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 September 30, 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: 000-27816
REDWOOD MORTGAGE INVESTORS VIII,
a California Limited Partnership
(Exact name of registrant as specified in its charter)
California | 94-3158788 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
900 Veterans Blvd., Suite 500, Redwood City, CA | 94063 |
(Address of principal executive offices) | (Zip Code) |
(650) 365-5341
(Registrant's telephone number, including area code)
Not Applicable |
(Former name, former address and former fiscal year, if changed since last report)
1
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. [X] YES[ ] 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 (§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).
[X] YES [ ] 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 [X] NO
2
Part I –FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Balance Sheets
September 30, 2013 (unaudited) and December 31, 2012 (audited)
($ in thousands)
ASSETS
September 30, | December 31, | |||||||
2013 | 2012 | |||||||
Cash and cash equivalents | $ | 14,539 | $ | 18,943 | ||||
Loans | ||||||||
Secured by deeds of trust | ||||||||
Principal balances | 49,307 | 60,870 | ||||||
Advances | 766 | 5,035 | ||||||
Accrued interest | 228 | 182 | ||||||
Unsecured | 148 | 108 | ||||||
Allowance for loan losses | (9,917 | ) | (19,815 | ) | ||||
Net loans | 40,532 | 46,380 | ||||||
Real estate owned | ||||||||
Held for sale, net | 18,481 | — | ||||||
Held as investment, net | 169,146 | 181,333 | ||||||
Receivable from affiliate | 9 | — | ||||||
Other assets, including receivables from guarantors | ||||||||
of secured loans of $3,951 at September 30, 2013 | 5,633 | 1,119 | ||||||
Total assets | $ | 248,340 | $ | 247,775 |
LIABILITIES AND CAPITAL
Liabilities | ||||||||
Mortgages payable | $ | 51,411 | $ | 47,293 | ||||
Accounts payable and accrued liabilities | 1,780 | 3,162 | ||||||
Payable to affiliate | 300 | 565 | ||||||
Total liabilities | 53,491 | 51,020 | ||||||
Capital | ||||||||
Partners’ capital | ||||||||
Limited partners’ capital, subject to redemption, net | 194,614 | 196,081 | ||||||
General partners’ capital (deficit), net | (1,023 | ) | (1,025 | ) | ||||
Total partners’ capital | 193,591 | 195,056 | ||||||
Non-controlling interest | 1,258 | 1,699 | ||||||
Total capital | 194,849 | 196,755 | ||||||
Total liabilities and capital | $ | 248,340 | $ | 247,775 |
The accompanying notes are an integral part of these consolidated financial statements.
3
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2013 and 2012
($ in thousands, except for per limited partner amounts)
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Revenues, net | ||||||||||||||||
Interest income | ||||||||||||||||
Loans | $ | 580 | $ | 348 | $ | 1,488 | $ | 1,094 | ||||||||
Imputed interest on formation loan | 99 | 114 | 289 | 207 | ||||||||||||
Other interest income | — | — | — | 1 | ||||||||||||
Total interest income | 679 | 462 | 1,777 | 1,302 | ||||||||||||
Interest expense | ||||||||||||||||
Bank loan, secured | — | 107 | — | 562 | ||||||||||||
Mortgages payable | 593 | 528 | 1,674 | 1,847 | ||||||||||||
Amortization of discount on formation loan | 99 | 114 | 289 | 207 | ||||||||||||
Other interest expense | — | 1 | — | 1 | ||||||||||||
Total interest expense | 692 | 750 | 1,963 | 2,617 | ||||||||||||
Net interest income/(expense) | (13 | ) | (288 | ) | (186 | ) | (1,315 | ) | ||||||||
Late fees | 3 | 1 | 8 | 14 | ||||||||||||
Other | 457 | 131 | 693 | 721 | ||||||||||||
Total revenues/(expense), net | 447 | (156 | ) | 515 | (580 | ) | ||||||||||
Provision for loan losses/(recoveries), net | — | — | (142 | ) | 139 | |||||||||||
Operating expenses | ||||||||||||||||
Mortgage servicing fees | 146 | 182 | 463 | 540 | ||||||||||||
Asset management fees | 190 | 195 | 574 | 645 | ||||||||||||
Costs from Redwood Mortgage Corp. | 386 | 318 | 1,160 | 996 | ||||||||||||
Professional services | 155 | 444 | 712 | 1,507 | ||||||||||||
REO | ||||||||||||||||
Rental operations, net | (1,051 | ) | (627 | ) | (2,914 | ) | (1,450 | ) | ||||||||
Holding costs | 17 | 141 | 108 | 861 | ||||||||||||
Loss/(gain) on disposal | — | 19 | — | (35 | ) | |||||||||||
Impairment loss | — | 380 | 291 | 466 | ||||||||||||
Other | 10 | 21 | 39 | 131 | ||||||||||||
Total operating expenses | (147 | ) | 1,073 | 433 | 3,661 | |||||||||||
Net income (loss) | $ | 594 | $ | (1,229 | ) | $ | 224 | $ | (4,380 | ) | ||||||
Net income (loss) | ||||||||||||||||
General partners (1%) | $ | 6 | $ | (12 | ) | $ | 2 | $ | (44 | ) | ||||||
Limited partners (99%) | 588 | (1,217 | ) | 222 | (4,336 | ) | ||||||||||
$ | 594 | $ | (1,229 | ) | $ | 224 | $ | (4,380 | ) | |||||||
Net income (loss) per $1,000 invested by limited | ||||||||||||||||
partners for entire period | ||||||||||||||||
Where income is reinvested | $ | 3 | $ | (5 | ) | $ | 1 | $ | (19 | ) | ||||||
Where partner receives income in monthly | ||||||||||||||||
distributions | $ | 3 | $ | (5 | ) | $ | 1 | $ | (19 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
4
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of Changes in Partners’ Capital
For the Nine Months Ended September 30, 2013
(in thousands) (unaudited)
Limited Partners | ||||||||||||||||
Capital | Unallocated Syndication Costs | Formation Loan | Capital, net | |||||||||||||
Balance, December 31, 2012 | $ | 204,026 | $ | (318 | ) | $ | (7,627 | ) | $ | 196,081 | ||||||
Net income (loss) | 222 | — | — | 222 | ||||||||||||
Allocation of syndication costs | (262 | ) | 262 | — | — | |||||||||||
Withdrawals | (1,689 | ) | — | — | (1,689 | ) | ||||||||||
Balance, September 30, 2013 | $ | 202,297 | $ | (56 | ) | $ | (7,627 | ) | $ | 194,614 |
General Partners | ||||||||||||||||
Capital | Unallocated Syndication Costs | Capital, net | Total Partners’ Capital | |||||||||||||
Balance, December 31, 2012 | $ | (1,022 | ) | $ | (3 | ) | $ | (1,025 | ) | $ | 195,056 | |||||
Net income (loss) | 2 | — | 2 | 224 | ||||||||||||
Allocation of syndication costs | (2 | ) | 2 | — | — | |||||||||||
Withdrawals | — | — | — | (1,689 | ) | |||||||||||
Balance, September 30, 2013 | $ | (1,022 | ) | $ | (1 | ) | $ | (1,023 | ) | $ | 193,591 |
The accompanying notes are an integral part of these consolidated financial statements.
