | |
| | | | | | | | | |
| Non-cash investing and financing activities: | | | | | | | | |
| Retirement of treasury stock | | $ | 855,000 | | | $ | 7,545,000 | |
| Treasury stock acquired through settlement | | $ | -- | | | $ | (190,000 | ) |
| Write-off of notes receivable and related allowance | | $ | -- | | | $ | 8,090,000 | |
| Note payable relating to prepaid D & O insurance | | $ | 219,000 | | | $ | 219,000 | |
| Real estate held for sale acquired through foreclosure, net of prior allowance | | $ | 32,000 | | | $ | 160,000 | |
| Assets held for sale acquired, net of related liabilities and noncontrolling interest –related party | | $ | 8,963,000 | | | $ | -- | |
| Deferred gain on asset held for sale | | $ | -- | | | $ | 102,000 | |
| Investment in real estate loans by purchase of secured borrowings | | $ | -- | | | $ | 1,320,000 | |
| Accrued liabilities related to sale of asset held for sale | | $ | -- | | | $ | 38,000 | |
| Write-off of interest receivable and related allowance | | $ | 810,000 | | | $ | 160,000 | |
| Transfer of fully allowed interest receivable to notes receivable | | $ | 907,000 | | | $ | -- | |
| Adjustment to accrued interest and related allowance | | $ | (1,013,000 | ) | | $ | -- | |
| Adjustment to note receivable and related allowance for charge offs | | $ | -- | | | $ | 3,580,000 | |
| Transfer of fully allowed interest receivable and related allowance to real estate held for sale | | $ | 2,334,000 | | | $ | -- | |
| Investment in real estate loans and related allowances transferred to note receivable | | $ | 7,407,000 | | | $ | -- | |
| Unrealized gain on marketable securities - related party | | $ | -- | | | $ | 46,000 | |
VESTIN REALTY MORTGAGE II, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
NOTE A — ORGANIZATION
Vestin Realty Mortgage II, Inc. (“VRM II”) formerly Vestin Fund II, LLC (“Fund II”) invests in loans secured by real estate through deeds of trust or mortgages (hereafter referred to collectively as “deeds of trust” and as defined in our management agreement (“Management Agreement”) as “Mortgage Assets”). In addition we may invest in, acquire, manage or sell real property or acquire entities involved in the ownership or management of real property. We commenced operations in June 2001. References in this report to the “Company,” “we,” “us,” or “our” refer to Fund II with respect to the period prior to April 1, 2006 and to VRM II with respect to the period commencing on April 1, 2006.
We operated as a real estate investment trust (“REIT”) through December 31, 2011. We are not a mutual fund or an investment company within the meaning of the Investment Company Act of 1940, nor are we subject to any regulation thereunder. As a REIT, we were required to have a December 31 fiscal year end. We announced on March 28, 2012 that we terminated our election to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), effective for the tax year ending December 31, 2012. Under the Code, we will not be able to make a new election to be taxed as a REIT during the four years following December 31, 2012. Pursuant to our charter, upon the determination by the Board of Directors that we should no longer qualify as a REIT, the restrictions on transfer and ownership of shares set forth in Article VII of our charter ceased to be in effect and, accordingly, shares of the Company’s stock are no longer be subject to such restrictions.
Vestin Group, Inc. (“Vestin Group”), a Delaware corporation, owns a significant majority of Vestin Mortgage, LLC, a Nevada limited liability company, which is our manager (the “manager” or “Vestin Mortgage”). On January 7, 2011, Vestin Mortgage converted from a corporation to a limited liability company. Michael Shustek, the CEO and managing member of our manager and CEO, President and a director of us, wholly owns Vestin Group, which is engaged in asset management, real estate lending and other financial services through its subsidiaries. Our manager, prior to June 30, 2006, also operated as a licensed Nevada mortgage broker and was generally engaged in the business of brokerage, placement and servicing of commercial loans secured by real property. Since February 14, 2011, the business of brokerage and placement of real estate loans have been performed by affiliated or non-affiliated mortgage brokers, including Advant Mortgage, LLC (“MVP Mortgage”), a licensed Nevada mortgage broker, which is indirectly wholly owned by Mr. Shustek.
As discussed in Part I, Item 1, Business of this Annual Report on Form 10-K, we are managed by Vestin Mortgage pursuant to a management agreement. Vestin Mortgage is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”), as the successor by merger to Vestin Fund I, LLC (“Fund I”) and Vestin Fund III, LLC (“Fund III”). These entities were formed to invest in real estate loans. VRM I has investment objectives similar to ours, and Fund III is in the process of an orderly liquidation of its assets.
The consolidated financial statements include the accounts of VRM II, Vestin TRS II, Inc., our wholly owned subsidiary, 1701 Commerce, LLC and Hawaii Funeral Service, LLC, in which we had a controlling interest through December 1, 2011. Our consolidated financial statements also included the accounts of the funeral merchandise and service trusts, cemetery merchandise and service trusts, and cemetery perpetual care trusts (“Trusts”) in which we had a variable interest and HFS was the primary beneficiary through December 1, 2011. All significant inter-company transactions and balances have been eliminated in consolidation.
During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services. Strategix Solutions also provides accounting and financial reporting services to VRM I and Fund III. Our CFO and other members of our accounting staff are employees of Strategix Solutions. Strategix Solutions is managed by LL Bradford and Company, LLC ("LL Bradford"), a certified public accounting firm that has provided non-audit accounting services to us. The principal manager of LL Bradford was a former officer of our manager from April 1999 through January 1, 2005. Strategix Solutions is owned by certain partners of LL Bradford, none of whom are currently or were previously officers of our manager. On January 14, 2013, Eric Bullinger resigned his position as Chief Financial Officer of Vestin Realty Mortgage I, Inc. and Vestin Realty Mortgage II, Inc and the equivalent of Chief Financial Officer of Vestin Fund III, LLC (hereafter referred to collectively as the “Vestin Entities”). On January 14, 2013, the Board of Directors appointed Tracee Gress as the Chief Financial Officer of the Vestin Entities (or the equivalent thereof in the case of Vestin Fund III, LLC). As used herein, “management” means our manager, its executive officers and the individuals at Strategix Solutions who perform accounting and financial reporting services on our behalf.
NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”). Management has included all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented.
Management Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include interest-bearing and non-interest-bearing bank deposits, money market accounts, short-term certificates of deposit with original maturities of three months or less, and short-term instruments with a liquidation provision of one month or less.
Revenue Recognition
Interest is recognized as revenue on performing loans when earned according to the terms of the loans, using the effective interest method. We do not accrue interest income on loans once they are determined to be non-performing. A loan is non-performing when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due. Cash receipts will be allocated to interest income, except when such payments are specifically designated by the terms of the loan as principal reduction. Interest is fully allowed for on impaired loans and is recognized on a cash basis method.
Investments in Real Estate Loans
We may, from time to time, acquire or sell investments in real estate loans from or to our manager or other related parties pursuant to the terms of our Management Agreement without a premium. The primary purpose is to either free up capital to provide liquidity for various reasons, such as loan diversification, or place excess capital in investments to maximize the use of our capital. Selling or buying loans allows us to diversify our loan portfolio within these parameters. Due to the short-term nature of the loans we make and the similarity of interest rates in loans we normally would invest in, the fair value of a loan typically approximates its carrying value. Accordingly, discounts or premiums typically do not apply upon sales of loans and therefore, generally no gain or loss is recorded on these transactions, regardless of whether to a related or unrelated party.
Investments in real estate loans are secured by deeds of trust or mortgages. Generally, our real estate loans require interest only payments with a balloon payment of the principal at maturity. We have both the intent and ability to hold real estate loans until maturity and therefore, real estate loans are classified and accounted for as held for investment and are carried at amortized cost. Loans sold to or purchased from affiliates are accounted for at the principal balance and no gain or loss is recognized by us or any affiliate. Loan-to-value ratios are initially based on appraisals obtained at the time of loan origination and are updated, when new appraisals are received or when management’s assessment of the value has changed, to reflect subsequent changes in value estimates. Such appraisals are generally dated within 12 months of the date of loan origination and may be commissioned by the borrower.
The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company’s impaired loans include troubled debt restructuring, and performing and non-performing loans in which full payment of principal or interest is not expected. The Company calculates an allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of its collateral.
Loans that have been modified from their original terms are evaluated to determine if the loan meets the definition of a Troubled Debt Restructuring (“TDR”) as defined by ASC 310-40. When the Company modifies the terms of an existing loan that is considered a TDR, it is considered performing as long as it is in compliance with the modified terms of the loan agreement. If the modification calls for deferred interest, it is recorded as interest income as cash is collected.
Allowance for Loan Losses
We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment. Our manager’s estimate of losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan. Additions to the allowance are provided through a charge to earnings and are based on an assessment of certain factors, which may indicate estimated losses on the loans. Actual losses on loans are recorded first as a reduction to the allowance for loan losses. Generally, subsequent recoveries of amounts previously charged off are recognized as income.
Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property. As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the real estate lending industry. We and our manager generally approve loans more quickly than other real estate lenders and, due to our expedited underwriting process; there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to a borrower and the security.
Additional facts and circumstances may be discovered as we continue our efforts in the collection and foreclosure processes. This additional information often causes management to reassess its estimates. In recent years, we have revised estimates of our allowance for loan losses. Circumstances that have and may continue to cause significant changes in our estimated allowance include, but are not limited to:
| | · | Declines in real estate market conditions, which can cause a decrease in expected market value; |
| | · | Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes; |
| | · | Lack of progress on real estate developments after we advance funds. We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances. After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances; |
| | · | Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed property; and |
| | · | Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property. |
Discontinued Operations
We have reclassified for all periods presented in the accompanying consolidated statements of operations, the amounts related to discontinued operations and real estate held for sale, in accordance with the applicable accounting criteria. In addition, the assets and liabilities related to the discontinued operations are reported separately in the accompanying consolidated balance sheets as real estate held for sale, assets held for sale, and liabilities related to assets held for sale.
Real Estate Held for Sale
Real estate held for sale (“REO”) includes real estate acquired through foreclosure and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property's estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions. While pursuing foreclosure actions, we seek to identify potential purchasers of such property. It is not our intent to invest in or to own real estate as a long-term investment. We generally seek to sell properties acquired through foreclosure as quickly as circumstances permit, taking into account current economic conditions. The carrying values of REO are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.
Management classifies real estate as REO when the following criteria are met:
| | · | Management commits to a plan to sell the properties; |
| | · | The property is available for immediate sale in its present condition subject only to terms that are usual and customary; |
| | · | An active program to locate a buyer and other actions required to complete a sale have been initiated; |
| | · | The sale of the property is probable; |
| | · | The property is being actively marketed for sale at a reasonable price; and |
| | · | Withdrawal or significant modification of the sale is not likely. |
Real Estate Held For Sale – Seller-Financed
We occasionally finance sales of foreclosed properties (“seller-financed REO”) to third parties. In order to record a sale of real estate when we provide financing, the buyer of the real estate is required to make minimum initial and continuing investments. Minimum initial investments range from 10% to 25% based on the type of real estate sold. In addition, there are limits on commitments and contingent obligations incurred by a seller in order to record a sale.
Because we occasionally foreclose on loans with raw land or developments in progress, available financing for such properties is often limited and we frequently provide financing up to 100% of the selling price on these properties. In addition, we may make additional loans to the buyer to continue development of a property. Although sale agreements are consummated at closing, they lack adequate initial investment by the buyer to qualify as a sale transaction. These sale agreements are not recorded as a sale until the minimum requirements are met.
These sale agreements are recorded under the deposit method or cost recovery method. Under the deposit method, no profit is recognized and any cash received from the buyer is reported as a deposit liability on the balance sheet. Under the cost recovery method, no profit is recognized until payments by the buyer exceed the carrying basis of the property sold. Principal payments received will reduce the related receivable, and interest collections will be recorded as unrecognized gross profit on the balance sheet. The carrying values of these properties would be included in real estate held for sale – seller financed on the consolidated balance sheets, when applicable.
In cases where the investment by the buyer is significant (generally 20% or more) and the buyer has an adequate continuing investment, the purchase money debt is not subject to future subordination, and a full transfer of risks and rewards has occurred, we will use the full accrual method. Under the full accrual method, a sale is recorded and the balance remaining to be paid is recorded as a normal note. Interest is recorded as income when received.
Secured Borrowings
Secured borrowings provide an additional source of capital for our lending activity. Secured borrowings allow us to increase the diversification of our loan portfolio and to invest in loans that we might not otherwise invest in. We do not receive any fees for entering into secured borrowing arrangements; however, we may receive revenue for any differential of the interest spread, if applicable. Loans in which unaffiliated investors have participated through inter-creditor agreements (“Inter-creditor Agreements”) are accounted for as secured borrowings.
The Inter-creditor Agreements provide us additional funding sources for real estate loans whereby an unaffiliated investor (the “Investor”) may participate on a non-paripassu basis in certain real estate loans with us and/or VRM I (collectively, the “Lead Lenders”). In the event of borrower non-performance, the Inter-creditor Agreements generally provide that the Lead Lenders must repay the Investor’s loan amount either by (i) continuing to remit to the Investor the interest due on the participated loan amount; (ii) substituting an alternative loan acceptable to the Investor; or (iii) repurchasing the participation from the Investor for the outstanding balance plus accrued interest.
Additionally, an Investor may participate in certain loans with the Lead Lenders through Participation Agreements. In the event of borrower non-performance, the Participation Agreement may allow the Investor to be repaid up to the amount of the Investor’s investment prior to the Lead Lender being repaid. Real estate loan financing under the Participation Agreements are also accounted for as a secured borrowing. We do not receive any revenues for entering into secured borrowing arrangements.
Investment in Marketable Securities – Related Party
Investment in marketable securities – related party consists of stock in VRM I. The securities are stated at fair value as determined by the closing market prices as of December 31, 2012 and 2011. All securities are classified as available-for-sale.
We are required to evaluate our available-for-sale investment for other-than-temporary impairment charges. We will determine when an investment is considered impaired (i.e., decline in fair value below its amortized cost), and evaluate whether the impairment is other than temporary (i.e., investment value will not be recovered over its remaining life). If the impairment is considered other than temporary, we will recognize an impairment loss equal to the difference between the investment’s cost and its fair value.
