UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2013
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: 333-125347
VESTIN REALTY MORTGAGE I, INC. |
(Exact name of registrant as specified in its charter) |
MARYLAND | 20-4028839 | |
(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: 702.227.0965
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 (Section 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 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 [] (Do not check if a smaller reporting company) | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [] No [X]
As of May 15, 2013, there were 6,340,859 shares of the Company’s Common Stock outstanding.
TABLE OF CONTENTS
Page | ||
3 | ||
PART I - FINANCIAL INFORMATION
ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS |
VESTIN REALTY MORTGAGE I, INC. | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
(UNAUDITED) | ||||||||
ASSETS | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 2,191,000 | $ | 2,482,000 | ||||
Investment in marketable securities - related party | 650,000 | 784,000 | ||||||
Interest and other receivables, net of allowance of $0 at March 31, 2013 and December 31, 2012 | 16,000 | 16,000 | ||||||
Notes receivable, net of allowance of $1,931,000 at March 31, 2013 and $1,894,000 at December 31, 2012 | -- | -- | ||||||
Real estate held for sale | 580,000 | 580,000 | ||||||
Investment in real estate loans, net of allowance for loan losses of $183,000 at March 31, 2013 and December 31, 2012 | 13,999,000 | 13,858,000 | ||||||
Asset held for sale | 4,480,000 | 4,398,000 | ||||||
Other assets | 50,000 | 76,000 | ||||||
Total assets | $ | 21,966,000 | $ | 22,194,000 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 35,000 | $ | 97,000 | ||||
Due to related parties | 41,000 | 216,000 | ||||||
Notes payable | -- | 19,000 | ||||||
Liabilities related to asset held for sale | 26,000 | 43,000 | ||||||
Deferred gain on sale of HFS | -- | 10,000 | ||||||
Total liabilities | 102,000 | 385,000 | ||||||
Commitments and contingencies | ||||||||
Stockholders' equity | ||||||||
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued | -- | -- | ||||||
Treasury stock, at cost, 0 shares at March 31, 2013 and December 31, 2012 | -- | -- | ||||||
Common stock, $0.0001 par value; 25,000,000 shares authorized; 6,340,859 shares issued and outstanding March 31, 2013 and December 31, 2012 | 1,000 | 1,000 | ||||||
Additional paid-in capital | 61,217,000 | 61,217,000 | ||||||
Accumulated deficit | (40,538,000 | ) | (40,702,000 | ) | ||||
Accumulated other comprehensive income | 21,000 | 156,000 | ||||||
Total stockholders’ equity before non-controlling interest – related party | 20,701,000 | 20,672,000 | ||||||
Noncontrolling interest – related party | 1,163,000 | 1,137,000 | ||||||
Total equity | 21,864,000 | 21,809,000 | ||||||
Total liabilities and stockholders' equity | $ | 21,966,000 | $ | 22,194,000 |
VESTIN REALTY MORTGAGE I, INC. |
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) |
For the Three Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Revenues | ||||||||
Interest income from investment in real estate loans | $ | 284,000 | $ | 142,000 | ||||
Recovery of allowance for doubtful notes receivable | 15,000 | 30,000 | ||||||
Gain related to pay off of real estate loan, including recovery of allowance for loan loss | -- | 57,000 | ||||||
Total revenues | 299,000 | 229,000 | ||||||
Operating expenses | ||||||||
Management fees - related party | 69,000 | 69,000 | ||||||
Provision for loan loss | -- | 19,000 | ||||||
Professional fees | 41,000 | 175,000 | ||||||
Insurance | 56,000 | 56,000 | ||||||
Consulting | 19,000 | 18,000 | ||||||
Other | 28,000 | 54,000 | ||||||
Total operating expenses | 213,000 | 391,000 | ||||||
Income (Loss) from operations | 86,000 | (162,000 | ) | |||||
Non-operating loss | ||||||||
Settlement expense | -- | (23,000 | ) | |||||
Total other non-operating loss, net | -- | (23,000 | ) | |||||
Provision for income taxes | -- | -- | ||||||
Income (loss) from continuing operations | 86,000 | (185,000 | ) | |||||
Discontinued operations, net of income taxes | ||||||||
Net gain on sale of real estate held for sale | 26,000 | 2,000 | ||||||
Income from assets held for sale | 99,000 | -- | ||||||
Expenses related to real estate held for sale | (21,000 | ) | (31,000 | ) | ||||
Total income (loss) from discontinued operations | 104,000 | (29,000 | ) | |||||
Net Income (Loss) | $ | 190,000 | $ | (214,000 | ) | |||
Allocation to non-controlling interest – related party | 26,000 | -- | ||||||
Net income (loss) attributable to common stockholders | 164,000 | (214,000 | ) | |||||
Basic and diluted income (loss) per weighted average common share | ||||||||
Continuing operations | $ | 0.01 | $ | (0.03 | ) | |||
Discontinued operations | 0.02 | -- | ||||||
Total basic and diluted income (loss) per weighted average common shares | $ | 0.03 | $ | (0.03 | ) | |||
Dividends declared per common share | $ | -- | $ | -- | ||||
Weighted average common shares: basic and diluted | 6,340,859 | 6,340,859 |
VESTIN REALTY MORTGAGE I, INC. |
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS) |