5
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2013 and 2012
($ in thousands) (unaudited)
2013 | 2012 | |||||||
Cash flows from operating activities | ||||||||
Net income (loss) | $ | 224 | $ | (4,380 | ) | |||
Adjustments to reconcile net income (loss) to | ||||||||
net cash provided by (used in) operating activities | ||||||||
Amortization of borrowings-related origination fees | 64 | 283 | ||||||
Imputed interest on formation loan | (289 | ) | (207 | ) | ||||
Amortization of discount on formation loan | 289 | 207 | ||||||
Provision for loan losses | (142 | ) | 139 | |||||
REO – depreciation, rental properties | 1,852 | 1,731 | ||||||
REO – depreciation, other properties | 16 | — | ||||||
REO – loss/(gain) on disposal | — | (35 | ) | |||||
REO – impairment loss | 397 | 466 | ||||||
Change in operating assets and liabilities | ||||||||
Accrued interest | (51 | ) | 858 | |||||
Advances on loans | 1,954 | (463 | ) | |||||
Allowance for loan losses-recoveries, net of receivables | 1,177 | 21 | ||||||
Receivable from affiliates | (137 | ) | — | |||||
Other assets | (1,067 | ) | (1,019 | ) | ||||
Accounts payable and accrued liabilities | (1,397 | ) | (2,533 | ) | ||||
Payable to affiliate | (265 | ) | (217 | ) | ||||
Net cash provided by (used in) operating activities | 2,625 | (5,149 | ) | |||||
Cash flows from investing activities | ||||||||
Secured loans funded or acquired | (16,638 | ) | (10,706 | ) | ||||
Principal collected on secured loans | 7,119 | 7,926 | ||||||
Secured loans assigned to affiliates | 2,107 | — | ||||||
Unsecured loans | (40 | ) | — | |||||
Payments for development of REO | (2,963 | ) | — | |||||
Proceeds from disposition of REO | 1,398 | 25,182 | ||||||
Net cash provided by (used in) investing activities | (9,017 | ) | 20,243 | |||||
Cash flows from financing activities | ||||||||
Payments on bank loan | — | (16,789 | ) | |||||
Mortgages taken | 5,000 | 5,160 | ||||||
Payments on mortgages | (882 | ) | (1,267 | ) | ||||
Partners’ withdrawals | (1,689 | ) | (1,857 | ) | ||||
Increase/(decrease) in non-controlling interest | (441 | ) | (1,418 | ) | ||||
Net cash provided by (used in) financing activities | 1,988 | (16,171 | ) | |||||
Net increase (decrease) in cash and cash equivalents | (4,404 | ) | (1,077 | ) | ||||
Cash and cash equivalents, January 1 | 18,943 | 4,200 | ||||||
Cash and cash equivalents, September 30 | $ | 14,539 | $ | 3,123 | ||||
Supplemental disclosures of cash flow information | ||||||||
Non-cash investing activities | ||||||||
Real estate acquired through foreclosure/settlement on loans, | ||||||||
net of liabilities assumed | $ | 6,979 | $ | 1,524 | ||||
Cash paid for interest | $ | 1,674 | $ | 2,409 |
The accompanying notes are an integral part of these consolidated financial statements.
6
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 1 – ORGANIZATIONAL AND GENERAL
In the opinion of the general partners, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the consolidated financial information included therein. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the partnership’s Form 10-K for the fiscal year ended December 31, 2012 filed with the Securities and Exchange Commission (SEC). The results of operations for the nine month period ended September 30, 2013 are not necessarily indicative of the operating results to be expected for the full year.
Redwood Mortgage Investors VIII, a California Limited Partnership, (“RMI VIII” or the “partnership”) was organized in 1993. The partnership was organized to engage in business as a mortgage lender for the primary purpose of making loans secured by deeds of trust on California real estate.
The general partners of the partnership are Redwood Mortgage Corp. (“RMC”) and its wholly-owned subsidiary, Gymno LLC (“Gymno”), a California limited liability company, and Michael R. Burwell (“Burwell”), an individual. The general partners are solely responsible for partnership business, subject to the voting rights of the limited partners on specified matters. Any one of the general partners acting alone has the power and authority to act for and bind the partnership. Loans are being arranged and serviced by RMC.
The rights, duties and powers of the general and limited partners of the partnership are governed by the limited partnership agreement and Sections 15900 et seq. of the California Corporations Code.
The partnership completed its sixth offering stage in 2008. No additional offerings are contemplated at this time. Sales commissions owed to securities broker/dealers in conjunction with the offerings, are not paid directly out of the offering proceeds by the partnership. These commissions are paid by RMC as consideration for the exclusive right to originate loans for RMI VIII. To fund the payment of these commissions, during the offering periods, the partnership lent amounts to RMC to pay all sales commissions and amounts payable in connection with unsolicited orders to invest (formation loan).