According to the SEC Staff Accounting Bulletin, Topic 5: Miscellaneous Accounting, M - Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities, there are numerous factors to be considered in such an evaluation and their relative significance will vary from case to case. The following are a few examples of the factors that individually or in combination, indicate that a decline is other than temporary and that a write-down of the carrying value is required:
| | · | The length of the time and the extent to which the market value has been less than cost; |
| | · | The financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential; or |
| | · | The intent and ability of the holder to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. |
Fair Value Disclosures
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. “the exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. The established hierarchy for inputs used, in measuring fair value, maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect a company’s judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
| | · | Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. |
| | · | Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. |
| | · | Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement, which utilize the Company’s estimates and assumptions. |
If the volume and level of activity for an asset or liability have significantly decreased, we will still evaluate our fair value estimate as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. In addition, since we are a publicly traded company, we are required to make our fair value disclosures for interim reporting periods.
Basic and Diluted Earnings Per Common Share
Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted EPS is similar to basic EPS except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been exercised. We had no outstanding common share equivalents during the years ended December 31, 2012 and 2011.
Common Stock Dividends
During June 2008, our Board of Directors decided to suspend the payment of dividends. Our Board of Directors will closely monitor our operating results in order to determine when dividends should be reinstated; however, we do not expect the reinstatement of dividends in the foreseeable future.
Treasury Stock
On June 7, 2012, our Board of Directors (“Board”) approved the adoption of a prearranged stock repurchase plan intended to qualify for the safe harbor under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan”). Due to the postponement of the merger between VRM I and us, the 10b5-1 plan has been terminated. No shares were purchased pursuant to this plan, however, during 2012 we received and purchased 461,600 shares of treasury stock through settlement agreements and retired 650,978.
Segments
We are currently authorized to operate two reportable segments, investments in real estate loans and investments in real property. As of December 31, 2012, we had not commenced investing in real property.
Our objective is to invest approximately 97% of our assets in real estate loans and real estate investments, while maintaining approximately 3% as a working capital cash reserve. Current market conditions have impaired our ability to be fully invested in real estate loans. As of December 31, 2012, approximately 62% of our assets, net of allowance for loan losses, are classified as investments in real estate loans.
Reclassifications
Certain amounts in the December 31, 2011 consolidated financial statements have been reclassified to conform to the December 31, 2012 presentation.
Principles of Consolidation
Our consolidated financial statements include the accounts of VRM II, Vestin TRS II, Inc., our wholly owned subsidiary, 1701 Commerce, LLC and Hawaii Funeral Service, LLC, in which we had a controlling interest through December 1, 2011. Our consolidated financial statements also included the accounts of the funeral merchandise and service trusts, cemetery merchandise and service trusts, and cemetery perpetual care trusts (“Trusts”) in which we had a variable interest and HFS was the primary beneficiary through December 1, 2011. Intercompany balances and transactions have been eliminated in consolidation.
Business Combinations
In December 2007, the Financial Accounting Standards Board (FASB) revised the authoritative guidance for business combinations, establishing principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired (including goodwill), the liabilities assumed, and any noncontrolling interest in the acquiree. Subsequently, on April 1, 2009, the FASB amended and clarified certain aspects of its authoritative guidance on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. We apply the FASB authoritative guidance to all business combinations for which the acquisition date is on or after January 1, 2009, and to certain future income tax effects related to our prior business combinations, should they arise.
Noncontrolling Interests
The FASB issued authoritative guidance for noncontrolling interests in December 2007, which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as an unconsolidated investment, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, the guidance requires consolidated net income to be reported at amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest.
Income Taxes
The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred tax assets and liabilities for future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, they would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods. Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of December 31, 2012, tax years that remain subject to examination by major tax jurisdictions include the years ended December 31, 2009 through 2011.
NOTE C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
Financial instruments consist of cash, interest and other receivables, notes receivable, accounts payable and accrued liabilities, due to/from related parties and notes payable. The carrying values of these instruments approximate their fair values due to their short-term nature. Marketable securities – related party and investment in real estate loans are further described in Note L – Fair Value.
Financial instruments with concentration of credit and market risk include cash, interest and other receivables, marketable securities - related party, notes receivable, accounts payable, accrued liabilities and secured borrowings, due to/from related parties, notes payable, and loans secured by deeds of trust.
We maintain cash deposit accounts and certificates of deposit which, at times, may exceed federally-insured limits. To date, we have not experienced any losses. As of December 31, 2012 and 2011, we had no funds in excess of the federally-insured limits.
As of December 31, 2012, 55% and 24% of our loans were in Nevada and California, respectively, compared to 36%, 28% 19% and 15% of our loans were in Nevada, Arizona, Texas and California, respectively, as of December 31, 2011. As a result of this geographical concentration of our real estate loans, the downturn in the local real estate markets in these states has had a material adverse effect on us.
At December 31, 2012, the aggregate amount of loans to our three largest borrowers represented approximately 45% of our total investment in real estate loans. These real estate loans consisted of commercial and land loans, secured by properties located in Nevada and California, with a first lien position. Their interest rates are between 8% and 11%, and the aggregate outstanding balance is approximately $12.3 million. As of December 31, 2012, our largest loan, totaling approximately $6.7 million, is secured by property located in California, is a performing loan with an interest rate of 11%. The other two loans, secured by property in Nevada, each have an interest rate of 8% and are considered performing. At December 31, 2011, the aggregate amount of loans to our three largest borrowers represented approximately 53% of our total investment in real estate loans. These real estate loans consisted of commercial and land loans, secured by property located in Arizona, Texas and California, with a first lien position on the California loan and second lien positions on the Arizona and Texas loans. Their interest rates ranged between 8% and 15%, and the aggregate outstanding balance was approximately $30.7 million.
In prior periods, we had a significant concentration of credit risk with our largest borrowers. During the year ended December 31, 2011, four of our performing loans totaling approximately $17.9 million, of which our portion was approximately $9.9 million, accounted for approximately 58% of our interest income. Three of these loans were paid in full as of December 31, 2011. Loans funded during 2012 have diversified our portfolio.
The success of a borrower’s ability to repay its real estate loan obligation in a large lump-sum payment may be dependent upon the borrower’s ability to refinance the obligation or otherwise raise a substantial amount of cash. With the weakened economy, credit continues to be difficult to obtain and as such, many of our borrowers who develop and sell commercial real estate projects have been unable to complete their projects, obtain takeout financing or have been otherwise adversely impacted. In addition, an increase in interest rates over the loan rate applicable at origination of the loan may have an adverse effect on our borrower’s ability to refinance.
Common Guarantors
As of December 31, 2011, four loans totaling approximately $11.0 million had a common guarantor. These loans represented approximately 19.0% of our portfolio’s total value as of December 31, 2011. All four loans were considered performing as of December 31, 2011. These loans were either paid off or transferred to notes receivable, net of allowances for loan loss during 2012. For additional information regarding these loans, see Note J — Notes Receivable.
As of December 31 2012 and 2011, four and nine loans totaling approximately $5.8 million and $6.2 million, respectively, representing approximately 21.3% and 10.7%, respectively, of our portfolio’s total value, had a common guarantor. At December 31, 2012 and 2011 all loans were considered performing.
As of December 31, 2012 four loans totaling approximately $7.9 million representing approximately 28.9% of our portfolio’s total value had a common guarantor. As of December 31, 2012 all loans were considered performing.
NOTE D — INVESTMENTS IN REAL ESTATE LOANS
As of December 31, 2012 and 2011, most of our loans provided for payments of interest only with a “balloon” payment of principal payable in full at the end of the term. As of December 31, 2012, three loans had a variable interest rate adjusted quarterly at a rate of prime plus 3.30% (6.55% as of December 31, 2012). The balance on these loans was approximately $0.3 million as of December 31, 2012. We had not investments with variable interest rates as of December 31, 2011.
In addition, we may invest in real estate loans that require borrowers to maintain interest reserves funded from the principal amount of the loan for a period of time. At December 31, 2012 and 2011, we had no investments in real estate loans that had interest reserves.
Loan Portfolio
As of December 31, 2012, we had five available real estate loan products consisting of commercial, construction, acquisition and development, land and residential. The effective interest rates on all product categories range from 6% to 15% which includes performing loans that are being fully or partially accrued and will be payable at maturity. Revenue by product will fluctuate based upon relative balances during the period.
Investments in real estate loans as of December 31, 2012, were as follows:
| Loan Type | | Number of Loans | | | Balance * | | | Weighted Average Interest Rate | | | Portfolio Percentage | | | Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses | |
| | | | | | | | | | | | | | | | |
| Commercial | | | 15 | | | | 19,648,000 | | | | 9.06 | % | | | 71.76 | % | | | 62.32 | % |
| Land | | | 2 | | | | 7,732,000 | | | | 10.33 | % | | | 28.24 | % | | | 48.60 | % |
| Total | | | 17 | | | $ | 27,380,000 | | | | 9.42 | % | | | 100.00 | % | | | 58.06 | % |
Investments in real estate loans as of December 31, 2011, were as follows:
| Loan Type | | Number of Loans | | | Balance * | | | Weighted Average Interest Rate | | | Portfolio Percentage | | | Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses | |
| | | | | | | | | | | | | | | | |
| Residential | | | 1 | | | $ | 385,000 | | | | 8.00 | % | | | 0.66 | % | | | 61.41 | % |
| Commercial | | | 19 | | | | 40,050,000 | | | | 10.97 | % | | | 69.02 | % | | | 71.43 | % |
| Construction | | | 1 | | | | 6,656,000 | | | | 8.00 | % | | | 11.47 | % | | | 89.49 | % |
| Land | | | 3 | | | | 10,933,000 | | | | 10.75 | % | | | 18.85 | % | | | 64.15 | % |
| Total | | | 24 | | | $ | 58,024,000 | | | | 10.57 | % | | | 100.00 | % | | | 71.10 | % |
| * | Please see Balance Sheet Reconciliation below. |
The “Weighted Average Interest Rate” as shown above is based on the contractual terms of the loans for the entire portfolio including non-performing loans. The weighted average interest rate on performing loans only, as of December 31, 2012 and 2011, was 8.87% and 6.79%, respectively. Please see “Non-Performing Loans” and “Asset Quality and Loan Reserves” below for further information regarding performing and non-performing loans.
Loan-to-value ratios are generally based on the most recent appraisals and may not reflect subsequent changes in value and include allowances for loan losses. Recognition of allowance for loan losses will result in a maximum loan-to-value ratio of 100% per loan.
The following is a schedule of priority of real estate loans as of December 31, 2012 and 2011:
Loan Type | | Number of Loans | | | December 31, 2012 Balance* | | | Portfolio Percentage | | | Number of Loans | | | December 31, 2011 Balance* | | | Portfolio Percentage | |
| | | | | | | | | | | | | | | | | | | |
| First deeds of trust | | | 16 | | | $ | 26,682,000 | | | | 97.00 | % | | | 18 | | | $ | 28,684,000 | | | | 49.43 | % |
| Second deeds of trust | | | 1 | | | | 698,000 | | | | 3.00 | % | | | 6 | | | | 29,340,000 | | | | 50.57 | % |
| Total | | | 17 | | | $ | 27,380,000 | | | | 100.00 | % | | | 24 | | | $ | 58,024,000 | | | | 100.00 | % |
| * | Please see Balance Sheet Reconciliation below. |
The following is a schedule of contractual maturities of investments in real estate loans as of December 31, 2012:
Non-performing and past due loans (a) | | $ | 2,450,000 | |
January 2013 – March 2013(b) | | | 5,311,000 | |
April 2013 – June 2013(b) | | | 9,720,000 | |
July 2013 – September 2013(b) | | | 9,578,000 | |
| October 2013 – December 2013 | | | -- | |
| Thereafter | | | 321,000 | |
| | | | | |
| Total | | $ | 27,380,000 | |
| | (a) | Amounts include the balance of non-performing loans. |
| | (b) | Amounts include loans that have been or are in the process of being extended subsequent to March 28, 2013. |
The following is a schedule by geographic location of investments in real estate loans as of December 31, 2012 and 2011:
| | | December 31, 2012 Balance * | | | Portfolio Percentage | | | December 31, 2011 Balance * | | | Portfolio Percentage | |
| | | | | | | | | | | | | |
| Arizona | | $ | -- | | | | -- | | | $ | 16,108,000 | | | | 27.76 | % |
| California | | | 6,696,000 | | | | 24.46 | % | | | 8,564,000 | | | | 14.76 | % |
| Colorado | | | -- | | | | -- | | | | 895,000 | | | | 1.54 | % |
| Michigan | | | 2,160,000 | | | | 7.89 | % | | | -- | | | | -- | |
| Nevada | | | 15,151,000 | | | | 55.34 | % | | | 21,114,000 | | | | 36.39 | % |
| Ohio | | | 321,000 | | | | 1.17 | % | | | 323,000 | | | | 0.56 | % |
| Oregon | | | -- | | | | -- | | | | 46,000 | | | | 0.08 | % |
| Utah | | | 1,901,000 | | | | 6.94 | % | | | -- | | | | -- | |
| Texas | | | 1,151,000 | | | | 4.20 | % | | | 10,974,000 | | | | 18.91 | % |
| Total | | $ | 27,380,000 | | | | 100.00 | % | | $ | 58,024,000 | | | | 100.00 | % |
| * | Please see Balance Sheet Reconciliation below. |
| | Balance Sheet Reconciliation |
The following table reconciles the balance of the loan portfolio to the amount shown on the accompanying Consolidated Balance Sheets.
| | | December 31, 2012 Balance (a) | | | December 31, 2011 Balance (a) | |
| Balance per loan portfolio | | $ | 27,380,000 | | | $ | 58,024,000 | |
| Less: | | | | | | | | |
Allowance for loan losses (a) | | | (2,500,000 | ) | | | (26,247,000 | ) |
| Balance per consolidated balance sheet | | $ | 24,880,000 | | | $ | 31,777,000 | |
| | (a) | Please refer to Specific Reserve Allowance below. |
Non-Performing Loans
As of December 31, 2012, we had one loan considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due) compared to five loans as of December 31, 2011. This reduction was a result of receiving a payoff on one loan, a first position lender foreclosed on a fully allowed for second position loan, we extended another loan to a borrower in exchange for a principal payment which funds were borrowed from a related party and lastly, we foreclosed on a non-performing loan which is now reported as real estate held for sale. This loan is currently carried on our books at a value of $0, net of allowance for loan losses of approximately $2.5 million. Except as otherwise provided below, this loan has been placed on non-accrual of interest status and may be the subject of pending foreclosure proceedings. Our manager has commenced foreclosure proceedings on this loan, and has proceeded with legal action to enforce the personal guarantees as our manager deems appropriate.