(UNAUDITED) |
For The Three Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Net income (loss) | $ | 190,000 | $ | (214,000 | ) | |||
Unrealized holding gain (loss) on available-for-sale securities – related party | (135,000 | ) | 161,000 | |||||
Comprehensive income (loss) | 55,000 | (53,000 | ) | |||||
Net income attributable to noncontrolling interest | (26,000 | ) | -- | |||||
Comprehensive income (loss) attributable to Vestin Realty Mortgage I, Inc. | $ | 29,000 | $ | (53,000 | ) | |||
VESTIN REALTY MORTGAGE I, INC. | |||
CONSOLIDATED STATEMENT OF EQUITY | |||
FOR THE THREE MONTHS ENDED MARCH 31, 2013 | |||
(UNAUDITED) |
Treasury Stock | Common Stock | |||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Additional Paid-in- Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest – Related Party | Total | ||||||||||||||||||||||||||||
Stockholders' Equity at December 31, 2012 | -- | $ | -- | 6,340,859 | $ | 1,000 | $ | 61,217,000 | $ | (40,702,000 | ) | $ | 156,000 | $ | 1,137,000 | $ | 21,809,000 | |||||||||||||||||||
Net Income | 164,000 | 26,000 | 190,000 | |||||||||||||||||||||||||||||||||
Unrealized Loss on Marketable Securities - Related Party | (135,000 | ) | (135,000 | ) | ||||||||||||||||||||||||||||||||
Comprehensive Income | 55,000 | |||||||||||||||||||||||||||||||||||
Stockholders' Equity at March 31, 2013 (Unaudited) | -- | $ | -- | 6,340,859 | $ | 1,000 | $ | 61,217,000 | $ | (40,538,000 | ) | $ | 21,000 | $ | 1,163,000 | $ | 21,864,000 |
VESTIN REALTY MORTGAGE I, INC. |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(UNAUDITED) |
For The Three Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 190,000 | $ | (214,000 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Recovery of allowance for doubtful notes receivable | (15,000 | ) | (1,000 | ) | ||||
Provision for loan loss | -- | 19,000 | ||||||
Gain related to recovery of allowance for loan loss | (57,000 | ) | ||||||
Recognized gain on sale of HFS | (23,000 | ) | -- | |||||
Change in operating assets and liabilities: | ||||||||
Interest and other receivables | -- | 4,000 | ||||||
Due to/from related parties | (175,000 | ) | (110,000 | ) | ||||
Deferred gain on sale of HFS | (10,000 | ) | (6,000 | ) | ||||
Other assets | 26,000 | (50,000 | ) | |||||
Asset held for sale, net of liabilities | (99,000 | ) | -- | |||||
Accounts payable and accrued liabilities | (40,000 | ) | (96,000 | ) | ||||
Net cash used in operating activities | (146,000 | ) | (511,000 | ) | ||||
Cash flows from investing activities: | ||||||||
Investments in real estate loans | (800,000 | ) | (5,870,000 | ) | ||||
Proceeds from loan payoffs | 659,000 | 3,382,000 | ||||||
Proceeds from notes receivable | 15,000 | -- | ||||||
Sale of investments in real estate loans from third parties | -- | 148,000 | ||||||
Net cash used in investing activities | (126,000 | ) | (2,340,000 | ) | ||||
Cash flows from financing activities: | ||||||||
Principal payments on notes payable | (19,000 | ) | (19,000 | ) | ||||
Net cash used in financing activities | (19,000 | ) | (19,000 | ) | ||||
NET CHANGE IN CASH | (291,000 | ) | (2,870,000 | ) | ||||
Cash and cash equivalents, beginning of period | 2,482,000 | 6,758,000 | ||||||
Cash and cash equivalents, end of period | $ | 2,191,000 | $ | 3,888,000 | ||||
Non-cash investing and financing activities: | ||||||||
Write-off of interest receivable and related allowance | $ | -- | $ | 229,000 | ||||
Other real estate owned through deed in lieu, net of prior allowance | $ | -- | $ | 786,000 | ||||
Adjustment to note receivable and related allowance | $ | -- | $ | 829,000 | ||||
Unrealized gain (loss) on marketable securities - related party | $ | (135,000 | ) | $ | 161,000 |
VESTIN REALTY MORTGAGE I, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
(UNAUDITED)
NOTE A — ORGANIZATION
Vestin Realty Mortgage I, Inc. (“VRM I”) formerly Vestin Fund I, LLC (“Fund I”) 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 December 1999. References in this report to the “Company,”“we,”“us,” or “our” refer to Fund I with respect to the period prior to April 1, 2006 and to VRM I with respect to the period commencing on May 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. 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 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 assets.
Vestin Mortgage is also the manager of Vestin Realty Mortgage II, Inc. (“VRM II”), as the successor by merger to Vestin Fund II, LLC (“Fund II”) and Vestin Fund III, LLC (“Fund III”). VRM II has investment objectives similar to ours, and Fund III is in the process of an orderly liquidation of its assets.
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 II 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 VRM I and VRM II and the equivalent of Chief Financial Officer of Fund III (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 Fund III). 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 consolidated financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented have been included. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the 2012 annual report filed on Form 10-K.