On the mortgage loans originated for RMI VIII, RMC may collect loan brokerage commissions (points) limited to an amount not to exceed four percent per year of the total partnership assets. The loan brokerage commissions are paid by the borrowers and thus, are not an expense of the partnership. The proceeds from loan brokerage commissions and other fees earned are the source of funds for the repayment of the formation loans by RMC.
A majority of the outstanding limited partnership interests may, without the permission of the general partners, vote to: (i) terminate the partnership, (ii) amend the limited partnership agreement, (iii) approve or disapprove the sale of all or substantially all of the assets of the partnership and (iv) remove or replace one or all of the general partners.
The approval of all the limited partners is required to elect a new general partner to continue the partnership business where there is no remaining general partner after a general partner ceases to be a general partner other than by removal.
Profits and losses are allocated among the limited partners according to their respective capital accounts after one percent of profits and losses is allocated to the general partners, and are subject to subsequent adjustment as a result of quarterly and year-end accounting and reporting.
The description of the limited partnership agreement contained in these financial statements provides only general information. Limited partners should refer to the limited partnership agreement for a more complete description of the provisions.
Income taxes – federal and state – are the obligation of the partners, if and when taxes apply, other than for the minimum annual California franchise tax paid by the partnership.
7
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 1 – ORGANIZATIONAL AND GENERAL (continued)
Formation loan
RMC financed the payment of sales commissions to broker-dealers by borrowing funds (“the formation loan”) from RMI VIII. The formation loan is non-interest bearing and is being repaid equally over an approximate ten-year period commencing the year after the close of a partnership offering. Interest has been imputed at the market rate of interest in effect in the years the offerings closed.
The formation loan is deducted from limited partners’ capital in the consolidated balance sheets. As payments are received from RMC, the formation loan’s balance outstanding and the deduction from capital are reduced. If the general partners are removed and RMC is no longer receiving payments for services rendered, the formation loan is forgiven.
Commission and fees paid by borrowers to the general partners
Brokerage commissions, loan originations – the partnership agreement provides for RMC to collect a loan brokerage commission for fees in connection with the review, selection, evaluation, negotiation and extension of loans, that is expected to range from approximately 2% to 5% of the principal amount of each loan made during the year. Total loan brokerage commissions are limited to an amount not to exceed four percent of the total partnership assets per year. The loan brokerage commissions are paid by the borrowers and are not an expense of the partnership.
Other fees – the partnership agreement provides for RMC or Gymno to receive fees for processing, notary, document preparation, credit investigation, reconveyance, and other mortgage related fees. The amounts received are customary for comparable services in the geographical area where the property securing the loan is located, payable solely by the borrower and not by the partnership.
Syndication costs
The partnership bears its own syndication costs, other than certain sales commissions, including legal and accounting expenses, printing costs, selling expenses and filing fees. Syndication costs are charged monthly against partners’ capital and are allocated to individual partners consistent with the partnership agreement.
Withdrawals
In March 2009, in response to economic conditions, the dysfunction of the credit markets, the distress in the real estate markets, and the expected cash needs of the partnership, the partnership suspended capital liquidations, and is not accepting new liquidation requests until further notice.
Term of the partnership
The partnership is scheduled to terminate in 2032, unless sooner terminated as provided in the partnership agreement.
8
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The partnership’s consolidated financial statements include the accounts of the partnership, its wholly-owned subsidiaries, and its 72.5%-owned subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation.
Reclassifications
Certain reclassifications, not affecting previously reported net income or total partner capital, have been made to the previously issued consolidated financial statements to conform to the current year presentation.
Management estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Such estimates relate principally to the determination of the allowance for loan losses, including the valuation of impaired loans, (which itself requires determining the fair value of the collateral), and the valuation of real estate held for sale and held as investment, at acquisition and subsequently. Actual results could differ significantly from these estimates.
The fair value of the collateral is reviewed quarterly and the protective equity for each loan is computed. As used herein, “protective equity” is the arithmetic difference between the net realizable value (fair value of the collateral less the cost to sell), net of any senior liens, and the loan balance, where “loan balance” is the sum of the unpaid principal, advances and the recorded interest. This computation is done for each loan (whether performing or designated impaired), and while loans secured by collateral of similar property type are grouped, there is enough distinction and variation in the collateral that a loan-by-loan, collateral-by-collateral analysis is appropriate.
The fair value of the collateral at sale is the price that would be received (i.e. the exit price) in an orderly transaction in the principal or most advantageous market under current market conditions and is determined by exercise of judgment based on management’s experience informed by appraisals (by licensed appraisers), brokers’ opinion of values, and publicly available information on in-market transactions.
Appraisals of commercial real property generally present three approaches to estimating value: 1) market comparables or sales approach; 2) cost to replace and 3) capitalized cash flows or investment approach. These approaches may or may not result in a common, single value. The market-comparables approach may yield several different values depending on certain basic assumptions, such as, determining highest and best use (which may or may not be the current use); determining the condition (e.g. as-is, when-completed, or for land when-entitled); and determining the unit of value (e.g. as a series of individual unit sales or as a bulk disposition). In some prior years, as has been previously noted, the appraisal process was further complicated by the low real estate transaction volumes of which a very high percentage were considered to be distressed sales, as well as other poor market conditions.
9
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Management estimates (continued)
Management has the requisite familiarity with the markets the partnership lends in generally and of the collateral properties specifically to analyze sales-comparables and assess their suitability/applicability. Management is acquainted with market participants – investors, developers, brokers, lenders – that are useful, relevant secondary sources of data and information regarding valuation and valuation variability. These secondary sources may have familiarity with and perspectives on pending transactions, successful strategies to optimize value, and the history and details of specific properties – on and off the market – that enhance the process and analysis that is particularly and principally germane to establishing value in distressed markets and/or property types (such as land held for development and for units in a condominium conversion). Multiple inputs from different sources often collectively provide the best evidence of fair value. In these cases expected cash flows would be considered alongside other relevant information. Management’s analysis of these secondary sources, as well as the analysis of comparable sales, assists management in preparing its estimates regarding valuations, such as collateral fair value. However, such estimates are inherently imprecise and actual results could differ significantly from such estimates.