At December 31, 2012, the following loan was non-performing:
| Loan Type | | Number Of Non-Performing Loans | | | Balance at December 31, 2012 | | | Allowance for Loan Losses | | | Net Balance at December 31, 2012 | |
Commercial | | | 1 | | | $ | 2,450,000 | | | $ | (2,450,000 | ) | | $ | -- | |
| Total | | | 1 | | | $ | 2,450,000 | | | $ | (2,450,000 | ) | | $ | -- | |
At December 31, 2011, the following loans were non-performing:
| Loan Type | | Number Of Non-Performing Loans | | | Balance at December 31, 2011 | | | Allowance for Loan Losses | | | Net Balance at December 31, 2011 | |
| | | | | | | | | | | | | |
| Commercial | | | 5 | | | $ | 29,564,000 | | | $ | (19,570,000 | ) | | $ | 9,994,000 | |
| Total | | | 5 | | | $ | 29,564,000 | | | $ | (19,570,000 | ) | | $ | 9,994,000 | |
Asset Quality and Loan Reserves
Losses may occur from investing in real estate loans. The amount of losses will vary as the loan portfolio is affected by changing economic conditions and the financial condition of borrowers.
The conclusion that a real estate loan is uncollectible or that collectability is doubtful is a matter of judgment. On a quarterly basis, our manager evaluates our real estate loan portfolio for impairment. The fact that a loan is temporarily past due does not necessarily mean that the loan is non-performing. Rather, all relevant circumstances are considered by our manager to determine impairment and the need for specific reserves. Such evaluation, which includes a review of all loans on which full collectability may not be reasonably assured, considers among other matters:
| | · | Prevailing economic conditions; |
| | · | The nature and volume of the loan portfolio; |
| | · | The borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay; |
| | · | Evaluation of industry trends; and |
| | · | Estimated net realizable value of any underlying collateral in relation to the loan amount. |
Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses on an individual loan basis; we do not have a general allowance for loan losses. Additions to the allowance for loan losses are made by charges to the provision for loan loss. As of December 31, 2012, our ratio of total allowance for loan losses to total loans with an allowance for loan loss is approximately 92%. The following is a breakdown of allowance for loan losses related to performing and non-performing loans as of December 31, 2012 and 2011:
| | | As of December 31, 2012 | |
| | | Balance | | | Allowance for loan losses ** | | | Balance, net of allowance | |
| Non-performing loans – no related allowance | | $ | -- | | | $ | -- | | | $ | -- | |
| Non-performing loans – related allowance | | | 2,450,000 | | | | (2,450,000 | ) | | | -- | |
| Subtotal non-performing loans | | | 2,450,000 | | | | (2,450,000 | ) | | | -- | |
| | | | | | | | | | | | | |
| Performing loans – no related allowance | | | 24,655,000 | | | | -- | | | $ | 24,655,000 | |
| Performing loans – related allowance | | | 275,000 | | | | (50,000 | ) | | | 225,000 | |
| Subtotal performing loans | | | 24,930,000 | | | | (50,000 | ) | | | 24,880,000 | |
| | | | | | | | | | | | | |
| Total | | $ | 27,380,000 | | | $ | (2,500,000 | ) | | $ | 24,880,000 | |
| | | | | | | | | | | | | |
| | | As of December 31, 2011 | |
| | | Balance | | | Allowance for loan losses ** | | | Balance, net of allowance | |
| | | | | | | | | | |
| Non-performing loans – no related allowance | | $ | -- | | | $ | -- | | | $ | -- | |
| Non-performing loans – related allowance | | | 29,564,000 | | | | (19,570,000 | ) | | | 9,994,000 | |
| Subtotal non-performing loans | | | 29,564,000 | | | | (19,570,000 | ) | | | 9,994,000 | |
| | | | | | | | | | | | | |
| Performing loans – no related allowance | | | 17,064,000 | | | | -- | | | | 17,064,000 | |
| Performing loans – related allowance | | | 11,396,000 | | | | (6,677,000 | ) | | | 4,719,000 | |
| Subtotal performing loans | | | 28,460,000 | | | | (6,677,000 | ) | | | 21,783,000 | |
| | | | | | | | | | | | | |
| Total | | $ | 58,024,000 | | | $ | (26,247,000 | ) | | $ | 31,777,000 | |
| ** | Please refer to Specific Reserve Allowances below. |
Our manager evaluated our loans and, based on current estimates with respect to the value of the underlying collateral, believes that such collateral is sufficient to protect us against further losses of principal or interest. However, such estimates could change or the value of the underlying real estate could decline. Our manager will continue to evaluate our loans in order to determine if any other allowance for loan losses should be recorded.
| | Specific Reserve Allowances |
As of December 31, 2012, we have provided a specific reserve allowance for one non-performing loan and one performing loan based on updated appraisals of the underlying collateral and/or our evaluation of the borrower.
The following table is a roll-forward of the allowance for loan losses for the years ended December 31, 2012 and 2011 by loan type.
Loan Type | | Balance at 12/31/2011 | | | Specific Reserve Allocation | | | Loan Pay Downs | | | Write-off | | | Transfers to REO or Notes Receivable | | | Balance at 12/31/2012 | |
| Commercial | | $ | 22,392,000 | | | $ | 1,265,000 | | | $ | (14,934,000 | ) | | $ | (3,250,000 | ) | | $ | (2,973,000 | ) | | $ | 2,500,000 | |
| Construction | | | 2,971,000 | | | | -- | | | | -- | | | | -- | | | | (2,971,000 | ) | | | -- | |
| Land | | | 884,000 | | | | -- | | | | -- | | | | (884,000 | ) | | | -- | | | | -- | |
| Total | | $ | 26,247,000 | | | $ | 1,265,000 | | | $ | (14,934,000 | ) | | $ | (4,134,000 | ) | | $ | (5,944,000 | ) | | $ | 2,500,000 | |
Loan Type | | Balance at 12/31/2010 | | | Specific Reserve Allocation | | | Reduction in Specific Reserve Allocation | | | Loan Pay Downs | | | Transfers to REO and Notes Receivables | | | Balance at 12/31/2011 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial | | $ | 27,486,000 | | | $ | 507,000 | | | $ | (1,413,000 | ) | | $ | (248,000 | ) | | $ | (3,940,000 | ) | | $ | 22,392,000 | |
| Construction | | | 5,647,000 | | | | 61,000 | | | | -- | | | | -- | | | | (2,737,000 | ) | | | 2,971,000 | |
| Land | | | 424,000 | | | | 460,000 | | | | -- | | | | -- | | | | -- | | | | 884,000 | |
| Total | | $ | 33,557,000 | | | $ | 1,028,000 | | | $ | (1,413,000 | ) | | $ | (248,000 | ) | | $ | (6,677,000 | ) | | $ | 26,247,000 | |
Troubled Debt Restructuring
As of December 31, 2012 we had no loans which met the definition of a Troubled Debt Restructuring or TDR. As of December 31, 2011, we had seven TDR loans totaling approximately $30.8 million. When the Company modifies the terms of an existing loan that is considered TDR, it is considered performing as long as it is in compliance with the modified terms of the loan agreement. If the modification calls for deferred interest, it is recorded as interest income as cash is collected. Impairment on these loans is generally determined by the lesser of the value of the underlying collateral or the present value of expected future cash flows. During the previous 12 months there have been no loans that became TDR loans. The following is a breakdown of our TDR loans that were considered performing and non-performing as of December 31, 2011:
| As of December 31, 2011 | | | | | | | | | | | | | | | | | | |
| | | Total | | | Performing | | | Non-Performing | |
| Loan Type | | Number of Loans | | | Fund Balance | | | Number of Loans | | | Fund Balance | | | Number of Loans | | | Fund Balance | |
| | | | | | | | | | | | | | | | | | | |
| Commercial | | | 5 | | | $ | 16,740,000 | | | | 3 | | | $ | 2,821,000 | | | | 2 | | | $ | 13,919,000 | |
| Construction | | | 1 | | | | 6,655,000 | | | | 1 | | | | 6,655,000 | | | | -- | | | | -- | |
| Land | | | 1 | | | | 7,450,000 | | | | 1 | | | | 7,450,000 | | | | -- | | | | -- | |
| Total | | | 7 | | | $ | 30,845,000 | | | | 5 | | | $ | 16,926,000 | | | | 2 | | | $ | 13,919,000 | |
| | · | Commercial – As of December 31, 2011, we had 19 commercial loans, five of which were modified pursuant to TDR. On January 1, 2011, the principal amount of one of the non-performing loans was reduced by approximately $0.8 million. Interest only payments were due monthly from September 2010 until August 2011, at which point payments of interest and principal started and will continue until September 2013. The interest rate was adjusted from 12% to 4.5%. |
| | · | Construction – As of December 31, 2011 we had one construction loan modified pursuant to TDR. As of December 31, 2011, the loan continued to perform as required by the loan modifications. On September 20, 2011 we repurchased the secured borrowings portion of this loan for approximately $1.1 million. During January 2012, additional restructuring of this loan occurred. |
The reduction in TDR loans was a result of a first position lender foreclosed on a fully allowed for second position loan, reclassifying second position loans as fully allowed for notes receivable due to receiving payoffs on the first position loans releasing the collateral, receiving payoff on another property and accepting a deed-in-lieu on another property which is now reported as assets held for sale.
One of our loans that required interest only payments due at maturity was paid off in November 2012. We received payment for the full principal balance of the note of approximately $2.5 million, which included a recovery of a specific reserve allowance on the loan of approximately $0.9 million. The accrued interest income on the loan amounted to approximately $0.8 million, which was being fully reserved. When the principal balance was received, no interest income was collected and the interest and related allowances was written off.
For additional information, see “Non-Performing” of this Note D – Investments in Real Estate Loans and Note J – “Notes Receivable”.
Extensions
As of December 31, 2012, our manager had granted extensions on six outstanding loans totaling approximately $18.4 million of which our portion was approximately $15.4 million, pursuant to the terms of the original loan agreements, which permit extensions by mutual consent. Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take-out financing. Our manager generally grants extensions when a borrower is in compliance with the material terms of the loan, including, but not limited to the borrower’s obligation to make interest payments on the loan. In addition, if circumstances warrant, our manager may extend a loan that is in default as part of a work out plan to collect interest and/or principal. As of December 31, 2012, five loans that have been granted extensions are performing.
As of December 31, 2011, our manager had granted extensions on nine loans totaling approximately $41.4 million of which our portion was approximately $36.5 million, pursuant to the terms of the original loan agreements, which permit extensions by mutual consent, or as part of a TDR. Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take-out financing. Our manager generally grants extensions when a borrower is in compliance with the material terms of the loan, including, but not limited to the borrower’s obligation to make interest payments on the loan. In addition, if circumstances warrant, our manager may extend a loan that is in default as part of a work out plan to collect interest and/or principal. Subsequent to their extension, three of the 11 loans had become non-performing. The loans, which became non-performing after their extension, had a total principal amount at December 31, 2011, of $19.1 million, of which our portion is $16.9 million.
NOTE E — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY
As of December 31, 2012 and 2011, we owned 538,178 shares of VRM I’s common stock, representing approximately 8.50% of the total outstanding shares. The closing price of VRM I’s common stock on December 31, 2012, was $1.10 per share.
During the three months ended December 31, 2012, the trading price for VRM I’s common stock ranged from $1.05 to $1.38 per share. We will continue to evaluate our investment in marketable securities on a quarterly basis.
During January 2012, we purchased 60,000 shares of Annaly Capital Management Inc. This company is a publicly traded REIT and the shares were deemed to be part of our 3% working capital reserve. During February 2012, we sold all of our shares for a gain of $15,000.
NOTE F — REAL ESTATE HELD FOR SALE
At December 31, 2012, we held five properties with a total carrying value of approximately $2.7 million, which were acquired through foreclosure and recorded as investments in REO. Our REO are accounted for at the lower of cost or fair value less costs to sell with fair value based on appraisals and knowledge of local market conditions.
During May 2012, we, VRM I and Fund III foreclosed on a loan with a balance of approximately $6.0 million, of which our portion was approximately $46,000. The property includes 23 cottage units in a retirement community located in Eugene, Oregon.
During April 2012, we, VRM I and Fund III sold a property to an unrelated third party for approximately $0.5 million, of which our portion was approximately $0.2 million. This transaction resulted in a net gain for us of approximately $2,000. A consultation fee of approximately $17,000 was paid to our manager.
During December 2012, we and VRM I sold a property to an unrelated third party for approximately $8.3 million, of which our portion was approximately $6.9 million. This transaction resulted in a net loss for us of approximately $57,000. A consultation fee of approximately $0.3 million was paid to MVP Mortgage.
In August, 2011, VREO XVIII, LLC, an entity owned by us, VRM I and VF III entered into a purchase and sale agreement to sell one of the REO assets. The terms of the sale provided for an all cash transaction in the amount of $2 million, with a closing to occur within 60 days. The date of closing was extended several times, but ultimately, the transaction cancelled, as the purchaser was unable to obtain financing. In 2012, non-refundable extension fees in the amount of $30,000 were collected, of which our portion was approximately $24,000.