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. Original 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 Accounting Standards Codification (“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 as a charge-off or a reduction to the allowance for loan losses. Generally, subsequent recoveries of amounts previously charged off are added back to the allowance and included 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. We 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 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. |
Classification of Operating Results from Real Estate Held for Sale
Generally, operating results and cash flows from long-lived assets held for sale are to be classified as discontinued operations as a separately stated component of net income. Our operations related to REO are separately identified in the accompanying consolidated statements of operations.
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-pari-passu basis in certain real estate loans with us and/or VRM II (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 II. The securities are stated at fair value as determined by the closing market price as of March 31, 2013 and December 31, 2012. 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 basis 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. |
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 three months ended March 31, 2013 and 2012.
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 them to be reinstating dividends in the foreseeable future.
Treasury Stock
On February 21, 2008, our Board of Directors authorized the repurchase of up to $5 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, including SEC Rule 10b-18, repurchases may be made at such times and in such amounts, as our management deems appropriate. The repurchases will be funded from our available cash.
Segments
We are currently authorized to operate two reportable segments, investments in real estate loans and investments in real property. As of March 31, 2013, 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 March 31, 2013, approximately 64% of our assets, net of allowance for loan losses, are classified as investments in real estate loans.
Reclassifications
Certain amounts in the March 31, 2012 financial statements have been reclassified to conform to the March 31, 2013 presentation. Income (loss) from real estate held for sale section on Statement of Operations now presented as Discontinued operations. The reclassification had no impact on the Company’s financial condition, results of operations or cashflows.
Principles of Consolidation
Our consolidated financial statements include the accounts of VRM I, TRS I, our wholly owned subsidiary, and VREO XXV, LLC, in which we have a controlling interest. All significant 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.
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 I – 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 and accrued liabilities, 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 March 31, 2013 we had approximately $1.9 million in funds in excess, and as of December 31, 2012, we had approximately $1.9 million in funds in excess of the federally-insured limits.
As of March 31, 2013, 84% and 12% of our loans were in Nevada and Michigan, respectively, compared to 79%, and 12% at December 31, 2012, respectively. 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.
As of March 31, 2013, the aggregate amount of loans to our three largest borrowers represented approximately 48% of our total investment in real estate loans. These real estate loans consisted of commercial loans, two of which are secured by property located in Nevada, and one of which is secured by property located in Michigan. All are first lien position with interest rates between 7.75% and 9.00%, and an aggregate outstanding balance of approximately $6.7 million. As of March 31, 2013, all three of our largest loans were considered performing.
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 March 31, 2013 and December 31, 2012, three and four loans, respectively, totaling approximately $4.3 million and $5.0 million, respectively, representing approximately 30.5% and 35.5%, respectively, of our portfolio’s total value, had a common guarantor. As of March 31, 2013, all of these loans are considered performing.
As of March 31, 2013 and December 31, 2012 six and five loans, respectively, totaling approximately $6.7 million and $5.9 million, respectively, representing approximately 47.2% and 42.0%, respectively, of our portfolio’s total value had a common guarantor. As of March 31, 2013 all of these loans were considered performing.
For additional information regarding the above loans, see Note D – Investments In Real Estate Loans.
NOTE D — INVESTMENTS IN REAL ESTATE LOANS
As of March 31, 2013 and December 31, 2012, most of our loans provided for interest only payments with a “balloon” payment of principal payable and any accrued interest 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 March 31, 2013 and December 31, 2012, we had no investments in real estate loans that had interest reserves.
Loan Portfolio
As of March 31, 2013, 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 10% 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 March 31, 2013, 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 | 13 | $ | 14,088,000 | 8.15 | % | 99.34 | % | 62.27 | % | |||||||||||
Land | 1 | 94,000 | 6.00 | % | 0.66 | % | 53.81 | % | ||||||||||||
Total | 14 | $ | 14,182,000 | 8.14 | % | 100.00 | % | 62.21 | % |
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 | 13 | $ | 13,947,000 | 8.23 | % | 99.33 | % | 64.21 | % | |||||||||||
Land | 1 | 94,000 | 6.00 | % | 0.67 | % | 53.81 | % | ||||||||||||
Total | 14 | $ | 14,041,000 | 8.21 | % | 100.00 | % | 66.79 | % |
* | 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 March 31, 2013 and December 31, 2012, was 8.14% and 8.21%, respectively. Please see “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 March 31, 2013 and December 31, 2012:
Loan Type | Number of Loans | March 31, 2013 Balance * | Portfolio Percentage | Number of Loans | December 31, 2012 Balance * | Portfolio Percentage | ||||||||||||||||||
First deeds of trust | 12 | $ | 13,199,000 | 93.07 | % | 12 | $ | 13,058,000 | 93.00 | % | ||||||||||||||
Second deeds of trust | 2 | 983,000 | 6.93 | % | 2 | 983,000 | 7.00 | % | ||||||||||||||||
Total | 14 | $ | 14,182,000 | 100.00 | % | 14 | $ | 14,041,000 | 100.00 | % |
* | Please see Balance Sheet Reconciliation below. |
The following is a schedule of contractual maturities of investments in real estate loans as of March 13, 2013:
April 2013 – June 2013 | $ | 5,809,000 | ||
July 2013 – September 2013 | 5,585,000 | |||
October 2013 – December 2013 | -- | |||
January 2014 – March 2014 | 800,000 | |||
April 2014 – June 2014 | 1,238,000 | |||
Thereafter | 750,000 | |||
Total | $ | 14,182,000 |
The following is a schedule by geographic location of investments in real estate loans as of March 31, 2013 and December 31, 2012:
March 31, 2013 Balance * | Portfolio Percentage | December 31, 2012 Balance * | Portfolio Percentage | |||||||||||||
Michigan | $ | 1,741,000 | 12.28 | % | $ | 1,741,000 | 12.40 | % | ||||||||
Nevada | 11,957,000 | 84.31 | % | 11,157,000 | 79.46 | % | ||||||||||
Texas | 484,000 | 3.41 | % | 484,000 | 3.45 | % | ||||||||||
Utah | -- | -- | 659,000 | 4.69 | % | |||||||||||
Total | $ | 14,182,000 | 100.00 | % | $ | 14,041,000 | 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.