Cash and cash equivalents
The partnership considers all highly liquid financial instruments with maturities of three months or less at the time of purchase to be cash equivalents. Periodically, partnership cash balances in banks exceed federally insured limits.
Loans and interest income
Loans generally are stated at the unpaid principal balance (principal). Management has discretion to pay amounts (advances) to third parties on behalf of borrowers to protect the partnership’s interest in the loan. Advances include, but are not limited to, the payment of interest and principal on a senior lien to prevent foreclosure by the senior lien holder, property taxes, insurance premiums, and attorney fees. Advances generally are stated at the unpaid principal balance and accrue interest until repaid by the borrower.
The partnership may fund a specific loan origination net of an interest reserve to insure timely interest payments at the inception (one to two years) of the loan. As monthly interest payments become due, the partnership funds the payments into the affiliated trust account.
If based upon current information and events, it is probable the partnership will be unable to collect all amounts due according to the contractual terms of the loan agreement, then a loan may be designated as impaired. Impaired loans are included in management’s periodic analysis of recoverability. If a valuation allowance had been established on an impaired loan, any subsequent payments on impaired loans are applied to late fees and then to reduce first the accrued interest, then advances, and then unpaid principal.
From time to time, the partnership negotiates and enters into loan modifications with borrowers whose loans are delinquent. If the loan modification results in a significant reduction in the cash flow compared to the original note, the modification is deemed a troubled debt restructuring and a loss is recognized. In the normal course of the partnership’s operations, loans that mature may be renewed at then current market rates and terms for new loans. Such renewals are not designated as impaired, unless the matured loan was previously designated as impaired.
Interest is accrued daily based on the unpaid principal balance of the loans. An impaired loan continues to accrue as long as the loan is in the process of collection and is considered to be well-secured. Loans are placed on non-accrual status at the earlier of management’s determination that the primary source of repayment will come from the foreclosure and subsequent sale of the collateral securing the loan (which usually occurs when a notice of sale is filed) or when the loan is no longer considered well-secured. When a loan is placed on non-accrual status, the accrual of interest is discontinued; however, previously recorded interest is not reversed. A loan may return to accrual status when all delinquent interest and principal payments become current in accordance with the terms of the loan agreement.
10
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for loan losses
Loans and the related accrued interest and advances are analyzed on a periodic basis for ultimate recoverability. Delinquencies are identified and followed as part of the loan system. Delinquencies are determined based upon contractual terms. For impaired loans, a provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral values, such that the net carrying amount (unpaid principal balance, plus advances, plus accrued interest less the specific allowance) is reduced to the present value of future cash flows discounted at the loan’s effective interest rate, or, if a loan is collateral dependent, to the estimated net realizable value of the related collateral net of any senior loans and other claims.
Loans determined not to be individually impaired are grouped by the property type of the underlying collateral, and for each loan and for the total by property type, the amount of protective equity or amount of exposure to loss (i.e., the dollar amount of the deficiency of the fair value of the underlying collateral to the loan balance) is computed.
Based on its knowledge of the borrowers and their historical (and expected) performance, and the exposure to loss as indicated in the analysis, management estimates an appropriate reserve by property type for probable credit losses in the portfolio. Because the partnership is an asset-based lender, except as to owner-occupied residences, and because specific regions, neighborhoods and even properties within the same neighborhoods, vary significantly as to real estate values and transaction activity, general market trends, which may be indicative of a change in the risk of a loss, are secondary to the condition of the property, the property type and the neighborhood/region in which the property is located, and do not enter substantially into the determination of the amount of the non-specific (i.e. general) reserves.
The partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined the full amount is not collectible.
Real estate owned (REO) held for sale
REO, held for sale includes real estate acquired in full or partial settlement of loan obligations generally through foreclosure that is being marketed for sale. REO, held for sale is recorded at acquisition at the lower of the amount owning per the note, plus any senior indebtedness, or at the property’s net realizable value. Any excess of the recorded investment in the loan over the net realizable value is charged against the allowance for loan losses. After acquisition, costs incurred relating to the development and improvement of property are capitalized to the extent they do not cause the recorded value to exceed the net realizable value, whereas costs relating to holding and disposition of the property are expensed as incurred. After acquisition, REO, held for sale is analyzed periodically for changes in net realizable values and any subsequent write down is charged to operating expenses. Any recovery in the net realizable value subsequent to such a write down is recorded – not to exceed the net realizable value at acquisition – as an offset to operating expenses. Gains or losses on sale of the property are recorded as an operating expense. Recognition of gains on the sale of real estate is dependent upon the transaction meeting certain criteria related to the nature of the property and the terms of the sale including potential seller financing.
Real estate owned (REO), held as investment, net
REO, held as investment, net includes real estate acquired in full or partial settlement of loan obligations generally through foreclosure that is not being marketed for sale and is either being operated, such as rental properties; is being managed through the development process, including obtaining appropriate and necessary entitlements, permits and construction; or are idle properties awaiting more favorable market conditions. REO, held as investment, net, is recorded at acquisition at the lower of the amount owning per the note, plus any senior indebtedness, or at the property’s estimated net realizable value. After acquisition, costs incurred relating to the development and improvement of the property are capitalized, whereas costs relating to operating or holding the property are expensed. Subsequent to acquisition, management periodically compares the carrying value of real estate to expected undiscounted future cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to estimated net realizable value.
11
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Rental income
Residential rental lease lengths generally range from month to month up to one year, and commercial rental lease lengths generally range from five to ten years, with rental income recognized when earned in accordance with the lease agreement.
Depreciation
Real estate owned held as investment that is being operated is depreciated on a straight-line basis over the estimated useful life of the property once the asset is placed in service.