As of December 31, 2012, four of our five REO properties consisted of raw land which did not have operations. The following is a summary of the entire results of operations for one remaining REO property which has operations for the period from May 1, 2012 (foreclosure) through December 31, 2012, which our portion is approximately $2,000:
| | | For The Period from May 1, 2012 (foreclosure) through December 31, 2012 | |
| | | | |
| Revenue | | $ | 435,000 | |
| Expenses | | | (220,000 | ) |
| | | | | |
| Net Income | | $ | 215,000 | |
We seek to sell properties acquired through foreclosure as quickly as circumstances permit taking into account current economic conditions. The following table is a roll-forward of REO for the years ended December 31, 2012 and 2011.
| Beginning balance, January 1, 2012 | | $ | 10,767,000 | |
| Real estate held for sale acquired through foreclosure | | | 32,000 | |
| Proceeds on nonrefundable extension fee | | | (24,000 | ) |
| Write down | | | (1,469,000 | ) |
| Sale | | | (6,687,000 | ) |
| Ending balance, December 31, 2012 | | $ | 2,619,000 | |
| Beginning balance, January 1, 2011 | | $ | 12,808,000 | |
| Real estate held for sale acquired through foreclosure | | | 160,000 | |
| Proceeds on nonrefundable extension fee | | | (90,000 | ) |
| Write down | | | (1,951,000 | ) |
| Sale | | | (160,000 | ) |
| Ending balance, December 31, 2011 | | $ | 10,767,000 | |
NOTE G — ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
As of December 31, 2012
On February 7, 2012, we, VRM I and VF III entered into a Deed in Lieu Agreement with a borrower resolving the foreclosure of our secured loan which had matured on December 31, 2011, with a principal balance of approximately $11.8 million, of which our portion was approximately $9.9 million. Pursuant to the Deed in Lieu Agreement, our subsidiary 1701 Commerce, LLC (“1701 Commerce”) received a deed to the property which had secured the loan. The property, which is being operated as the Sheraton – Forth Worth, Texas, is held subject to approximately $46 million in secured claims and up to approximately $3 million in unsecured claims. On March 26, 2012, 1701 Commerce filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of Texas, Ft. Worth Division, to reorganize its financial affairs and to avoid a pending foreclosure of the property that had been scheduled by a mortgage lien holder and to preserve and protect 1701 Commerce’s equity and the interests of the other creditors of the property. Due to the uncertainty and disputes involving this property, we recorded this investment as Other Real Estate Owned on the balance sheet until August 23, 2012 when the Bankruptcy Court issued an order allowing the bankruptcy to proceed despite a motion to dismiss it and required 1701 Commerce to deposit $1 million as additional collateral with the court which was funded by us, VRM I and VF III. We hold an interest of approximately 90%, VRM I holds an interest of approximately 8% and Fund III holds an interest of approximately 2% in 1701 Commerce. Pursuant to the order issued on August 23, 2012, we include the operations through consolidation into our financial statements from this date forward.
The asset purchase agreement previously entered into on September 24, 2012 was cancelled by the buyer. On January 31, 2013, 1701 Commerce entered into a non-exclusive asset purchase agreement to sell its assets in consideration of $49 million. Upon the satisfaction of all conditions included in the agreement, subject to payment of certain approved claims and court approval, the balance of the purchase price will be paid by cash to 1701 Commerce. Pursuant to this sale agreement, this asset will be reported as an asset held for sale.
If the property is not sold by April 1, 2013, the senior lender is set to foreclose on April 2, 2013 and the Company will lose its interest in the property. Due to the uncertainties and timing, our Manager believes the net proceeds from this investment has been fully depleted therefore a loss of approximately $9.9 million has been recognized which is included in loss from assets held for sale for the year ended December 31, 2012.
Effective January 1, 2009, we adopted FASB's accounting standard related to business combination which required acquisition method of accounting to be used for all business combinations and for an acquirer to be identified for each business combination. This accounting standard requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. It also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with the standard).
Our acquisition of 1701 Commerce was accounted for in accordance with this standard and the Company has allocated the purchase price of 1701 Commerce based upon the estimated fair value of the net assets acquired and liabilities assumed and the fair value of the noncontrolling interest measured at the acquisition date. The estimated fair value of 1701 Commerce at the time of the acquisition totaled $9.9 million. Craig burr, an attorney licensed in the State of Nevada and Danny Stubbs were appointed as Senior Vice Presidents by 1701 Commerce for the purpose of acting as the legal administrator for actions necessary to be taken by 1701 Commerce.
We performed an allocation as of the date the order was issued by the Bankruptcy Court, August 23, 2012, as follows:
| Cash | | $ | 1,252,000 | |
| Receivables | | | 902,000 | |
| Inventory | | | 55,000 | |
| Other current assets | | | 297,000 | |
| Property and equipment | | | 52,578,000 | |
| Other assets | | | 1,413,000 | |
| Accounts payable and accrued liabilities | | | (7,281,000 | ) |
| Notes payable | | | (39,300,000 | ) |
| | | | | |
| Net assets | | $ | 9,916,000 | |
In addition, we estimated the fair value of the non-controlling interest at $1.0 million, which is 8% owned by VRM I and 2% by Fund III.
Assets and groups of assets and liabilities which comprise disposal groups are classified as “held for sale” when all of the following criteria are met: a decision has been made to sell, the assets are available for sale immediately, the assets are being actively marketed at a reasonable price in relation to the current fair value, a sale has been or is expected to be concluded within twelve months of the balance sheet date, and significant changes to the plan to sell are not expected. Assets held for sale are not depreciated.
Additionally, the operating results and cash flows related to these assets and liabilities are included in discontinued operations in the consolidated statements of operations and consolidated statements of cash flows for the year ended December 31, 2012.
The following is summary of the results of operations related to the assets held for sale for the period from September 1, 2012 (foreclosure) through December 31, 2012:
| | | | |
| Revenue | | $ | 4,955,000 | |
| Expenses | | | (14,872,000 | ) |
| | | | | |
| Net Income | | $ | (9,917,000 | ) |
As of December 31, 2011
As discussed in Note O – Legal Matters Involving the Company, during July 2010, we, VRM I and Vestin Mortgage acquired through foreclosure the RightStar property, which includes 4 cemeteries and 8 mortuaries in Hawaii. Subsequent to our foreclosure of this property, we and VRM I acquired our manager’s interest in this property for $500,000, of which our portion was $375,000. Our manager recorded no gain or loss as a result of this transaction. At the time of foreclosure, the RightStar assets were moved into Hawaii Funeral Services, LLC (“HFS”) of which we held 62% and VRM I held 38%.
Effective January 1, 2009, we adopted FASB's accounting standard related to business combination which required acquisition method of accounting to be used for all business combinations and for an acquirer to be identified for each business combination. This accounting standard requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. It also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with the standard).
Our acquisition of HFS was accounted for in accordance with this standard and the Company has allocated the purchase price of HFS based upon the estimated fair value of the net assets acquired and liabilities assumed and the fair value of the noncontrolling interest measured at the acquisition date. The estimated fair value of HFS at the time of the acquisition totaled $14.1 million.
We performed an allocation as of the foreclosure date as follows:
| Cash | | $ | 1,032,000 | |
| Preneed receivables | | | 4,063,000 | |
| Other receivable | | | 1,037,000 | |
| Inventory | | | 22,000 | |
| Property and equipment | | | 8,390,000 | |
| Other assets | | | 523,000 | |
| Accounts payable and accrued liabilities | | | (842,000 | ) |
| Deferred preneed revenues | | | (72,000 | ) |
| | | | | |
| Net assets | | $ | 14,153,000 | |
In addition, we estimated the fair value of the non-controlling interest at $5.4 million.
Immediately upon foreclosure, we committed to a plan to sell all interests in HFS, at which point we began classifying the related assets of HFS as assets held for sale, and the related liabilities as liabilities related to assets held for sale. Additionally, we have classified HFS’s results as discontinued operations.
Assets and groups of assets and liabilities which comprise disposal groups are classified as “held for sale” when all of the following criteria are met: a decision has been made to sell, the assets are available for sale immediately, the assets are being actively marketed at a reasonable price in relation to the current fair value, a sale has been or is expected to be concluded within twelve months of the balance sheet date, and significant changes to the plan to sell are not expected. Assets held for sale are not depreciated.
Additionally, the operating results and cash flows related to these assets and liabilities are included in discontinued operations in the consolidated statements of operations and consolidated statements of cash flows for the year ended December 31, 2011.
The following is summary of net assets held for sale through November 30, 2011:
| | | November 30, 2011 | |
| Assets: | | | |
| Current Assets | | $ | 3,772,000 | |
| Preneed cemetery receivables, net | | | 3,324,000 | |
| Cemetery property, at cost | | | 3,140,000 | |
| Property and equipment | | | 5,335,000 | |
| Deferred charges and other assets | | | 1,066,000 | |
| Cemetery trust investments | | | 44,210,000 | |
| Total assets | | $ | 60,847,000 | |
| | | | | |
| Liabilities: | | | | |
| Accounts payable and accrued liabilities | | $ | 1,120,000 | |
| Deferred preneed cemetery revenues | | | 1,752,000 | |
| Trusts’ corpus | | | 46,228,000 | |
| Total liabilities | | | 49,100,000 | |
| | | | | |
| Net assets held for sale | | $ | 11,747,000 | |
On December 1, 2011, we and VRM I closed the sale of its membership interests in HFS, including the variable interest entities of HFS, to NorthStar Hawaii, LLC (“NorthStar”). The sale was effected pursuant to a Membership Interest Purchase Agreement dated October 3, 2011. We received the entire purchase price at the closing resulting in net proceeds of $8,866,000. In addition to the net proceeds, we retained approximately $806,000 of the cash balance held by HFS and assumed accounts payables of approximately $38,000. Pursuant to terms of the agreement, we have an option to repurchase HFS under certain conditions from NorthStar in consideration of the full amount of the sales price for a period of 15 months following the closing of the transaction. As a result of this option, our net gain of approximately $102,000 has been recognized as “Deferred gain on sale of HFS” on the balance sheet. The gain will be recognized upon the expiration of this option.
As discussed in Note O – Legal Matters Involving the Company, in April 2006, the lenders of the loans made to RightStar, Inc. (“RightStar”) filed suit against the State of Hawaii listing 26 causes of action, including allegations that the State of Hawaii has illegally blocked the lender’s right to foreclose and take title to its collateral by inappropriately attaching conditions to the granting of licenses needed to operate the business, the pre-need trust funds and the perpetual care trust funds and that the State of Hawaii has attempted to force the lenders to accept liability for any statutory trust fund deficits while no such lender liability exists under the laws of the State of Hawaii. The State of Hawaii responded by filing allegations against Vestin Mortgage and us alleging that these Vestin entities improperly influenced the former RightStar trustees to transfer trust funds to us.
On May 9, 2007, we, VRM I, Vestin Mortgage, the State of Hawaii and Comerica Incorporated (“Comerica”) announced that an arrangement had been reached to auction the RightStar assets. The auction was not successful. On June 12, 2007, the court approved the resolution agreement, which provides that the proceeds of the foreclosure sale would be allocated in part to VRM I, Vestin Mortgage and us and in part to fund the trust’s statutory minimum balances. We, VRM I, Vestin Mortgage, the State of Hawaii and Comerica have pledged to cooperate to recover additional amounts owed to the trusts and the creditors from others. Should the recovery meet or exceed $9 million, all parties have agreed that no further litigation between the state of Hawaii and Vestin will be reinstituted related to the trust’s statutory minimum balances. The Vestin entities and the State of Hawaii signed a new agreement that would permit the foreclosure to proceed. On October 12, 2009, the State Court approved the agreement permitting the foreclosure to proceed. On January 25, 2010, the Circuit Court of the First Circuit for the State of Hawaii confirmed the right of us, VRM I and Vestin Mortgage, to acquire through foreclosure the RightStar assets.
An alleged trust deficiency ranging from $24.4 million to $32.7 million may have existed prior to our acquiring the RightStar properties through foreclosure. Under state law, such deficiencies are generally required to be funded. However, due to the agreement with the state of Hawaii and certain actuarial information obtained from third parties, no accrual has been recorded as of December 31, 2011.
We, VRM I., and our manager (collectively, “Vestin”) entered into a settlement agreement with Alternative Debt Portfolios, L.P. and Alternative Debt Portfolios, LLC (collectively, “ADP”). On September 22, 2008 a judgment was entered by the Hawaii Circuit Court in favor of Vestin against ADP in the amount of $1,119,000 plus interest. ADP filed an appeal with the Intermediate Court of Appeals for the State of Hawaii and put up a cash bond of $1,972,000. Both Vestin and ADP agreed to settle the appeal and on November 28, 2011 a Settlement and Mutual Release Agreement was agreed to whereby ADP received $800,000 from the cash bond. Vestin received the remainder of the cash bond, less fees pertaining to the settlement, in the amount of approximately $0.1 million. The parties agreed to a full release as part of the settlement.
NOTE H — RELATED PARTY TRANSACTIONS
Transactions with our Manager
From time to time, we may acquire or sell investments in real estate loans from/to our manager or other related parties. Pursuant to the terms of our Management Agreement, such acquisitions and sales are made without any mark up or mark down. No gain or loss is recorded on these transactions, as it is not our intent to make a profit on the purchase or sale of such investments. The purpose is generally to diversify our portfolio by syndicating loans, thereby providing us with additional capital to make additional loans.
Our manager is entitled to receive from us an annual management fee of up to 0.25% of our aggregate capital contributions received by us and Fund II from the sale of shares or membership units, paid monthly. The amount of management fees paid to our manager for the year ended December 31, 2012 and 2011 were approximately $1.1 million, during each period. A discount of 7% was applied to the July 2012 payment due to prepayment of five months fees in January 2012.
As of December 31, 2012 and 2011, our manager owned 92,699 of our common shares, representing approximately 0.7% of our total outstanding common stock for both periods.
As of December 31, 2012 and 2011, we had receivables from our manager of approximately $20,000 and $19,000, respectively.
Integrated Financial Associates, Inc. (“IFA”) entered into an Intercreditor Agreement (“Intercreditor Agreement”) with us in connection with a note of $23.1 million (the “Note”) of which our portion was $3.0 million. Pursuant to the Intercreditor Agreement, in the event that our interest in the Note was not repaid in full, IFA would be responsible to pay a monthly fee equal to one percent of the unpaid amount plus interest at the rate of 15% per annum. We are to receive the 15% interest per annum and our Manager has a claim to the monthly fee equal to one percent of the unpaid amount. IFA breached the Intercreditor Agreement and we obtained, on November 9, 2010, a judgment against IFA in the amount of approximately $4.0 million, plus, among other things, additional monthly fees and default interest. During March 2011, IFA filed a Chapter 11 bankruptcy petition. During May 2012, we entered into a Purchase and Sale Agreement (“Sale Agreement”) with TPKT, LLC (“TPKT”), owned by certain principals of IFA, whereby we agreed to assign our interest in the claim and judgment in exchange for $1,050,000 and the first $1,250,000 plus certain other amounts received on our portion of the Note. During May 2012, the outstanding fee due to our Manager was approximately $1.6 million. In order to resolve our Manager’s claim, our Manager received $500,000 in connection with the purchase by TPKT and waived any right to receive any amounts paid on our portion of the Note.
During May 2012, our manager received total consultation fee of approximately $17,000, related to the sale of a REO property owned by VRM I, Fund III and us.