March 31, 2013 | December 31, 2012 | |||||||
Balance per loan portfolio | $ | 14,182,000 | $ | 14,041,000 | ||||
Less: | ||||||||
Allowance for loan losses (a) | (183,000 | ) | (183,000 | ) | ||||
Balance per consolidated balance sheets | $ | 13,999,000 | $ | 13,858,000 |
(a) | Please refer to Specific Reserve Allowance below. |
Non-Performing Loans
As of March 31, 2013, we had no loans 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).
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; |
· | Historical experience; |
· | 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 March 31, 2013, our ratio of total allowance for loan losses to total loans with an allowance for loan loss is 17%. The following is a breakdown of allowance for loan losses related to performing and non-performing loans as of March 31, 2013 and December 31, 2012.
As of March 31, 2013 | ||||||||||||
Balance | Allowance for loan losses * | Balance, net of allowance | ||||||||||
Non-performing loans – no related allowance | $ | -- | $ | -- | $ | -- | ||||||
Non-performing loans – related allowance | -- | -- | -- | |||||||||
Subtotal non-performing loans | -- | -- | -- | |||||||||
Performing loans – no related allowance | 13,082,000 | -- | 13,082,000 | |||||||||
Performing loans – related allowance | 1,100,000 | (183,000 | ) | 917,000 | ||||||||
Subtotal performing loans | 14,182,000 | (183,000 | ) | 13,999,000 | ||||||||
Total | $ | 14,182,000 | $ | (183,000 | ) | $ | 13,999,000 |
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 | -- | -- | -- | |||||||||
Subtotal non-performing loans | -- | -- | -- | |||||||||
Performing loans – no related allowance | 12,941,000 | -- | 12,941,000 | |||||||||
Performing loans – related allowance | 1,100,000 | (183,000 | ) | 917,000 | ||||||||
Subtotal performing loans | 14,041,000 | (183,000 | ) | 13,858,000 | ||||||||
Total | $ | 14,041,000 | $ | (183,000 | ) | $ | 13,858,000 |
* | 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. 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 March 31, 2013, we have provided a specific reserve allowance for two performing loans 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 three months ended March 31, 2013 and 2012 by loan type.
Loan Type | Balance at 12/31/2012 | Specific Reserve Allocation | Loan Pay Downs and Settlements | Write Off | Transfers to REO and Notes Receivable | Balance at 3/31/2013 | ||||||||||||||||||
Commercial | $ | 183,000 | $ | -- | $ | -- | $ | -- | -- | $ | 183,000 | |||||||||||||
Total | $ | 183,000 | $ | -- | $ | -- | $ | -- | -- | $ | 183,000 |
Loan Type | Balance at 12/31/2011 | Specific Reserve Allocation | Sales | Loan Pay Downs and Settlements | Transfers to Notes Receivable | Balance at 3/31/2012 | ||||||||||||||||||
Commercial | $ | 5,412,000 | $ | 19,000 | $ | -- | $ | (57,000 | ) | $ | (892,000 | ) | $ | 4,482,000 | ||||||||||
Construction | 73,000 | -- | -- | (73,000 | ) | -- | -- | |||||||||||||||||
Total | $ | 5,485,000 | $ | 19,000 | $ | -- | $ | (130,000 | ) | $ | (892,000 | ) | $ | 4,482,000 |
Troubled Debt Restructuring
As of March 31, 2013 and December 31, 2012 we had one loan totaling approximately $0.8 that met the definition of a Troubled Debt Restructuring or TDR. 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 March 31, 2013 and December 31, 2012:
Total | Performing | Non-Performing | ||||||||||||||||||||||
Loan Type | Number of Loans | Fund Balance | Number of Loans | Fund Balance | Number of Loans | Fund Balance | ||||||||||||||||||
Commercial | 1 | $ | 750,000 | 1 | $ | 750,000 | -- | $ | -- | |||||||||||||||
Construction | -- | -- | -- | -- | -- | -- | ||||||||||||||||||
Total | 1 | $ | 750,000 | 1 | $ | 750,000 | -- | $ | -- |
Extensions
As of March 31, 2013, our manager had granted extensions on nine outstanding loans, totaling approximately $19.1 million, of which our portion was approximately $7.9 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.