Net income per $1,000 invested
Amounts reflected in the statements of income as net income per $1,000 invested by limited partners for the entire period are amounts allocated to limited partners who held their investment throughout the period and have either elected to leave their profits to compound or elected to receive periodic distributions of their net income. Individual income is allocated each month based on the limited partners’ pro rata share of partners’ capital. Because the net income percentage varies from month to month, amounts per $1,000 will vary for those individuals who made or withdrew investments during the period, or selected other options.
NOTE 3 – GENERAL PARTNERS AND OTHER RELATED PARTIES
The general partners are entitled to one percent of the profits and losses, which amounted to approximately $6,000 and $(12,000) for the three months and $2,000 and $(44,000) for the nine months ended September 30, 2013 and 2012, respectively.
The following commissions and/or fees are paid by the borrowers to the general partners and their affiliates and are not an expense of the partnership.
Brokerage commissions, loan originations
Loan brokerage commissions paid by the borrowers were $89,000 and $0 for the three months and $315,000 and $107,000 for the nine months ended September 30, 2013 and 2012, respectively.
Other fees
Other fees totaled $5,876 and $150 for the three months and $16,052 and $1,505 for the nine months ended September 30, 2013 and 2012, respectively.
The following commissions and fees are paid by the partnership to RMC.
Mortgage servicing fees
RMC may earn mortgage servicing fees from RMI VIII of up to 1.5% annually of the unpaid principal of the loan portfolio or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located. Historically, RMC charged one percent annually, and at times waived additional amounts to improve the partnership’s earnings. Such fee waivers were not made for the purpose of providing the partnership with sufficient funds to satisfy withdrawal requests, nor were such waivers made in order to meet any required level of distributions, as the partnership has no such required level of distributions. RMC does not use any specific criteria in determining the amount of fees, if any, to be waived. The decision to waive fees and the amount, if any, to be waived, is made by RMC in its sole discretion.
12
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 3 – GENERAL PARTNERS AND OTHER RELATED PARTIES (continued)
Mortgage servicing fees (continued)
Mortgage servicing fees paid to RMC by the partnership are presented in the following table for the three and nine months ended September 30, ($ in thousands).
Three months ended September 30, | Nine months ended September 30, | |||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||
Chargeable by RMC | $ | 219 | $ | 272 | $ | 695 | $ | 810 | ||||||
Waived by RMC | (73 | ) | (90 | ) | (232 | ) | (270 | ) | ||||||
Charged | $ | 146 | $ | 182 | $ | 463 | $ | 540 |
Asset management fees
The general partners receive monthly fees for managing the partnership’s loan portfolio and operations of up to 1/32 of 1% of the “net asset value” (3/8 of 1% annually). At times, the general partners have charged less than the maximum allowable rate to enhance the partnership’s earnings. Such fee waivers were not made with the purpose of providing the partnership with sufficient funds to satisfy withdrawal requests, nor to meet any required level of distributions, as the partnership has no such required level of distributions. RMC does not use any specific criteria in determining the exact amount of fees, if any, to be waived. The decision to waive fees and the amount, if any, to be waived, is made by RMC in its sole discretion.
Asset management fees for the three months ended September 30, 2013 and 2012 were $190,000 and $195,000, respectively, and for the nine months ended September 30, 2013 and 2012, were $574,000 and $645,000, respectively. No asset management fees were waived during any period reported.
Costs from Redwood Mortgage Corp.
RMC is reimbursed by the partnership for operating expenses incurred on behalf of the partnership, including without limitation, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners, and out-of-pocket general and administration expenses. The decision to request reimbursement of any qualifying charges is made by RMC in its sole discretion. Operating expenses of $386,000 and $318,000, for the three months and $1,160,000 and $996,000, for the nine months ended September 30, 2013 and 2012, respectively, were reimbursed to RMC. To the extent some operating expenses incurred on behalf of RMI VIII were not charged by RMC, the financial position and results of operations for the partnership would be different.
Formation loan
Formation loan transactions are presented in the following table at September 30, 2013 ($ in thousands).
Formation loan made | $ | 22,567 | ||
Unamortized discount on formation loan | (1,934 | ) | ||
Formation loan made, net | 20,633 | |||
Repayments to date | (14,297 | ) | ||
Early withdrawal penalties applied | (643 | ) | ||
Formation loan, net | 5,693 | |||
Unamortized discount on formation loan | 1,934 | |||
Balance, September 30, 2013 | $ | 7,627 |
13
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 3 – GENERAL PARTNERS AND OTHER RELATED PARTIES (continued)
Formation loan (continued)
An estimated amount of imputed interest is recorded for the formation loan. During the three months ended September 30, 2013 and 2012, $99,000 and $114,000, respectively, was recorded related to imputed interest and for the nine months ended September 30, 2013 and 2012, $289,000 and $207,000, respectively, was recorded.
RMC acts as the broker in originating mortgage loans for RMI VIII. The corresponding brokerage commissions paid by borrowers from mortgage loans made by these funds are the primary source of cash used to repay the formation loans. RMI VIII was prohibited by its lending banks from originating new loans under the terms of an Amended and Restated Loan Agreement dated October 2010, and a preceding forbearance agreement that was in effect in the fourth quarter of 2009, until the bank loan was repaid in full, which loan was paid in full in September 2012. The amended loan and forbearance agreements were the result of a technical (i.e. not a payment default) covenant default under the original loan. As a result, RMC was deprived of the opportunity to receive brokerage commissions on loans by RMI VIII for the period from the fourth quarter of 2009 continuing through September 30, 2012, a period of almost three years. During that period, despite receiving no loan brokerage commissions, RMC continued to make the annual formation loan payments of approximately $1.8 million per year (or $5.4 million for the three years) from its own cash reserves that existed as of the date of the forbearance agreement. RMC believes it would have had a reasonable argument that the annual formation loan payments should be suspended until such time as lending by RMI VIII was permitted to resume and brokerage commissions could be earned, but RMC elected not to make such a proposal and, instead, continued to make annual formation loan payments due to concerns that the lending banks would view nonpayment of the formation loan as another technical loan default that might have led to a “distressed sale” liquidation of RMI VIII’s assets, resulting in substantial loss of limited partners’ capital.