During December 2012, MVP Mortgage received total consultation fee of approximately $0.3 million related to the sale of a REO property owned by VRM I, Fund III and us.
Transactions with Other Related Parties
As of December 31, 2012 and 2011, we owned 538,178 common shares of VRM I, representing approximately 8.5% of their total outstanding common stock for both periods.
As of December 31, 2012 and 2011, VRM I owned 537,078 of our common shares, representing approximately 4.4% of our total outstanding common stock for both periods.
As of December 31, 2012 and 2011, we had receivables from VRM I of approximately $0.2 million and $0.1 million, respectively, primarily related to legal fees.
As of December 31, 2011, Fund III owned 114,117 of our common shares, representing approximately 0.9% of our total outstanding common stock. On June 11, 2012, our Chairman and Chief Executive Officer, Michael Shustek purchased these shares from Fund III.
As of December 31, 2012, we had receivables from Fund III of $89,000. As of December 31, 2011, we had a payable to Fund III of approximately $13,000.
During 2012 we sold $1.0 million in investments in real estate loans to VRM I.
During 2012 we purchased $0.4 million in investments in real estate loans from VRM I.
NOTE I — INVESTMENT IN AND NOTE RECEIVABLE FROM MVP REALTY ADVISORS
Together with MVP Capital Partners LLC, which is owned by our Chairman and Chief Executive Officer, Michael Shustek, we have formed a Nevada limited liability company, MVP Realty Advisors, LLC (“MVPRA”). MVPRA acts as the advisor to MVP REIT, Inc., a Maryland corporation which was organized to invest in real estate and loans secured by real estate (“MVP REIT”). On April 16, 2012, MVP REIT filed a registration statement with the Securities and Exchange Commission, which was declared effective by the Securities and Exchange Commission on September 25, 2012. MVP REIT is organized as a publically registered, non-traded real estate investment trust (“REIT”). Under the terms of an Advisory Agreement between MVPRA and MVP REIT, MVPRA is entitled to certain fees for advisory and other management services rendered to MVP REIT.
During April 2012, we contributed $1,000 for a 40% interest in MVPRA. Mr. Shustek, through a wholly owned company named MVP Capital Partners, LLC (“MVPCP”), contributed $1,500 for a 60% interest in MVPRA. We and MVPCP anticipate providing additional funds to MVPRA, either in the form of capital contributions or loans. The amount and nature of such funding arrangements cannot be determined at this time. As of December 31, 2012, we and MVPCP have loaned approximately $1.5 million and approximately $1.6 million, respectively, to MVPRA related to MVP REIT, Inc.
Under the terms of the Operating Agreement which governs MVPRA, any loans we may make to MVPRA must be paid in full and we shall have received distributions of profits equal to our capital contributions prior to MVPCP receiving any distributions from MVPRA.
Our participation in MVPRA was approved by the independent members of our Board of Directors.
NOTE J — NOTES RECEIVABLE
During December 2006, we and VRM I entered into a settlement agreement in the amount of $1.5 million with the guarantors of a loan collateralized by a 126 unit (207 bed) assisted living facility in Phoenix, AZ, which we had foreclosed on. Our portion was approximately $1.3 million. The promissory note is payable in seven annual installments of $100,000 with an accruing interest rate of 7%, with the remaining note balance due in April 2013. During 2011, we had received $88,000 in regularly scheduled principal payments. Also during 2011, an agreement which would accept approximately $0.4 million as a final payment for the note was approved, of which approximately $0.3 million was received. The balance of this agreement of approximately $50,000 was fully reserved as of December 31, 2012. Payments will be recognized as income when received.
During July 2009, we, VRM I, and Fund III entered into a promissory note, totaling approximately $1.4 million, of which our portion is approximately $1.3 million, with the borrowers of a construction loan, as part of the repayment terms of the loan. In addition, we received a principal pay off on the loan of approximately $3.9 million, which reflected our book value of the loan, net of allowance for loan loss of approximately $2.4 million. The promissory note accrues interest over a 60-month period with an interest rate of 7%, with the first monthly payment due on the 37th month. The remaining note balance and accrued interest will be due at maturity. Payments will be recognized as income when received. The balance of approximately $1.4 million was fully reserved as of December 31, 2012.
During July 2009, we, VRM I, and Fund III entered into a promissory note, totaling approximately $1.3 million, of which our portion is approximately $1.2 million, with the borrowers of a construction loan, as part of the repayment terms of the loan. In addition, we received a principal pay off on the loan of approximately $1.6 million, which reflected our book value of the loan, net of allowance for loan loss of approximately $2.8 million. The promissory note accrues interest over a 60-month period with an interest rate of 7%, with the first monthly payment due on the 37th month. The remaining note balance and accrued interest will be due at maturity. Payments will be recognized as income when received. The balance of approximately $1.4 million was fully reserved as of December 31, 2012.
During December 2009, we and VRM I entered into a promissory note with the borrowers of a land loan, totaling approximately $6.1 million, of which our portion is approximately $5.6 million, as part of the sale of the land collateralizing the loan. In addition, we and VRM I received a principal payoff of $2.0 million, of which our portion was approximately $1.8 million, on the land loan. The remaining balance of approximately $1.2 million, of which our portion is approximately $1.1 million, was refinanced as a loan to the new owners of property. The promissory note is for a 60-month period, with an interest rate of 6.0%, with the first monthly payment due on December 10, 2014. Payments will be recognized as income when they are received. The balance of approximately $5.6 million was fully reserved as of December 31, 2012.
During July 2010, we entered into a promissory note, totaling $48,000 with the guarantor of a previous land loan. The remaining note balance of $2,500 as of December 31, 2011 has been paid in full during 2012.
As of November 30, 2010, we had five loans totaling approximately $19.0 million, of which our portion is approximately $1.1 million, before allowances totaling approximately $4.2 million, of which our portion is approximately $0.2 million, and were guaranteed by common guarantors. Pursuant to agreements entered into on March 16, 2009 and July 2, 2009, which modified these loans, three of these loans continued to be secured by real property and two became unsecured due to the permanent financing being obtained for less than the outstanding balance on the loans. On November 30, 2010, we entered into additional agreements to modify the terms related to these five loans in order to further enhance our investment. Pursuant to these additional agreements, we obtained an additional guarantor, interest in operating profits and any aggregate sales proceeds of $10.4 million less operating profits previously received related to these properties. The new guarantor is the managing member of the borrowing entities who is also the principal manager of L.L. Bradford and was a former officer of our manager from April 1999 through January 2005. In the event the total proceeds from the operating profits and sales proceeds do not equal $10.4 million, each borrower will execute a promissory note to pay us the deficiency, which shall be guaranteed by the guarantors, including the new guarantor. In addition, we agreed to release our deeds of trust on two of the three loans secured by real estate totaling $9.0 million, of which our portion is $0.5 million. As a result of releasing our deeds of trust we classified these loans as unsecured notes receivable for the same amount and recognized a full allowance on this balance.
During March 2011, we were awarded a deficiency judgment totaling $5.0 million related to a REO sold in a prior period. The balance accrues interest at the rate of 9% until paid in full. Provided all payments of approximately $3.0 million as outlined in the judgment are received, the remaining balance of judgment shall be forgiven. The balance of approximately $2.9 million was fully reserved as of December 31, 2012.
During March 2011, we were awarded a deficiency judgment totaling $2.8 million related to a REO sold in a prior period. The balance accrues interest at the rate of 9% until paid in full. Provided all payments of approximately $1.2 million as outlined in the judgment are received, the remaining balance of judgment shall be forgiven. The balance of approximately $1.2 million was fully reserved as of December 31, 2012.
During January 2012 we, VRM I and Fund III rewrote one of our existing loans. The interest rate of this loan was changed from 3% paying monthly with 5% accruing to 7% paid monthly. The amount of the loan allowance of approximately $3.0 million and the interest currently accrued on the existing loan, which was fully allowed for, of approximately $1.0 million was moved to notes receivable. In April 2012, we received a payment on the new loan which was less than the amount owed. The difference of approximately $0.8 million was recorded as a loan allowance as of March 31, 2012 and was reclassified to note receivable during April, 2012. As of December 31, 2012 the balance is approximately $1.4 million.
During April 2012, we, VRM I and Fund III received a payment in full satisfaction of an investment in real estate loan secured by a first deed of trust. The remaining balance due on the second deed of trust was previously fully allowed for, of approximately $0.7 million was moved to notes receivable and remains fully allowed for. We receive monthly payments of approximately $33,000. As of December 31, 2012 the balance is approximately $0.5 million.
During February 2012, we, VRM I and Fund III received a payment in full satisfaction of an investment in real estate loan secured by a first deed of trust and a partial payment of an investment in real estate loan secured by a second deed of trust on the same real estate. The remaining balance due on the second deed of trust was previously fully allowed for, of approximately $1.3 million was moved to notes receivable and remains fully allowed for. During March 2012 a payment of approximately $50,000 was received and recognized as gain related to pay off of notes receivable, including recovery of allowance for notes receivable. Additionally, we receive monthly payments of approximately $3,000. As of December 31, 2012 the balance is approximately $1.2 million.
On February 29, 2012, we made a loan to TNP Strategic Retail Operating Partnership, LP, a Delaware limited-partnership, in the amount of $1,040,000 evidenced by a promissory note (“Note”) and secured by the separate and unconditional guaranty (“Guaranty”) of TNP Strategic Retail Trust, Inc., a Maryland corporation (“TNP Trust”). The unpaid principal balance on the Note bore interest at a rate of 9.0% per annum until May 31, 2012, at which time the loan matured. The Guaranty was secured by an absolute assignment to VRM II of all of TNP Trust’s right, title and interest in and to 25% of all net proceeds received by TNP Trust in connection with TNP Trust’s public offering of stock after payment of sales commission, fees and expenses payable in connection therewith. This loan was paid in full on May 17, 2012.
NOTE K — NOTES PAYABLE
In April 2012, we financed a 12-month insurance policy for Directors and Officers liability, with an annual interest rate of 3.2%. The agreement required a down payment of $73,000 and nine monthly payments of $24,000 beginning on May 27, 2012. As of December 31, 2012, the outstanding balance of the note was approximately $25,000. During January 2013, the outstanding balance of the note was paid in full.
In April 2011, we financed a 12-month insurance policy for Directors and Officers liability, with an annual interest rate of 3.2%. The agreement required a down payment of $82,000 and nine monthly payments of $28,000 beginning on May 27, 2011. As of December 31, 2011, the outstanding balance of the note was $25,000. During January 2012, the outstanding balance of the note was paid in full.
NOTE L — FAIR VALUE
As of December 31, 2012 and 2011, financial assets and liabilities utilizing Level 1 inputs included investment in marketable securities - related party. We had no assets or liabilities utilizing Level 2 inputs, and assets and liabilities utilizing Level 3 inputs included investments in real estate loans.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, our degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset or liability will be classified in its entirety based on the lowest level of input that is significant to the measurement of fair value.
Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that are current as of the measurement date, including during periods of market dislocation, such as the recent illiquidity in the auction rate securities market. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition may cause our financial instruments to be reclassified from Level 1 to Level 2 or Level 3 and/or vice versa.
Our valuation techniques will be consistent with at least one of the three possible approaches: the market approach, income approach and/or cost approach. Our Level 1 inputs are based on the market approach and consist primarily of quoted prices for identical items on active securities exchanges. Our Level 2 inputs are primarily based on the market approach of quoted prices in active markets or current transactions in inactive markets for the same or similar collateral that do not require significant adjustment based on unobservable inputs. Our Level 3 inputs are primarily based on the income and cost approaches, specifically, discounted cash flow analyses, which utilize significant inputs based on our estimates and assumptions.
The following table presents the valuation of our financial assets and liabilities as of December 31, 2012, measured at fair value on a recurring basis by input levels:
| | | Fair Value Measurements at Reporting Date Using | | | | |
| | | Quoted Prices in Active Markets For Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Balance at 12/31/2012 | | | Carrying Value on Balance Sheet at 12/31/2012 | |
| Assets | | | | | | | | | | | | | | | |
| Investment in marketable securities - related party | | $ | 592,000 | | | $ | -- | | | $ | -- | | | $ | 592,000 | | | $ | 592,000 | |
| Investment in real estate loans | | $ | -- | | | $ | -- | | | $ | 24,500,000 | | | $ | 24,500,000 | | | $ | 24,880,000 | |
| | | | | | | | | | | | | | | | | | | | | |
The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2012 to December 31, 2012:
| | | | |
| | | Investment in real estate loans | |
| | | | |
| Balance on January 1, 2012 | | $ | 30,646,000 | |
| Change in temporary valuation adjustment included in net income (loss) | | | | |
| Increase in allowance for loan losses | | | (1,264,000 | ) |
| Purchase and additions of assets | | | | |
| Transfer of allowance on real estate loans to real estate held for sale | | | 14,000 | |
| Transfer of allowance on real estate loan to asset held for sale | | | 1,705,000 | |
| Reduction of allowance on real estate loans due to loan payments | | | 5,761,000 | |
| Reduction of allowance on real estate loans following settlement of loan | | | 11,565,000 | |
| New mortgage loans and mortgage loans acquired | | | 20,468,000 | |
| Write-off of allowance on uncollectible loan | | | 3,250,000 | |
| Transfer of allowance on real estate loans converted to unsecured notes receivable | | | 2,715,000 | |
| Sales, pay downs and reduction of assets | | | | |
| Transfer of real estate loan to real estate held for sale | | | (45,000 | ) |
| Transfer of real estate loan to asset held for sale | | | (10,669,000 | ) |
| Collections and settlements of principal and sales of investment in real estate loans | | | (22,866,000 | ) |
| Reduction of loan balance following settlement of loan | | | (11,565,000 | ) |
| Write-off of uncollectible loan | | | (3,250,000 | ) |
| Conversion of real estate loans to unsecured notes receivable | | | (2,715,000 | ) |
| Temporary change in estimated fair value based on future cash flows | | | 750,000 | |
| | | | | |
| Balance on December 31, 2012, net of temporary valuation adjustment | | $ | 24,500,000 | |
The following table presents the valuation of our financial assets and liabilities as of December 31, 2011, measured at fair value on a recurring basis by input levels:
| | | Fair Value Measurements at Reporting Date Using | | | | |
| | | Quoted Prices in Active Markets For Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Balance at 12/31/2011 | | | Carrying Value on Balance Sheet at 12/31/2011 | |
| Assets | | | | | | | | | | | | | | | |
| Investment in marketable securities - related party | | $ | 592,000 | | | $ | -- | | | $ | -- | | | $ | 592,000 | | | $ | 592,000 | |
| Investment in real estate loans | | $ | -- | | | $ | -- | | | $ | 30,646,000 | | | $ | 30,646,000 | | | $ | 31,777,000 | |
| | | | | | | | | | | | | | | | | | | | | |
The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2011 to December 31, 2011:
| | | Assets | |
| | | Investment in real estate loans | | | Assets under secured borrowings | |
| | | | | | | |
| Balance on January 1, 2011 | | $ | 26,624,000 | | | $ | 1,320,000 | |
| Change in temporary valuation adjustment included in net loss | | | | | | | | |
| Increase in allowance for loan losses | | | (1,028,000 | ) | | | -- | |
| Purchase and additions of assets | | | | | | | | |
| Transfer of allowance on real estate loans to real estate held for sale | | | 2,736,000 | | | | -- | |
| Reduction of allowance on real estate loans due to loan payment | | | 249,000 | | | | -- | |
| New mortgage loans and mortgage loans acquired | | | 13,723,000 | | | | -- | |
| Transfer of allowance on real estate loans converted to unsecured notes receivable | | | 3,940,000 | | | | -- | |
| Sales, pay downs and reduction of assets | | | | | | | | |
| Collections and settlements of principal and sales of investment in real estate loans | | | (9,046,000 | ) | | | -- | |
| Conversion of real estate loans to unsecured notes receivable | | | (3,940,000 | ) | | | -- | |
| Transfer of real estate loans to real estate held for sale | | | (2,896,000 | ) | | | -- | |
| Payments on assets under secured borrowings | | | | | | | (1,320,000 | ) |
| Temporary change in estimated fair value based on future cash flows | | | 284,000 | | | | -- | |
| Transfer to Level 1 | | | -- | | | | -- | |
| Transfer to Level 2 | | | -- | | | | -- | |
| | | | | | | | | |
| Balance on December 31, 2011, net of temporary valuation adjustment | | $ | 30,646,000 | | | $ | -- | |
| | | Liabilities | |
| | | Secured borrowings | |
| | | | |
| Balance on January 1, 2011 | | $ | 1,088,000 | |
| Payment on secured borrowings | | | (1,088,000 | ) |
| | | | | |
| Balance on December 31, 2011, net of temporary valuation adjustment | | $ | -- | |
NOTE M — RECENT ACCOUNTING PRONOUNCEMENTS
No new accounting pronouncements have been defined that would materially impact our financial statements.