NOTE E — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY
As of March 31, 2013 and December 31, 2012, we owned 537,078 shares of VRM II’s common stock, representing approximately 4.4% of the total outstanding shares. The closing price of VRM II’s common stock on March 31, 2013, was $1.21 per share, resulting in an unrealized loss for the three months ended March 31, 2013.
During the three months ended March 31, 2013, the trading price for VRM II’s common stock ranged from $1.08 to $1.60 per share. We will continue to evaluate our investment in marketable securities on a quarterly basis.
NOTE F — REAL ESTATE HELD FOR SALE
At March 31, 2013 we held five properties with a total carrying value of approximately $0.6 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. We seek to sell properties acquired through foreclosure as quickly as circumstances permit taking into account current economic conditions.
Beginning balance, January 1, 2013 | ||||
Real estate held for sale acquired through foreclosure | $ | 580,000 | ||
Additional investment in REO | -- | |||
Proceeds on nonrefundable extension fee | -- | |||
Write down | -- | |||
Sale | -- | |||
Ending balance, March 31, 2013 | $ | 580,000 |
NOTE G — ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
During May 2012, we, VRM II and Fund III foreclosed on a loan with a balance of approximately $6.0 million, of which our portion was approximately $4.4 million. The property includes 23 cottage units in a retirement community located in Eugene, Oregon. The property includes operations, which will be reported as an asset held for sale from the date of this foreclosure.
Effective January 1, 2009, we adopted FASB's accounting standard related to business combination which required the 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 VREO XXV was accounted for in accordance with this standard and the Company has allocated the purchase price of VREO XXV 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 VREO XXV at the time of the acquisition totaled $4.1 million.
We performed an allocation as of the foreclosure date as follows:
Cash | $ | 308,000 | ||
Property and equipment | 3,841,000 | |||
Current assets | 14,000 | |||
Accounts payable and accrued liabilities | (23,000 | ) | ||
Net assets | $ | 4,140,000 |
In addition, we estimated the fair value of the non-controlling interest at $1.1 million, which is 25% owned by Fund III and 1% by VRM II.
Immediately upon foreclosure, we committed to a plan to sell all interests in VREO XXV, at which point we began classifying the related assets of VREO XXV as assets held for sale, and the related liabilities as liabilities related to assets held for sale. Additionally, we have classified VREO XXV’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 three months ended March 31, 2013.
The following is summary of net assets held for sale through March 31, 2013:
March 31, 2013 | ||||
Assets: | ||||
Cash | $ | 609,000 | ||
Current assets | 15,000 | |||
Property and equipment | 3,856,000 | |||
Total assets | $ | 4,480,000 | ||
Liabilities: | ||||
Accounts payable and accrued liabilities | $ | 26,000 | ||
Total liabilities | 26,000 | |||
Net assets held for sale | $ | 4,454,000 |
The following is a summary of the results of operations related to the assets held for sale for the three months ended March 31, 2013:
For The Three Months Ended March 31, 2013 | ||||
Revenue | $ | 168,000 | ||
Expenses | (69,000 | ) | ||
Net Income | $ | 99,000 |
NOTE H — 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, 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.
Transactions with the Manager
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 I from the sale of shares or membership units, paid monthly. The amount of management fees paid to our manager for the three months ended March 31, 2013 and 2012 was $69,000.
As of March 31, 2013 and December 31, 2012, our manager owned 100,000 of our common shares, representing approximately 1.6% of our total outstanding common stock. For the three months ended March 31, 2013 and 2012, we declared $0 in dividends payable to our manager.
As of March 31, 2013 and December 31, 2012 we did not owe or have any receivables from our manager.
Transactions with Other Related Parties
As of March 31, 2013 and December 31, 2012, we owned 537,078 common shares of VRM II, representing approximately 4.4%, of their total outstanding common stock. For the three months ended March 31, 2013 and 2012 we recognized $0 in dividend income from VRM II.
As of March 31, 2013 and December 31, 2012, VRM II owned 538,178 of our common shares, approximately 8.5%, of our total outstanding common stock. For the three months ended March 31, 2013 and 2012 we declared $0 in dividends payable to VRM II.
As of March 31, 2013 and December 31, 2012, we owed VRM II approximately $36,000 and $0.2 million, respectively, primarily related to legal fees.
As of March 31, 2013 we owed Fund III approximately $5,000. As of December 31, 2012 we had a receivable with Fund III of approximately $8,000.
NOTE I — FAIR VALUE
As of March 31, 2013, 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 as of March 31, 2013, 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 3/31/13 | Carrying Value on Balance Sheet at 3/31/13 | ||||||||||||||||
Assets | ||||||||||||||||||||
Investment in marketable securities - related party | $ | 650,000 | $ | -- | $ | -- | $ | 650,000 | $ | 650,000 | ||||||||||
Investment in real estate loans | $ | -- | $ | -- | $ | 14,034,000 | $ | 14,034,000 | $ | 13,999,000 |
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 | $ | 784,000 | $ | -- | $ | -- | $ | 784,000 | $ | 784,000 | ||||||||||
Investment in real estate loans | $ | -- | $ | -- | $ | 13,870,000 | $ | 13,870,000 | $ | 13,858,000 |
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 March 31, 2013. There were no liabilities measured at fair value on a recurring basis using significant unobservable inputs as of January 1, 2012 to March 31, 2013.