As the bank loan was fully repaid as of September 2012, RMC has temporarily suspended annual formation loan payments, beginning with the payment due December 31, 2012, for the three-year period then beginning, which is a period commensurate with the period during which lending by RMI VIII was prohibited and RMC was deprived of loan brokerage commissions.
NOTE 4 – LOANS
The partnership generally funds loans with a fixed interest rate and a five-year term. As of September 30, 2013, approximately 45% of the partnership’s loans (representing 48% of the aggregate principal balance of the partnership’s loan portfolio) have a five year term or less from loan inception. The remaining loans have terms longer than five years.
As of September 30, 2013, approximately 33% of the loans outstanding (representing 60% of the aggregate principal balance of the partnership’s loan portfolio) provide for monthly payments of interest only, with the principal due in full at maturity. The remaining loans require monthly payments of principal and interest, typically calculated on a 30 year amortization, with the remaining principal balance due at maturity.
The partnership may make construction loans that are not fully disbursed at loan inception. Construction loans are determined by the managers to be those loans made to borrowers for the construction of entirely new structures or dwellings, whether residential, commercial or multi-family properties. The partnership will approve and fund the construction loan up to a maximum loan balance. Disbursements will be made periodically as phases of the construction are completed or at such other times as the loan documents may require. Undisbursed construction funds will be held in escrow pending disbursement. Upon project completion, construction loans are reclassified as permanent loans. Funding of construction loans is limited to 10% of the loan portfolio. As of September 30, 2013, the partnership had no construction loans outstanding.
14
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 4 – LOANS (continued)
The partnership may also make rehabilitation loans. A rehabilitation loan will be approved up to a maximum principal balance and, at loan inception, will be either fully or partially disbursed. A rehabilitation loan escrow account is fully funded and advanced periodically as phases of the rehabilitation are completed or at such other times as the loan documents may require. The rehabilitation loan proceeds are generally used to acquire and remodel single family homes for future sale or rental. As of September 30, 2013, the partnership had no rehabilitation loans outstanding.
Loans unpaid principal balance (principal)
Secured loan transactions are summarized in the following table for the nine months ended September 30, ($ in thousands).
2013 | 2012 | |||||||
Principal, January 1 | $ | 60,870 | $ | 73,386 | ||||
Loans funded or acquired | 16,638 | 10,606 | ||||||
Principal collected | (7,119 | ) | (7,899 | ) | ||||
Loans assigned to affiliates | (2,107 | ) | — | |||||
Foreclosures | (18,975 | ) | (3,728 | ) | ||||
Principal, September 30 | $ | 49,307 | $ | 72,365 |
During the nine months ended September 30, 2013 and 2012, the partnership renewed two loans, respectively, with a remaining aggregate principal of approximately $350,000 and $383,000, at September 30, 2013 and 2012, respectively, not included in the activity shown on the table above.
15
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 4 – LOANS (continued)
Loan characteristics
Secured loans had the characteristics presented in the following table ($ in thousands).
September 30, | December 31, | |||||||
2013 | 2012 | |||||||
Number of secured loans | 33 | 39 | ||||||
Secured loans – principal | $ | 49,307 | $ | 60,870 | ||||
Secured loans – lowest interest rate (fixed) | 3.00 | % | 3.00 | % | ||||
Secured loans – highest interest rate (fixed) | 12.00 | % | 12.00 | % | ||||
Average secured loan – principal | $ | 1,494 | $ | 1,561 | ||||
Average principal as percent of total principal | 3.03 | % | 2.56 | % | ||||
Average principal as percent of partners’ capital | 0.77 | % | 0.80 | % | ||||
Average principal as percent of total assets | 0.60 | % | 0.63 | % | ||||
Largest secured loan – principal | $ | 16,312 | $ | 16,697 | ||||
Largest principal as percent of total principal | 33.08 | % | 27.43 | % | ||||
Largest principal as percent of partners’ capital | 8.43 | % | 8.56 | % | ||||
Largest principal as percent of total assets | 6.57 | % | 6.74 | % | ||||
Smallest secured loan – principal | $ | 86 | $ | 87 | ||||
Smallest principal as percent of total principal | 0.18 | % | 0.14 | % | ||||
Smallest principal as percent of partners’ capital | 0.04 | % | 0.04 | % | ||||
Smallest principal as percent of total assets | 0.03 | % | 0.04 | % | ||||
Number of counties where security is located (all California) | 17 | 19 | ||||||
Largest percentage of principal in one county | 42.21 | % | 46.18 | % | ||||
Number of secured loans in foreclosure status | 5 | 6 | ||||||
Secured loans in foreclosure – principal | $ | 17,245 | $ | 1,910 | ||||
Number of secured loans with an interest reserve | — | — | ||||||
Interest reserves | $ | — | $ | — |
As of September 30, 2013, the partnership’s largest loan, in the unpaid principal balance of $16,312,000 (representing 33.08% of outstanding secured loans and 6.57% of partnership assets) has an interest rate of 5.00% and is secured by 75 units in a condominium complex with 128 total units, located in Contra Costa County, California. This loan matured April 1, 2012. A court appointed receiver is managing the 75 units. A foreclosure sale date is still to be determined based upon the progress of the receiver.
Larger loans sometimes increase above 10% of the secured loan portfolio or partnership assets as these amounts decrease due to limited partner withdrawals and loan payoffs and due to restructuring of existing loans.
16
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 4 – LOANS (continued)
Distribution of loans within California
Secured loans are distributed within California as summarized in the following table ($ in thousands).