NOTE N — LEGAL MATTERS INVOLVING THE MANAGER
The United States Securities and Exchange Commission (the “Commission”), conducted an investigation of certain matters related to us, our manager, Vestin Capital, VRM I, and Fund III. We fully cooperated during the course of the investigation. On September 27, 2006, the investigation was resolved through the entry of an Administrative Order by the Commission (the “Order”). Our manager, Vestin Mortgage and its Chief Executive Officer, Michael Shustek, as well as Vestin Capital (collectively, the “Respondents”), consented to the entry of the Order without admitting or denying the findings therein.
In the Order, the Commission found that the Respondents violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 through the use of certain slide presentations in connection with the sale of units in Fund III and in our predecessor, Vestin Fund II, LLC. The Respondents consented to the entry of a cease and desist order, the payment by Mr. Shustek of a fine of $100,000 and Mr. Shustek’s suspension from association with any broker or dealer for a period of six months, which expired in March 2007. In addition, the Respondents agreed to implement certain undertakings with respect to future sales of securities. We are not a party to the Order.
For additional information, see Note O – Legal Matters Involving the Company
In addition to the matters described above, our manager is involved in a number of other legal proceedings concerning matters arising in connection with the conduct of its business activities. Our manager believes it has meritorious defenses to each of these actions and intends to defend them vigorously. Other than the matters described above, our manager believes that it is not a party to any pending legal or arbitration proceedings that would have a material adverse effect on our manager’s financial condition or results of operations or cash flows, although it is possible that the outcome of any such proceedings could have a material impact on our manager’s net income in any particular period.
NOTE O — LEGAL MATTERS INVOLVING THE COMPANY
On February 7, 2012, we, VRM I and Fund III entered into a Deed in Lieu Agreement with a borrower resolving the foreclosure of our secured loan which had matured on December 31, 2011, with a principal balance, net of allowance for loan loss of approximately $9.9 million, of which our portion was approximately $0.8 million. Pursuant to the Deed in Lieu Agreement, our subsidiary 1701 Commerce, LLC (“1701 Commerce”) received a deed to the property which had secured the loan. The property, which is being operated as the Sheraton – Fort Worth, Texas. We dispute both the validity of certain claimed liens and as of this time intend to pursue our objections and disputes as to such matters. On March 26, 2012, 1701 Commerce filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of Texas, Ft. Worth Division, to reorganize its financial affairs and to avoid a pending foreclosure of the property that had been scheduled by a mortgage lien holder and to preserve and protect 1701 Commerce’s equity and the interests of the other creditors of the property. Due to the uncertainty and disputes involving this property, we recorded this investment as Other Real Estate Owned on the balance sheet until August 23, 2012 when the Bankruptcy Court issued an order allowing the bankruptcy to proceed despite a motion to dismiss it and required 1701 Commerce to deposit $1 million as additional collateral with the court funded by us, VRM I and VF III, and gave 1701 Commerce until November 24, 2012, which has now been extended indefinitely to obtain confirmation of a reorganization plan. 1701 Commerce is working with several potential buyers who have expressed interest in purchasing the hotel. The property has been scheduled for foreclosure by the senior lender on April 2, 2013. We hold an interest of approximately 90%, VRM I holds an interest of approximately 8% and Fund III holds an interest of approximately 2% in 1701 Commerce.
On January 2013, 1701 Commerce entered into an asset purchase agreement to sell its assets in consideration of $49 million. Pursuant to the agreements, a non-refundable earnest money deposit of $500,000 was paid to the first lien holder by the buyer, which reduced the secured debt. The buyer has until March 26, 2013 to close the purchase of the hotel. Upon the satisfaction of all conditions included in the agreement, the balance of the purchase price will be paid in cash to 1701 Commerce. As of the date of this report, management estimates the net realizable value to approximate the net assets held for sale.
In addition to the matters described above, we are involved in a number of other legal proceedings concerning matters arising in the ordinary course of our business activities. We believe we have meritorious defenses to each of these actions and intend to defend them vigorously. Other than the matters described above, we believe that we are not a party to any pending legal or arbitration proceedings that would have a material adverse effect on our financial condition or results of operations or cash flows, although it is possible that the outcome of any such proceedings could have a material impact on our operations in any particular period.
NOTE P — INCOME TAXES
We operated as a REIT through December 31, 2011. We announced on March 28, 2012 that we have terminated our election to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), effective for the tax year ending December 31, 2012.
The components of the provision for income tax benefit are as follows for the year ended:
| | | 12/31/2012 | | | 12/31/2011 | |
| Current Taxes | | | | | | |
| Federal | | | -- | | | | -- | |
| State | | | -- | | | | -- | |
| Total Current Taxes | | | -- | | | | -- | |
| Change in Deferred Taxes | | | 4,079,000 | | | | -- | |
| Change in Valuation Allowance | | | (4,079,000 | ) | | | -- | |
| | | | | | | | | |
| Provision for income tax expense (benefit) | | | -- | | | | -- | |
The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31, 2012:
| Deferred Tax Assets: | | | |
| Provision for Loan Losses | | | 851,000 | |
| Write down on real estate held for sale | | | 2,181,000 | |
| Recovery of allowance for doubtful notes receivable | | | 5,269,000 | |
| Net operating loss carryforward | | | 69,577,000 | |
| Total Deferred Tax Assets | | | 77,878,000 | |
| Valuation allowance | | | (77,878,000 | ) |
| Deferred Tax Assets, net of valuation allowance | | | -- | |
| Non-current portion | | | -- | |
| Current portion | | | -- | |
The effective tax rate used for calculation of the deferred taxes as of December 31, 2012 was 34%. The Company has established a valuation allowance against deferred tax assets of $77,878,000 due to the uncertainty regarding realization, comprised primarily of a reserve against the deferred tax assets attributable to the net operating loss carryforward timing differences.
As of December 31, 2011 we were organized and conducted our operations to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the “Code”) and to comply with the provisions of the Internal Revenue Code with respect thereto. A REIT is generally not subject to federal income tax on that portion of its REIT taxable income (“Taxable Income”) which is distributed to its stockholders, provided that at least 90% of Taxable Income is distributed and provided that certain other requirements are met. Our Taxable Income may substantially exceed or be less than our net income as determined based on GAAP, because, differences in GAAP and taxable net income consist primarily of allowances for loan losses or doubtful account, write-downs on real estate held for sale, amortization of deferred financing cost, capital gains and losses, and deferred income.
NOTE Q— SUBSEQUENT EVENTS
The following subsequent events have been evaluated through the date of this filing with the SEC.
During March 2013, We, VRM I and VF III entered into an agreement to satisfy a Notes Receivable due from guarantors of approximately $2.4 million. Pursuant to the agreement, the guarantors shall make quarterly payments of cash totaling $36,000 or shares of our common stock or VRM I’s common stock totaling $24,000 beginning June 30, 2013. The guarantors may prepay the debt at any time for $720,000 in cash or $480,000 of our common stock or VRM I’s common stock. Lastly, the guarantors may accelerate the retirement of the debt by transferring $350,000 in shares of our common stock or VRM I’s common stock on or before March 31, 2015.
During March 2013, we and VRM I entered into an agreement to satisfy a judgment totaling $8.4 million owed by guarantors of a previously non performing loan which was foreclosed and subsequently sold in December 2012. Pursuant to the agreement the guarantors shall purchase annually 100,000 common shares of our common stock commencing on December 31, 2013 through December 31, 2017. At the guarantor’s option, they may pay cash totaling $162,500 in lieu of the 100,000 shares of common stock. Additionally, the guarantor may satisfy the obligation by transferring 400,000 shares of our common stock to us and VRM I by December 31, 2013.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the 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 management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required financial disclosure. In connection with the preparation of this Report on Form 10-K, management carried out an evaluation, under the supervision and with the participation of our CEO and CFO, as of December 31, 2012, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Exchange Act. Based upon management’s evaluation, our CEO and CFO concluded that, as of December 31, 2012, our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in our reports under the Securities Exchange Act of 1934, as amended, 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 our management, including our CFO and CEO, as appropriate to allow timely decisions regarding required disclosure due to the material weakness in our internal control over financial reporting as described below.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within our company have been or will be detected. Even effective internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation. Furthermore, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. Our management, including our CEO and CFO, does not expect that our controls and procedures will prevent all errors.
The certifications of our CEO and CFO required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for our Company, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of our Company are being made only in accordance with authorizations of management and directors of our Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our Company's assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management has conducted an assessment, including testing, of the effectiveness of our internal control over financial reporting as of December 31, 2012. In making its assessment of internal control over financial reporting, management used the criteria in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management, with the participation of the Chief Executive and Chief Financial Officers, believes that, as of December 31, 2012, we did not maintain effective internal control over financial reporting due to the material weakness described below.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. We identified the following material weakness in our assessment of the effectiveness of internal control over financial reporting:
Material weakness relates to the monitoring and review of work performed in the preparation of the consolidated financial statements, footnotes and financial data provided to the Company's registered public accounting firm in connection with the annual audit. We have experienced turnover in several members of our accounting staff that have resulted in deficiencies including the lack of control over preparation of the consolidated financial statements, and proper application of accounting policies.
After a review of the Company's current review and approval of certain aspects of the accounting process, management concluded that the inadequate review and approval process represented a material weakness.
Plan of Remediation
To remediate the aforementioned material weakness, our Manager has reviewed the Company's current review and approval processes, to insure that all accounting reconciliations, journal entries and complex transactions are reviewed and approved on a timely basis. Since December 31, 2012, we have replaced accounting staff and have reassigned duties to enhance our internal review and approval process.
Changes in Internal Control Over Financial Reporting
As required by Rule 13a-15(d) under the Exchange Act, our management, including our CEO and CFO, has evaluated our internal control over financial reporting to determine whether any changes occurred during the fourth fiscal quarter of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the fourth fiscal quarter of 2012.
None.
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
We are managed on a day-to-day basis by Vestin Mortgage, a majority-owned subsidiary of Vestin Group.
Directors and Executive Officers
The following table sets forth the names, ages as of March 28, 2013 and positions of the individuals who serve as our directors and executive officers as of March 28, 2013.
| Name | Age | Title |
| | | |
| Michael V. Shustek | 54 | President, Chief Executive Officer and Director |
| Tracee Gress(4) | 42 | Chief Financial Officer |
| Robert J. Aalberts(1)(2)(3) | 61 | Director |
| John E. Dawson | 55 | Director |
| Roland M. Sansone(1)(2)(3) | 58 | Director |
| Fredrick J. Zaffarese Leavitt(1)(2)(3) | 42 | Director |
| | (1) | Member of the audit committee. |
| | (2) | Member of the nominating committee. |
| | (3) | Member of the compensation committee. |
| | (4) | During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services. Strategix Solutions also provides accounting and financial reporting services to VRM I and Fund III. Our CFO and other members of our accounting staff are employees of Strategix Solutions. Strategix Solutions is managed by LL Bradford and Company, LLC ("LL Bradford"), a certified public accounting firm that has provided non-audit accounting services to us. The principal manager of LL Bradford was a former officer of our manager from April 1999 through January 1, 2005. Strategix Solutions is owned by certain partners of LL Bradford, none of whom are currently or were previously officers of our manager. On January 14, 2013, Eric Bullinger resigned from his position as Chief Financial Officer of Vestin Realty Mortgage I, Inc. and Vestin Realty Mortgage II, Inc and the equivalent of Chief Financial Officer of Vestin Fund III, LLC (hereafter referred to collectively as the “Vestin Entities”). On January 14, 2013, the Board of Directors appointed Tracee Gress as the Chief Financial Officer of the Vestin Entities (or the equivalent thereof in the case of Vestin Fund III, LLC). As of December 31, 2012, Strategix Solutions dedicated to us a total of three employees, including our CFO. |
The following table sets forth the names, ages as of March 28, 2013 and positions of the individuals who serve as directors, executive officers and certain significant employees of Vestin Mortgage (our manager) or our affiliates:
| Name | Age | Title |
| | | |
| Michael V. Shustek | 54 | President, Chief Executive Officer and Chairman |
| Tracee Gress | 42 | Chief Financial Officer |
| Michael J. Whiteaker | 63 | Vice President of Regulatory Affairs | |
| | | |
Directors, Executive Officers and certain significant employees of Vestin Realty Mortgage II, Vestin Mortgage (our manager), Vestin Group, Vestin Originations or our affiliates.