Investment in real estate loans | ||||
Balance on January 1, 2013 | $ | 13,870,000 | ||
Purchase and additions of assets | ||||
New mortgage loans and mortgage loans bought | 800,000 | |||
Sales, pay downs and reduction of assets | ||||
Collections of principal and sales of investment in real estate loans | (659,000 | ) | ||
Temporary change in estimated fair value based on future cash flows | 23,000 | |||
Balance on March 31, 2013, net of temporary valuation adjustment | $ | 14,034,000 |
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 March 31, 2012:
Investment in real estate loans | ||||
Balance on January 1, 2012 | $ | 10,827,000 | ||
Change in temporary valuation adjustment included in net income (loss) | ||||
Net decrease in allowance for loan losses | 111,000 | |||
Transfer of allowance on real estate loans converted to unsecured notes receivable | 742,000 | |||
Transfer of allowance on real estate loan to real estate held for sale | 150,000 | |||
Purchase and additions of assets | ||||
New mortgage loans and mortgage loans bought | 5,869,000 | |||
Transfer of real estate loans to real estate held for sale | (937,000 | ) | ||
Transfer of real estate loans converted to unsecured notes receivable | (742,000 | ) | ||
Sales, pay downs and reduction of assets | ||||
Collections of principal and sales of investment in real estate loans | (3,603,000 | ) | ||
Temporary change in estimated fair value based on future cash flows | (64,000 | ) | ||
Balance on March 31, 2012, net of temporary valuation adjustment | $ | 12,353,000 |
NOTE J — RECENT ACCOUNTING PRONOUNCEMENTS
No new accounting pronouncements have been defined that would materially impact our financial statements.
NOTE K — 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.
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 in Note M – Legal Matters Involving The Company below, 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 the manager’s net income in any particular period.
NOTE L — LEGAL MATTERS INVOLVING THE COMPANY
On February 7, 2012, we, VRM II and Fund III entered into a Deed in Lieu Agreement with a borrower in lieu of the foreclosure of our subordinate 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 is operated as the Sheraton – Forth Worth, Texas. 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 potential buyers who have expressed interest in purchasing the hotel.
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 $1,500,000 has been paid to the first lien holder by the buyer, which reduced the secured debt. The buyer has until June 3, 2013 to close the purchase of the hotel. Upon the satisfaction of all conditions included in the agreement, and subject to creditors of 1701 Commerce being paid and subject to court order, 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.
If the property is not sold by June 3, 2013, the senior lender is set to foreclose on June 4, 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 $0.9 million has been recognized which is included in write downs on real estate held for sale for the year ended December 31, 2012.
We hold an interest of approximately 8%, VRM II holds an interest of approximately 90% and Fund III holds an interest of approximately 2% in 1701 Commerce.
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 M — SUBSEQUENT EVENTS
The following subsequent events have been evaluated through the date of this filing with the SEC.
During April 2013 we funded a new loan of $4.0 million which brought the Company below the 3% reserve requirement.
ITEM 2. | 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 three months ended March 31, 2013 and 2012. This discussion should be read in conjunction with our consolidated financial statements and accompanying notes and other detailed information regarding us appearing elsewhere in this report on Form 10-Q and our report on Form 10-K, Part II, Item 7 Management’s Discussion and Analysis of Financial Conditions and Results of Operations for the year ended December 31, 2012.
FORWARD-LOOKING STATEMENTS
Certain statements in this report, including, without limitation, matters discussed under this Item 2 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-Q. 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 of this Quarterly Report on Form 10-Q 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 I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
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 depressed 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 the weakness in lending may continue to have an adverse impact upon our markets. 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 Loansof the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
During the three months ended March 31, 2013, we funded one loan totaling approximately $0.8 million. During the three months ended March 31, 2012, we funded three loans totaling approximately $5.9 million. As of March 31, 2013, our loan-to-value ratio was 62.21%, 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 March 31, 2013, we have provided a specific reserve allowance for two performing loans 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 Loansof the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
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 March 31, 2013, our loans were in the following states: Michigan, Nevada, 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, 2019 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.
SUMMARY OF FINANCIAL RESULTS
Comparison of Operating Results for the three months ended March 31, 2013 to the three months ended March 31, 2012
Total Revenue: | 2013 | 2012 | $ Change | % Change | ||||||||||||
Interest income from investment in real estate loans | $ | 284,000 | $ | 142,000 | $ | 142,000 | 100 | % | ||||||||
Recovery of allowance for doubtful notes receivable | 15,000 | 30,000 | (15,000 | ) | (50 | %) | ||||||||||
Gain related to pay off of real estate loan, including recovery of allowance for loan loss | -- | 57,000 | (57,000 | ) | (100 | %) | ||||||||||
Total | $ | 299,000 | $ | 229,000 | $ | 70,000 | 30 | % |
Our revenue from interest income is dependent upon the balance of our investment in real estate loans and the interest earned on these loans. Scheduled payments on fully reserved notes receivable and loans in 2012 resulted in a decrease in gain related to payoff of real estate loan and notes receivable.