September 30, 2013 | December 31, 2012 | |||||||||||||
Loans | Principal | Percent | Loans | Principal | Percent | |||||||||
San Francisco | 8 | $ | 20,815 | 42 | % | 6 | $ | 28,115 | 46 | % | ||||
San Francisco Bay Area(1) | 9 | 22,048 | 45 | 16 | 25,688 | 42 | ||||||||
Northern California(1) | 6 | 3,064 | 6 | 6 | 3,110 | 5 | ||||||||
Southern California | 10 | 3,380 | 7 | 11 | 3,957 | 7 | ||||||||
Total secured loans | 33 | $ | 49,307 | 100 | % | 39 | $ | 60,870 | 100 | % |
(1) | Excludes line(s) above |
Lien position
At funding secured loans had the following lien positions and are presented in the following table ($ in thousands).
September 30, 2013 | December 31, 2012 | |||||||||||||
Loans | Principal | Percent | Loans | Principal | Percent | |||||||||
First trust deeds | 15 | $ | 34,107 | 69 | % | 17 | $ | 33,785 | 56 | % | ||||
Second trust deeds | 17 | 14,909 | 30 | 21 | 26,789 | 44 | ||||||||
Third trust deeds | 1 | 291 | 1 | 1 | 296 | — | ||||||||
Total secured loans | 33 | 49,307 | 100 | % | 39 | 60,870 | 100 | % | ||||||
Liens due other lenders at loan closing | 52,849 | 80,875 | ||||||||||||
Total debt | $ | 102,156 | $ | 141,745 | ||||||||||
Appraised property value at loan closing | $ | 150,883 | $ | 199,392 | ||||||||||
Percent of total debt to appraised | ||||||||||||||
values (LTV) at loan closing(2) | 67.71 | % | 71.10 | % |
(2) | Based on appraised values and liens due other lenders at loan closing. The loan to value computation does not take into account subsequent increases or decreases in security property values following the loan closing nor does it include decreases or increases of the amount owing on senior liens to other lenders by payments or interest accruals, if any. Property values likely have changed, particularly over the last four years, and the portfolio’s current loan to value ratio likely is higher than this historical ratio. |
Property type
Secured loans summarized by property type are presented in the following table ($ in thousands).
September 30, 2013 | December 31, 2012 | |||||||||||||
Loans | Principal | Percent | Loans | Principal | Percent | |||||||||
Single family | 26 | $ | 32,526 | 66 | % | 31 | $ | 46,295 | 76 | % | ||||
Multi-family | — | — | — | 2 | 2,557 | 4 | ||||||||
Commercial | 6 | 16,247 | 33 | 5 | 11,479 | 19 | ||||||||
Land | 1 | 534 | 1 | 1 | 539 | 1 | ||||||||
Total secured loans | 33 | $ | 49,307 | 100 | % | 39 | $ | 60,870 | 100 | % |
17
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 4 – LOANS (continued)
Property type (continued)
Single family properties include owner-occupied and non-owner occupied single family homes (1-4 unit residential buildings), condominium units, townhouses, and condominium complexes. From time to time, loan originations in one sector or property type become more active due to prevailing market conditions. The current concentration of the partnership’s loan portfolio in condominium properties may pose additional or increased risks. Recovery of the condominium sector of the real estate market is generally expected to lag behind that of single-family residences. In addition, availability of financing for condominium properties has been, and will likely continue to be, constricted and more difficult to obtain than other property types. As of September 30, 2013 and December 31, 2012, $18,798,000 and $36,855,000, respectively, of the partnership’s loans were secured by condominium properties.
Condominiums may create unique risks for the partnership that are not present for loans made on other types of properties. In the case of condominiums, a board of managers generally has discretion to make decisions affecting the condominium building, including regarding assessments to be paid by the unit owners, insurance to be maintained on the building, and the maintenance of that building, which may have an impact on the partnership loans that are secured by such condominium property.
The partnership may have less flexibility in foreclosing on the collateral for a loan secured by condominiums upon a default by the borrower. Among other things, the partnership must consider the governing documents of the homeowners association and the state and local laws applicable to condominium units, which may require an owner to obtain a public report prior to the sale of the units.
Scheduled maturities
Secured loans are scheduled to mature as presented in the following table ($ in thousands).
Scheduled maturities at September 30, 2013 | Loans | Principal | Percent | ||||
2013 | 1 | $ | 96 | 0 | % | ||
2014 | 6 | 11,914 | 24 | ||||
2015 | 8 | 12,839 | 26 | ||||
2016 | 3 | 4,012 | 8 | ||||
2017 | 4 | 1,394 | 3 | ||||
Thereafter | 1 | 237 | 1 | ||||
Total future maturities | 23 | 30,492 | 62 | ||||
Matured at September 30, 2013 | 10 | 18,815 | 38 | ||||
Total secured loans | 33 | $ | 49,307 | 100 | % |
It is the partnership’s experience loans may be repaid or refinanced before, at or after the contractual maturity date. For matured loans, the partnership may continue to accept payments while pursuing collection of amounts owed from borrowers. Therefore, the above tabulation for scheduled maturities is not a forecast of future cash receipts.
The partnership reports maturity data based upon the most recent contractual agreement with the borrower. The table above includes two loans with a remaining aggregate principal of $350,000 which were renewed in 2013.
18
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 4 – LOANS (continued)
Matured loans
Secured loans past maturity are summarized in the following table ($ in thousands).
September 30, | December 31, | |||||||
2013 | 2012 | |||||||
Number of loans(3)(4) | 10 | 14 | ||||||
Principal | $ | 18,815 | $ | 36,486 | ||||
Advances | 743 | 5,014 | ||||||
Accrued interest | 63 | 61 | ||||||
Loan balance | $ | 19,621 | $ | 41,561 | ||||
Percent of principal | 38 | % | 60 | % |
(3) | The secured loans past maturity include 9 and 12 loans as of September 30, 2013 and December 31, 2012, also included in the secured loans in non-accrual status. |
(4) | The secured loans past maturity include 9 and 10 loans as of September 30, 2013 and December 31, 2012, respectively, also included in the secured loans delinquency. |
Delinquency
Secured loans summarized by payment delinquency are presented in the following table ($ in thousands).