Michael V. Shustek has been a director of our manager, Vestin Mortgage, LLC, and Chairman of the board of directors, Chief Executive Officer and a director of Vestin Group since April 1999 and a Director and CEO of us and Vestin Realty Mortgage I, Inc. (“VRM I”) since January 2006. In February 2004, Mr. Shustek became the President of Vestin Group. Mr. Shustek also serves on the loan committee of Vestin Mortgage, LLC, and its affiliates. In 2003, Mr. Shustek became the Chief Executive Officer of Vestin Mortgage, LLC. In 1995, Mr. Shustek founded Del Mar Mortgage, and has been involved in various aspects of the real estate industry in Nevada since 1990. In 1993, he founded Foreclosures of Nevada, Inc., a company specializing in non-judicial foreclosures. In 1993, Mr. Shustek also started Shustek Investments, a company that originally specialized in property valuations for third-party lenders or investors.
In 1997, Mr. Shustek was involved in the initial founding of Nevada First Bank, with the largest initial capital base of any new state charter in Nevada’s history. Mr. Shustek has co-authored two books, entitled “Trust Deed Investments,” on the topic of private mortgage lending, and “If I Can Do It, So Can You.” Mr. Shustek is a guest lecturer at the University of Nevada, Las Vegas, where he also has taught a course in Real Estate Law and Ethics. Mr. Shustek received a Bachelor of Science degree in Finance at the University of Nevada, Las Vegas. Mr. Shustek is also Chairman of our Board of Directors As VRM II’s founder and CEO, Mr. Shustek is highly knowledgeable with regard to VRM II’s business operations and loan portfolio. In addition, his participation on the Board of Directors is essential to ensure efficient communication between the Board and management.
Tracee Gress was appointed as our Chief Financial Officer (CFO) on January 14, 2013. In addition, Ms. Gress was appointed as the Chief Financial Officer of VRM I and the equivalent of our Chief Financial Officer of Fund III. Ms. Gress’ services are furnished to us pursuant to an accounting services agreement entered into by our manager and Strategix Solutions. Strategix Solutions is managed by LL Bradford, a certified public accounting firm, and provides accounting and financial reporting services on our behalf. Ms. Gress is a Certified Public Accountant and has worked for LL Bradford for approximately 4 years. Ms. Gress has audited various public and private companies. Additionally, she has also acted as Chief Financial Officer for various private companies. She received a Bachelor of Business Administration degree in Accounting from the University of Nevada, Las Vegas.
Michael J. Whiteaker has been Vice President of Regulatory Affairs since May 1999. Mr. Whiteaker is experienced in the banking and finance regulatory fields, having served with the State of Nevada, Financial Institution Division from 1982 to 1999 as its Supervisory Examiner, responsible for the financial and regulatory compliance audits of all financial institutions in Nevada. Mr. Whiteaker has worked extensively on matters pertaining to both state and federal statutes, examination procedures, policy determination and credit administration for commercial and real estate loans. From 1973 to 1982, Mr. Whiteaker was Assistant Vice President of Nevada National Bank, responsible for a variety of matters including loan review. Mr. Whiteaker has previously served on the Nevada Association of Mortgage Brokers, Legislative Committee and is a past member of the State of Nevada, Mortgage Advisory Council.
Independent Directors of Vestin Realty Mortgage II
Robert J. Aalberts was a director of Vestin Group from April 1999 to December 2005. He has been a member of our board of directors since January 2006 and was a director for VRM I from January 2006 until he resigned in January 2008. In March 2009, Mr. Aalberts was appointed to replace Mr. Micone, who resigned from VRM I’s Board. Since 1991, Professor Aalberts has held the Ernst Lied Professor of Legal Studies professorship in the College of Business at the University of Nevada, Las Vegas. From 1984 to 1991, Professor Aalberts was an Associate Professor of Business Law at Louisiana State University in Shreveport, Louisiana. From 1982 through 1984, he served as an attorney for Gulf Oil Company. Professor Aalberts has co-authored a book relating to the regulatory environment, law and business of real estate; including Real Estate Law (7th Ed. (2009) 6th Ed. (2006)) published by the Thomson/West Company. He is also the author of numerous legal articles, dealing with various aspects of real estate, business and the practice of law. Since 1992, Professor Aalberts has been the Editor-in-chief of the Real Estate Law Journal. Professor Aalberts received his Juris Doctor degree from Loyola University, in New Orleans, Louisiana, a Masters of Arts from the University of Missouri, Columbia, and received a Bachelor of Arts degree in Social Sciences, Geography from the Bemidji State University in Bemidji, Minnesota. He was admitted to the State Bar of Louisiana in 1982 (currently inactive status). Mr. Aalberts’ extensive knowledge of business and real estate law is a valuable resource for our Board of Directors.
John E. Dawson was previously a director of Vestin Group from March 2000 to December 2005. He has been a member of our board of directors since March 2007 and was a director for VRM I from March 2007 until he resigned in January 2008. Since 2005 Mr. Dawson has been a partner of the Las Vegas law firm of Lionel Sawyer & Collins. Previous to that, from 1995 to 2005, Mr. Dawson was a partner at the law firm of Marquis &Aurbach. Mr. Dawson received his Bachelor’s Degree from Weber State and his Juris Doctor from Brigham Young University. Mr. Dawson received his Masters of Law (L.L.M.) in Taxation from the University of San Diego in 1993. Mr. Dawson was admitted to the Nevada Bar in 1988 and the Utah Bar in 1989. Mr. Dawson’s legal knowledge, and his familiarity with the business and legal communities in Las Vegas, provide an important perspective as the Board addresses issues related to the management of our loan portfolio and REO.
Roland M. Sansone was a director for Vestin Group from December 2004 to December 2005. He has been a member of our board of directors since January 2006 and was a director for VRM I from January 2006 until he resigned in January 2008. In addition, he has served as President of Sansone Development, Inc. since 2002. Sansone Development, Inc. is a real estate development company. Mr. Sansone has been self-employed as a Manager and developer of real estate since 1980. Mr. Sansone is currently the president of several companies that develop, own and manage commercial and residential property. Mr. Sansone attended Mt. San Antonio College. Mr. Sansone has extensive experience and familiarity with real estate markets that is invaluable to our Board’s oversight of our lending operations.
Fredrick J. Zaffarese Leavitt was a director for Vestin Group from November 2004 to December 2005. He has been a member of our board of directors since January 2006 and was a director for VRM I from January 2006 until he resigned in January 2008. Since August of 1993 Mr. Zaffarese Leavitt has been an accountant for the United States Department of the Interior where his responsibilities include the review and audit of various states, local and municipality governments for compliance with federal laws and regulations as well as preparation of financial statements for Executive Branch and Congressional review. Additionally, Mr. Zaffarese Leavitt sits on various audit committees involving the utility industry. Mr. Zaffarese Leavitt is a CPA and a graduate of University of Nevada Las Vegas. The Board also determined that Mr. Zaffarese-Leavitt meets the audit committee financial expert requirements of NASDAQ Marketplace Rule 4350(d)(2)(A). Mr. Zaffarese Leavitt’s experience as an accountant provides the Board with an important perspective on financial reporting and internal controls.
CORPORATE GOVERNANCE
Board Composition
Our board of directors is authorized to have up to 15 directors. Our board of directors is currently comprised of five directors. In accordance with our articles of charter and bylaws, our board of directors is divided into three classes, class I, class II and class III, with each class serving staggered three-year terms. The members of the classes are divided as follows:
| | · | The class I director is Mr. Zaffarese Leavitt, and his term will expire at the 2013 annual meeting of stockholders; |
| | · | The class II directors are Messrs. Dawson and Sansone, and their terms will expire at the 2014 annual meeting of stockholders; and |
| | · | The class III directors are Messrs. Aalberts and Shustek, and their terms will expire at the 2015 annual meeting of stockholders. |
The authorized number of directors may be changed only by resolution of the board of directors. Any additional directors resulting from an increase in the number of directors will be distributed between the three classes so that, as nearly as possible, each class will consist of one third of the directors. This classification of our board of directors may have the effect of delaying or preventing changes in our control or management. Our directors will hold office until their successors have been elected and qualified or until their earlier death, resignation, disqualification or removal for cause by the affirmative vote of the holders of at least a majority of our outstanding stock entitled to vote on election of directors.
Board Leadership
Michael V. Shustek serves as our CEO and as the Chairman of our Board of Directors. Mr. Shustek was the founder of our Company and has served as its CEO since inception. Our Board of Directors believes that Mr. Shustek is best situated to serve as Chairman of the Board because he is the director most familiar with our business and loan portfolio and is therefore best positioned to lead Board discussions relating to strategic priorities and opportunities. In this regard, the Board noted Mr. Shustek’s extensive experience in secured real estate lending and his familiarity with our assets and operations. The Board of Directors believes that under these circumstances, the combined role of CEO and Chairman promotes effective strategy development and execution.
We have not appointed a lead independent director, viewing this position as unnecessary given the small size of our Board of Directors. However, Mr. Zaffarese Leavitt generally chairs executive sessions of our independent directors.
Board Committees
Our board of directors has appointed an audit committee, a nominating committee and a compensation committee. There are no family relationships among any of our directors or executive officers.
Audit Committee
Fredrick J. Zaffarese Leavitt (Chairman)
Robert J. Aalberts
Roland M. Sansone
Compensation Committee
Robert J. Aalberts (Chairman)
Roland M. Sansone
Fredrick J. Zaffarese Leavitt
Nominating Committee
Roland M. Sansone (Chairman)
Robert J. Aalberts
Fredrick J. Zaffarese Leavitt
Special Committee
Fredrick J. Zaffarese Leavitt (Chairman)
Roland Sansone
John Dawson
Audit committee – The Audit Committee is responsible for the appointment, compensation, retention and oversight of the Company’s independent accountants. In addition, the Audit Committee reviews with the Company’s management and its independent accountants financial information that will be provided to stockholders and others, the systems of internal controls which management and our board of directors have established and our audit and financial reporting processes. The Audit Committee operates under a written Audit Committee Charter adopted by our board of directors, which is available at http://www.vestinrealtymortgage2.com/VRT_About/CommitteeCharters.aspx. Our Audit Committee, consisting of Mr. Zaffarese Leavitt (chair), Mr. Aalberts and Mr. Sansone, met in March 2013 in connection with the audit of our 2012 financial statements, and held a total of four meetings in fiscal 2012.Our Audit Committee oversees our accounting and financial reporting processes, internal systems of control, independent auditor relationships and the audits of our financial statements. This committee’s responsibilities include, among other things:
| | · | Selecting and hiring our independent auditors; |
| | · | Evaluating the qualifications, independence and performance of our independent auditors; |
| | · | Approving the audit and non-audit services to be performed by our independent auditors; |
| | · | Reviewing the design, implementation, adequacy and effectiveness of our internal controls and our critical accounting policies; |
| | · | Overseeing and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters; and |
| | · | Reviewing with management and our auditors any earnings announcements and other public announcements regarding our results of operations. |
Our independent auditors and internal financial personnel regularly meet privately with our audit committee and have unrestricted access to this committee. Our board of directors has determined that each of these directors meet the independence standards for audit committee members and that Mr. Zaffarese Leavitt meets the financial expertise requirements set forth in Section 407 of the Sarbanes Oxley Act of 2002.
Nominating Committee – Our Nominating Committee was formed to assist our board of directors by identifying individuals qualified to become directors. During fiscal 2012, the Nominating Committee, consisting of Mr. Sansone (chair), Mr. Zaffarese Leavitt and Mr. Aalberts, held one meeting. Our nominating committee currently consists of Mr. Sansone, Mr. Zaffarese Leavitt and Mr. Aalberts.
The Nominating Committee operates under a charter adopted by our board of directors, which is available at http://www.vestinrealtymortgage2.com/VRT_About/CommitteeCharters.aspx. Responsibilities of the Nominating Committee include, among other things:
| | · | Evaluating the composition, size, operations and governance of our board of directors and making recommendations regarding future planning and the appointment of directors; |
| | · | Evaluating the independence of our directors and candidates for election to the Board; and |
| | · | Evaluating and recommending candidates for election to our board of directors. |
Compensation Committee – Our Compensation Committee operates under a charter adopted by our board of directors, which is available at http://www.vestinrealtymortgage2.com/VRT_About/CommitteeCharters.aspx. It was established to assist our board of directors relating to compensation of the Company’s directors and its sole manager Vestin Mortgage and to produce as may be required an annual report on executive officer compensation. Subject to applicable provisions of our bylaws and the Management Agreement with our manager, the compensation committee is responsible for reviewing and approving compensation paid by us to our manager. During fiscal 2012 the Compensation Committee, consisting of Mr. Aalberts, Mr. Zaffarese Leavitt and Mr. Sansone, held no meetings. No member of the Compensation Committee had a relationship that requires disclosure as a compensation committee interlock.
Special Committee - The Board of Directors of the Company has appointed a special committee to evaluate and negotiate a potential stock for stock merger with Vestin Realty Mortgage I, Inc. The special committee held 4 meetings in 2012. Our special committee currently consists of Mr. Sansone, Mr. Zaffarese Leavitt and Mr. Dawson.
Our board of directors may establish other committees to facilitate the management of our business.
Criteria for Selecting Directors
In evaluating candidates, the Nominating Committee will consider an individual’s business and professional experience, the potential contributions they could make to our Board and their familiarity with our business. The Nominating Committee will consider candidates recommended by our directors, members of our management team and third parties. The Nominating Committee will also consider candidates suggested by our stockholders. We do not have a formal process established for this purpose.
We do not have a formal diversity policy with respect to the composition of our Board of Directors. However, the Nominating Committee seeks to ensure that the Board of Directors is composed of directors whose diverse backgrounds, experience and expertise will provide the Board with a range of perspectives on matters coming before the Board.