For additional information see Note D – Investments in Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Operating Expenses: | 2013 | 2012 | $ Change | % Change | ||||||||||||
Management fees – related party | $ | 69,000 | $ | 69,000 | $ | -- | -- | |||||||||
Provision for loan loss | -- | 19,000 | (19,000 | ) | (100 | %) | ||||||||||
Professional fees | 41,000 | 175,000 | (134,000 | ) | (77 | %) | ||||||||||
Insurance | 56,000 | 56,000 | -- | -- | ||||||||||||
Consulting | 19,000 | 18,000 | 1,000 | 6 | % | |||||||||||
Other | 28,000 | 54,000 | (26,000 | ) | (48 | %) | ||||||||||
Total | $ | 213,000 | $ | 391,000 | $ | (178,000 | ) | (46 | %) |
Operating expenses were 46% lower during the three months ended March 31, 2013 than what occurred during the three months ended March 31, 2012. This decrease is due to lower provision for loan losses and the decrease in professional fees due to a significant decrease in pending litigation.
See “Specific Loan Allowance” in Note D – Investments in Real Estate Loans and Note L – Legal Matters Involving The Company of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Non-operating income (loss): | 2013 | 2012 | $ Change | % Change | ||||||||||||
Settlement expense | -- | (23,000 | ) | (23,000 | ) | (100 | %) | |||||||||
Total | $ | -- | $ | (23,000 | ) | $ | (23,000 | ) | (100 | %) |
During the three months ended March 31, 2012 we settled a lawsuit with an acquirer of property previously foreclosed upon and sold, which resulted in an expense of approximately $23,000, and did not have similar expense in 2013.
See Note L – Legal Matters Involving The Company of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Discontinued operations, net of income taxes: | 2013 | 2012 | $ Change | % Change | ||||||||||||
Net gain on sale of real estate held for sale | $ | 26,000 | $ | 2,000 | $ | 24,000 | 1200 | % | ||||||||
Income from assets held for sale | 99,000 | -- | 99,000 | 100 | % | |||||||||||
Expenses related to real estate held for sale | (21,000 | ) | (31,000 | ) | 10,000 | 32 | % | |||||||||
Total | $ | 104,000 | $ | (29,000 | ) | $ | 133,000 | 459 | % |
During the three months ended March 31, 2013 we recorded net gain of approximately $26,000 related to the sale of HFS in December 2011. During 2012 we recorded net gains on sale of real estate held for sale for properties sold in prior periods due to payments on settlement agreements. We received income from assets held for sale during the three months ended March 31, 2013 and did not receive similar income during the same period in 2012.
See Note F — Real Estate Held For Sale and Note G – Assets Held for Sale and Discontinued Operations of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Annual Report on Form 10-Q.
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% working capital reserve, we generally seek to use all of our available funds to invest in real estate loans. 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 our aggregate capital received by us and Fund I from the sale of shares or membership units.
During the three months ended March 31, 2013, net cash flows used in operating activities approximated $0.1 million. Operating cash flows were used for the payment of normal operating expenses such as management fees, accounting fees and legal bills. Cash flows related to investing activities consisted of cash used by loan investments in new real estate loans of approximately $0.8 million. In addition, cash flows related to investing activities consisted of cash provided by notes receivable payoffs of approximately $15,000 and cash provided by payoffs of real estate loans of approximately $0.7 million. Cash flows used in financing activities consisted of cash for payments on notes payable of approximately $19,000 to finance our directors and officers insurance policy.
At March 31, 2013, we had approximately $2.2 million in cash, $0.7 million in marketable securities – related party and approximately $22.0 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.
On February 21, 2008, our Board of Directors authorized the repurchase of up to $5 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. During the year ended December 31, 2011, we used approximately $104,000 to acquire 78,600 shares of our common stock. We are not obligated to purchase any additional shares. As of March 31, 2013 and December 31, 2012, we have no treasury stock.
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 May 15, 2013, we have not met our 3% reserve requirement due to the funding of a loan during April 2013 of $4.0 million.
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. The effective interest rates on all product categories range from 6.0% to 10%. Revenue by product will fluctuate based upon relative balances during the period.