Stockholders are encouraged to contact the Chair of the Nominating Committee if they wish the Committee to consider a proposed candidate. Stockholders should submit the names of any candidates in writing, together with background information about the candidate, and send the materials to the attention of Mr. Roland Sansone at the following address: 8880 W. Sunset Road, Suite 200, Las Vegas, NV 89148. Stockholders wishing to directly nominate candidates for election to the Board must provide timely notice in accordance with the requirements of our Bylaws, between the 150th and 120th days prior to the anniversary of the date of mailing of the notice for the preceding year’s annual meeting of stockholders.
Code of Ethics
Our board of directors has adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees of our manager. The Code of Business Conduct and Ethics may be found on our web site at http://www.vestinrealtymortgage2.com/VRT_About/GovernanceDocuments.aspx.
We do not pay any compensation to our executive officers. We pay our manager a management (acquisition and advisory) fee of up to 0.25% of the amounts raised by us and Fund II through the sale of shares or units. Payment of the management fee is reviewed by and subject to approval of our Compensation Committee. For the year ended December 31, 2012, we paid our manager approximately $1.1 million for its management services, which represented approximately 48% of the revenues received by our manager and its affiliates in 2012.
Pursuant to our management agreement, we pay our manager a fee which is calculated as a percentage of our original capital contributions. In addition, we may pay our manager or its affiliates for services rendered in selling properties acquired through foreclosure. We also pay a fee to Strategix Solutions which is based upon the wages of the employees providing the services. We have evaluated the risks entailed in these fee arrangements and we do not believe that such risks are reasonably likely to have a material adverse effect upon the Company.
Our manager and our affiliates also receives various fees from borrowers. Such fees may include origination fees as well as charges for servicing, extending or modifying their loans. We are not a party to such fee arrangements and have no control over them. As discussed under Risk Factors, many of these fees are paid on an up-front basis and, as a result, could create an incentive for our manager and our affiliates to make or extend riskier loans. Funding risky loans could have a material adverse effect upon our operating results and financial condition.
Except as specified about, our independent directors receive $500 for each board meeting and committee meeting they attend, whether in person or by phone, and are reimbursed for travel expenses and other out-of-pocket costs of attending board and committee meetings.
| SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Shown below is certain information as of March 28, 2013, with respect to beneficial ownership, as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of shares of common stock by the only persons or entities known to us to be a beneficial owner of more than 5% of the outstanding shares of common stock. Unless otherwise noted, the percentage ownership is calculated based on 12,069,805 shares of our common stock as of March 28, 2013.
Name and Address of Beneficial Owner | | Amount and Nature of Beneficial Ownership | | Percent of Class |
| | | | | |
Michael V. Shustek 8880 West Sunset Rd Ste 200 Las Vegas, NV 89148 | | Sole voting and investment power of 1,814,936 shares and shared voting and investment power of 75,097shares | | 15.7% |
The following table sets forth the total number and percentage of our common stock beneficially owned as of March 28, 2013,by:
| | · | Our chief executive officer, chief financial officer and the officers of our manager who function as the equivalent of our executive officers; and |
| | · | All executive officers and directors as a group. |
Unless otherwise noted, the percentage ownership is calculated based on 12,069,805 shares of our total outstanding common stock as of March 28, 2013.
| | | | | Common Shares Beneficially Owned |
| Beneficial Owner | | Address | | Number | | Percent |
| | | | | | | |
| Michael V. Shustek(1) | | 8880 West Sunset Rd. Ste 200 Las Vegas, NV 89118 | | 1,890,033 | | 15.7% |
| John Dawson (3) | | 1321 Imperia Henderson, NV 89052 | | 25,487 | | ** |
| Robert J. Aalberts (2) (3) | | 311 Vallarte Dr. Henderson, NV 89014 | | 189 | | ** |
| Frederick J. Zaffarese Leavitt | | P.O. Box 91683 Henderson, NV 89009 | | -- | | -- |
| Roland M. Sansone | | 2310 E. Sunset Rd #8015 Las Vegas, NV 89119 | | -- | | -- |
| All directors and executive officers as a group (5 persons) | | | | 1,915,709 | | 15.7% |
** Less than one percent of our total outstanding common stock.
| (1) | Mr. Shustek is the Chairman, President and Chief Executive Officer of Vestin Mortgage and indirectly owns a significant majority of the capital stock of our manager through Vestin Group. Mr. Shustek is the beneficial owner of 1,890,033 shares of our common stock, representing approximately 15.1% of our outstanding common stock (based upon 12,069,805 shares of common stock outstanding at March 28, 2013). Mr. Shustek, directly owns 1,722,237 shares of our common stock (totaling 13.7%) and indirectly owns and has economic benefit of 92,699 shares of our common stock (totaling 0.7%) through his ownership of Vestin Mortgage. Mr. Shustek has economic benefit of and shares voting and dispositive power of 75,097 shares of our common stock (totaling 0.6%) owned by his spouse, of which 25,309 shares were acquired by her prior to their marriage. |
Mr. Shustek has sole voting and dispositive power with respect to shares owned directly by himself and with respect to shares owned by Vestin Mortgage.
| (3) | Except as otherwise indicated, and subject to applicable community property and similar laws, the persons listed as beneficial owners of the shares have sole voting and investment power with respect to such shares. |
| CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
From time to time, we may acquire or sell investments in real estate loans from/to our manager or other related parties pursuant to the terms of our Management Agreement without a premium. No gain or loss is recorded on these transactions, as it is not our intent to make a profit on the purchase or sale of such investments. The purpose is generally to diversify our portfolio by syndicating loans, thereby providing us with additional capital to make additional loans.
Please refer to Note H – Related Party Transactions in Part II, Item 8 Financial Statements of this Annual Report on Form 10-K, for information regarding our related party transactions, which are incorporated herein by reference.
Director Independence. The Board of Directors has determined that each of the current non-employee Directors (i.e., Messrs. Dawson, Aalberts, Zaffarese-Leavitt, and Sansone) are “independent,” as that term is defined in Rule 4200(a)(15) of The Nasdaq Stock Market, Inc.’s listing requirements. In making these determinations, the Board of Directors did not rely on any exemptions to The Nasdaq Stock Market, Inc.’s requirements.
| PRINCIPAL ACCOUNTING FEES AND SERVICES |
During the year ended December 31, 2012 and 2011, JLK Rosenberger LLP (“JLK”) services to us as follows:
| | | December 31, 2012 | | | December 31, 2011 | |
| Audit Fees | | $ | 186,000 | | | $ | 233,000 | |
| Audit Related Fees | | $ | -- | | | $ | -- | |
| Tax Fees | | $ | -- | | | $ | -- | |
| All Other Fees | | $ | -- | | | $ | -- | |
JLK did not perform any non-audit services for us in the years ended December 31, 2012 and 2011.
The Audit Committee has direct responsibility to review and approve the engagement of the independent auditors to perform audit services or any permissible non-audit services. All audit and non-audit services to be provided by the independent auditors must be approved in advance by the Audit Committee. The Audit Committee may not engage the independent auditors to perform specific non-audit services proscribed by law or regulation. All services performed by our independent auditors under engagements entered into from May 6, 2003 to April 1, 2006, were approved by the Audit Committee of Vestin Group, all services performed after April 1, 2006, were approved by our Audit Committee, pursuant to our pre-approval policy, and none was approved pursuant to the de minimis exception to the rules and regulations of the Securities Exchange Act of 1934, Section 10A(i)(1)(B), on pre-approval.
PART IV
| EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
The following are filed as part of this Report:
(a) 1. Financial Statements
The list of the financial statements contained herein are contained in Part II, Item 8 Financial Statements on this Annual Report on Form 10-K, which is hereby incorporated by reference.
| Exhibit No. | | Description of Exhibits |
| 2.1 (2) | | Agreement and Plan of Merger between Vestin Fund II, LLC and the Registrant | |
| 2.2(12) | | Membership Interest Purchase Agreement between VRM I, VRM II and NorthStar Hawaii, LLC | |
| 3.1 (1) | | Articles of Incorporation of the Registrant | |
| 3.2 (1) | | Bylaws of the Registrant | |
| 3.3 (1) | | Form of Articles Supplementary of the Registrant | |
| 3.4 (5) | | Amendment to Vestin Realty Mortgage II’s Articles of Incorporation, effective December 31, 2007. | |
| 3.6 (6) | | Amended Articles of Incorporation of the Registrant | |
| 4.1 (1) | | Reference is made to Exhibits 3.1, 3.2 and 3.3 | |
| 4.2 (2) | | Specimen Common Stock Certificate | |
| 4.3 (1) | | Form of Rights Certificate | |
| 10.1 (1) | | Form of Management Agreement between Vestin Mortgage, LLC and the Registrant | |
| 10.2 (1) | | Form of Rights Agreement between the Registrant and the rights agent | |
| 10.3 (4) | | Form of Purchase Agreement | |
| 10.4 (4) | | Amended and Restated Trust Agreement | |
| 10.5 (7) | | Intercreditor Agreement, dated June 16, 2008, by and between Vestin Originations, Inc., Vestin Mortgage, LLC, Vestin Realty Mortgage II, Inc., and Owens Mortgage Investment Fund | |
| 10.6 (10) | | Agreement between Strategix Solutions, LLC and Vestin Realty Mortgage II, Inc. for accounting services. | |
| 10.7 (11) | | Second Supplemental Indenture, dated as of May 27, 2009 pertaining to Junior Subordinated Indenture | |
| 10.8 (11) | | First Amendment to Amended and Restated Trust Agreement, dated as of May 27, 2009 | |
| 10.9 (13) | | Deed in Lieu | |
| 14 (3) | | Vestin Realty Mortgage II, Inc. Code of Business Conduct and Ethics | |
| 21.1 (2) | | List of subsidiaries of the Registrant | |
| 31.1 | | Section 302 Certification of Michael V. Shustek | |
| 31.2 | | Section 302 Certification of Tracee Gress | |
| 32 | | Certification Pursuant to 18 U.S.C. Sec. 1350 | |
| 101 | | The following material from the Company's quarterly report on Form 10-Q for the three and nine months ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2012 and 2011, (ii) Consolidated Statements of Operations for the years ended December 31, 2012 and 2011 (iii) Cosolidated Statements of Other Comprehensive Income for the years ended December 31, 2012 and 2011 (iv) Consolidated Statement of Equity for the years ended December 31, 2012 and 2011 (v) Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011 and (vi) Notes to the Consolidated Financial Statements. | |
| (1) | | Incorporated herein by reference to Post-Effective Amendment No. 6 to our Form S-4 Registration Statement filed on January 4, 2006 (File No. 333-125121) |
| (2) | | Incorporated herein by reference to Post-Effective Amendment No. 7 to our Form S-4 Registration Statement filed on January 13, 2006 (File No. 333-125121) |
| (3) | | Incorporated herein by reference to the Transition Report on Form 10-K for the nine month transition period ended March 31, 2006 filed on September 7, 2006 (File No. 000-51892) |
| (5) | | Incorporated herein by reference to the Current Report on Form 8-K filed on January 4, 2008 (File No. 000-51892) |
| (6) | | Incorporated herein by reference to the Annual Report on Form 10-K filed on March 14, 2008 (File No. 000-51892) |
| (7) | | Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on August 11, 2008 (File No. 000-51892) |
| (10) | | Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on May 8, 2009 (File No. 000-51892) |
| (11) | | Incorporated herein by reference to the Current Report on Form 8-K filed on June 10, 2009 (File No. 000-51892) |
| (12) | | Incorporated herein by reference to the Current Report on Form 8-K/A filed on November 14, 2011 (File No. 000-51892) |
| (13) | | Incorporated herein by reference to the Current Report on Form 10-K filed on March 16, 2012 (File No. 000-51892) |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | Vestin Realty Mortgage II, Inc. |
| | | |
| | By: | /s/ Michael V. Shustek |
| | | Michael V. Shustek |
| | | President and Chief Executive Officer |
| | Date: | March 28, 2013 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | | Capacity | | Date |
| | | | | |
| /s/ Michael V. Shustek | | President and Chief Executive Officer and Director | | March 28, 2013 |
| Michael V. Shustek | | (Principal Executive Officer) | | |
| | | | | |
| /s/ Tracee Gress | | Chief Financial Officer | | March 28, 2013 |
| Tracee Gress | | (Principal Financial and Accounting Officer) | | |
| | | | | |
| /s/ John E. Dawson | | Director | | March 28, 2013 |
| John E. Dawson | | | | |
| | | | | |
| /s/ Robert J. Aalberts | | Director | | March 28, 2013 |
| Robert J. Aalberts | | | | |
| | | | | |
| /s/ Fredrick J. Zaffarese Leavitt | | Director | | March 28, 2013 |
| Fredrick J. Zaffarese Leavitt | | | | |
| | | | | |
| /s/ Roland M. Sansone | | Director | | March 28, 2013 |
| Roland M. Sansone | | | | |
Exhibit 31.1
CERTIFICATIONS
I, Michael V. Shustek, certify that:
1. I have reviewed this Form 10-K of Vestin Realty Mortgage II, Inc.;
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 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(s) 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 that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this 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 principles; |
| | (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 (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. The registrant's other certifying officer(s) 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 the 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: March 28, 2013
| /s/ Michael V. Shustek |
| Michael V. Shustek |
| Chief Executive Officer |
| Vestin Realty Mortgage II, Inc. |
Exhibit 31.2
CERTIFICATIONS
I, Tracee Gress, certify that:
1. I have reviewed this Form 10-K of Vestin Realty Mortgage II, Inc.;
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 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(s) 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 that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this 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 principles; |
| | (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 (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. The registrant's other certifying officer(s) 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 the 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: March 28, 2013
| /s/ Tracee Gress |
| Tracee Gress |
| Chief Financial Officer |
| Vestin Realty Mortgage II, Inc. |
| |
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
Michael V. Shustek, as Chief Executive Officer of Vestin Realty Mortgage II, Inc. (the “Registrant”), and Tracee Gress, as Chief Financial Officer of the Registrant, hereby certify, pursuant to 18 U.S.C. Sec. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| | (1) | The Registrant’s Report on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and |
| | (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
Date: March 28, 2013
| /s/ Michael V. Shustek |
| Michael V. Shustek |
| Chief Executive Officer |
| Vestin Realty Mortgage II, Inc. |
Date: March 28, 2013
| /s/ Tracee Gress |
| Tracee Gress |
| Chief Financial Officer |
| Vestin Realty Mortgage II, Inc. |