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 I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Asset Quality and Loan Reserves
As a commercial real estate lender willing to invest in riskier loans, rates of delinquencies, foreclosures and our 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 March 31, 2013, 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 of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
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 March 31, 2013, 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 | $ | 149,000 | ||
Weighted average interest rate assumption increased by 5.0% or 500 basis points | $ | 743,000 | ||
Weighted average interest rate assumption increased by 10.0% or 1,000 basis points | $ | 1,486,000 | ||
Weighted average interest rate assumption decreased by 1.0% or 100 basis points | $ | (149,000 | ) | |
Weighted average interest rate assumption decreased by 5.0% or 500 basis points | $ | (743,000 | ) | |
Weighted average interest rate assumption decreased by 10.0% or 1,000 basis points | $ | (1,486,000 | ) |
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 March 31, 2013, 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 | |||
AAllowance for loan losses assumption increased by 1.0% of loan portfolio | $ | 142,000 | ||
Allowance for loan losses assumption increased by 5.0% of loan portfolio | $ | 709,000 | ||
Allowance for loan losses assumption increased by 10.0% of loan portfolio | $ | 1,418,000 | ||
Allowance for loan losses assumption decreased by 1.0% of loan portfolio | $ | (142,000 | ) | |
Allowance for loan losses assumption decreased by 5.0% of loan portfolio | $ | (709,000 | ) | |
Allowance for loan losses assumption decreased by 10.0% of loan portfolio | $ | (1,418,000 | ) |
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
See Note J – Recent Accounting Pronouncements of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
ITEM 4. | CONTROLS AND PROCEDURES |
(a) Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer has evaluated the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.
(b) Changes in Internal Control over Financial Reporting
During first quarter we replaced a financial accounting position which we believe enhanced the company’s internal control over financial controls.
PART II – OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
Please refer to Note K – Legal Matters Involving the Manager and Note L – Legal Matters Involving the Company of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q for information regarding our legal proceedings, which are incorporated herein by reference.
ITEM 2. | UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS |
None.
The following is a summary of our stock purchases during the three months ended March 31, 2013, 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 of (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
January 1, 2013 –January 31, 2013 | -- | $ | -- | -- | $ | 4,013,475 | ||||||||||
February 1, 2013 – February 28, 2013 | -- | -- | -- | 4,013,475 | ||||||||||||
March 1, 2013 – March 31, 2013 | -- | -- | -- | 4,013,475 | ||||||||||||
Total | -- | $ | -- | -- | $ | 4,013,475 |
ITEM 6. | EXHIBITS |
EXHIBIT INDEX
Exhibit No. | Description of Exhibits | |
2.1(1) | Agreement and Plan of Merger between Vestin Fund II, LLC and the Registrant | |
2.2(5) | 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 | |
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 and the Registrant | |
10.2(1) | Form of Rights Agreement between the Registrant and the rights agent | |
10.3 (4) | Agreement between Strategix Solutions, LLC and Vestin Realty Mortgage I, Inc. for accounting services. | |
10.4 (6) | Died in Lieu | |
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 | |
99.2R(3) | Vestin Realty Mortgage I, Inc. Code of Business Conduct and Ethics | |
101 | The following material from the Company's quarterly report on Form 10-Q for the three months ended March 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012 (unaudited), (ii) Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012 (unaudited) (iii) Consolidated Statements of Other Comprehensive Income for the three months ended March 31, 2013 and 2012 (unaudited) (iv) Consolidated Statement of Equity for the three months ended March 31, 2013 (unaudited) (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (unaudited) and (vi) Notes to the Consolidated Financial Statements (unaudited) |
(1) | Incorporated herein by reference to Post-Effective Amendment No. 3 to our Form S-4 Registration Statement filed on January 4, 2006 (File No. 333-125347) | |
(2) | Incorporated herein by reference to Post-Effective Amendment No. 4 to our Form S-4 Registration Statement filed on January 31, 2006 (File No. 333-125347) | |
(3) | Incorporated herein by reference to the Transition Report on Form 10-K for the ten month transition period ended April 30, 2006 filed on June 28, 2006 (File No. 000-51964) | |
(4) | Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on May 8, 2009 (File No. 000-51964) | |
(5) | Incorporated herein by reference to the Form 8-K/A filed on November 14, 2011 (File No. 000-51964) | |
(6) | Incorporated herein by reference to the Form 10-K filed on March 16, 2012 (File No. 000-51964) |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Vestin Realty Mortgage I, Inc. | ||
By: | /s/ Michael V. Shustek | |
Michael V. Shustek | ||
President and Chief Executive Officer | ||
Date: | May 15, 2013 | |
By: | /s/ Tracee Gress | |
Tracee Gress | ||
Chief Financial Officer | ||
Date: | May 15, 2013 |
Exhibit 31.1
CERTIFICATIONS
I, Michael V. Shustek, certify that:
1. I have reviewed this Form 10-Q of Vestin Realty Mortgage I, 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 consolidated 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 consolidated 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: May 15, 2013
/s/ Michael V. Shustek |
Michael V. Shustek |
Chief Executive Officer |
Vestin Realty Mortgage I, Inc. |
Exhibit 31.2
CERTIFICATIONS
I, Tracee Gress, certify that:
1. I have reviewed this Form 10-Q of Vestin Realty Mortgage I, 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 consolidated 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 consolidated 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: May 15, 2013
/s/ Tracee Gress |
Tracee Gress |
Chief Financial Officer |
Vestin Realty Mortgage I, Inc. |
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
Michael V. Shustek, as Chief Executive Officer of Vestin Realty Mortgage I, 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-Q for the three months ended March 31, 2013, 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: May 15, 2013
/s/ Michael V. Shustek |
Michael V. Shustek |
Chief Executive Officer |
Vestin Realty Mortgage I, Inc. |
Date: May 15, 2013
/s/ Tracee Gress |
Tracee Gress |
Chief Financial Officer |
Vestin Realty Mortgage I, Inc. |