September 30, | December 31, | |||||||
2013 | 2012 | |||||||
Past due | ||||||||
30-89 days | $ | 16,743 | $ | 783 | ||||
90-179 days | 474 | 2,062 | ||||||
180 or more days | 1,170 | 19,033 | ||||||
Total past due | 18,387 | 21,878 | ||||||
Current | 30,920 | 38,992 | ||||||
Total secured loans | $ | 49,307 | $ | 60,870 |
At September 30, 2013, the partnership had four workout agreements in effect with an aggregate principal of $3,365,000. All of the borrowers had made all required payments under the workout agreements and the loans were included in the above table as current. All of the loans with a workout agreement in effect were designated impaired.
At December 31, 2012, the partnership had six workout agreements in effect with an aggregate principal of $20,081,000. Of the six borrowers, four, with an aggregate principal of $2,967,000 had made all required payments under the workout agreements and the loans were included in the above table as current. All of the loans with a workout agreement in effect were designated impaired.
Interest income accrued on loans contractually past due 90 days or more as to principal or interest payments during the nine months ended September 30, 2013 and 2012 was $27,000 and 22,000, respectively. Accrued interest on loans contractually past due 90 days or more as to principal or interest payments at September 30, 2013 and December 31, 2012 was $63,000 and $14,000, respectively.
19
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 4 – LOANS (continued)
Loans in non-accrual status
Secured loans in non-accrual status are summarized in the following table ($ in thousands).
September 30, | December 31, | |||||||
2013 | 2012 | |||||||
Secured loans in non-accrual status | ||||||||
Number of loans | 11 | 18 | ||||||
Principal | $ | 18,794 | $ | 43,352 | ||||
Advances | 596 | 5,028 | ||||||
Accrued interest | 63 | 11 | ||||||
Loan balance | $ | 19,453 | $ | 48,391 | ||||
Foregone interest | $ | 560 | $ | 3,255 |
At September 30, 2013, there was one loan with a loan balance of $659,000, and at December 31, 2012, there was one loan with a loan balance of $99,000, in each case, was contractually 90 or more days past due as to principal or interest and not in non-accrual status.
Impaired Loans
Impaired loans had the balances shown and the associated specific reserve for loan losses presented in the following table ($ in thousands).
September 30, | December 31, | |||||||
2013 | 2012 | |||||||
Principal | $ | 24,447 | $ | 45,964 | ||||
Recorded investment(5) | $ | 25,291 | $ | 51,054 | ||||
Impaired loans without a specific reserve | $ | 6,850 | $ | 9,611 | ||||
Impaired loans with a specific reserve | $ | 18,441 | $ | 41,443 | ||||
Specific reserves for loan losses, impaired loans | $ | 9,772 | $ | 19,560 |
(5) | Recorded investment is the sum of principal, advances, and interest accrued for financial reporting purposes. |
Impaired loans had the average balances and interest income recognized and received in cash as presented in the following table ($ in thousands).
September 30, | December 31, | |||||||
2013 | 2012 | |||||||
Average recorded investment | $ | 38,173 | $ | 66,898 | ||||
Interest income recognized | $ | 182 | $ | 195 | ||||
Interest income received in cash | $ | 186 | $ | 612 |
20
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 4 – LOANS (continued)
Modifications and troubled debt restructurings
During the nine months ended September 30, 2013 the partnership had not modified any loans. Of the six modified loans with an aggregate principal of $22,702,000 as of December 31, 2012, during the nine months ended September 30, 2013, one loan paid in full all amounts owning and another loan was foreclosed upon, leaving four loans with an aggregate principal of $3,703,000 in effect at September 30, 2013.
During the nine months ended September 30, 2013 the partnership entered into a forbearance agreement which qualified as a troubled debt restructuring under GAAP resulting in no losses being recorded.
Allowance for loan losses
Activity in the allowance for loan losses is presented in the following table for the nine months ended September 30 ($ in thousands).
2013 | 2012 | |||||||
Balance, January 1 | $ | 19,815 | $ | 22,035 | ||||
Provision for loan losses | (142 | ) | 139 | |||||
Charge-offs, net | ||||||||
Charge-offs | (14,344 | ) | (2,414 | ) | ||||
Recoveries | 4,588 | 21 | ||||||
Charge-offs, net | (9,756 | ) | (2,393 | ) | ||||
Balance, September 30 | $ | 9,917 | $ | 19,781 | ||||
Specific reserves | $ | 9,772 | $ | 19,260 | ||||
General reserves | 145 | 521 | ||||||
Balance, September 30 | $ | 9,917 | $ | 19,781 | ||||
Ratio of charge-offs, net during the period to average | ||||||||
secured loans outstanding during the period | 14.47 | % | 3.38 | % |
Allowance for loan losses applicable to secured loans (by property type) and the percentage of principal (by property type) are presented in the following table ($ in thousands).
September 30, 2013 | December 31, 2012 | |||||||||||
Amount | Percent | Amount | Percent | |||||||||
Allowance for loan losses | ||||||||||||
Secured loans by property type | ||||||||||||
Single family | $ | 9,772 | 66 | % | $ | 19,255 | 76 | % | ||||
Multi-family | — | — | 60 | 4 | ||||||||
Commercial | 135 | 33 | 490 | 19 | ||||||||
Land | 10 | 1 | 10 | 1 | ||||||||
Total for secured loans | $ | 9,917 | 100 | % | $ | 19,815 | 100 | % | ||||
Unsecured loans | $ | — | 100 | % | $ | — | 100 | % | ||||
Total allowance for loan losses | $ | 9,917 | 100 | % | $ | 19,815 | 100 | % |
21
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 5 – REAL ESTATE OWNED (REO)
REO held for sale
REO held for sale at September 30, 2013 and December 31, 2012, was $18,481,000 and $0, respectively. The properties at September 30, 2013 consisted of the following.
- | Acquired through foreclosure four units in a multi-family building located in San Francisco County. Three of the units have sold in the fourth quarter for approximately their carrying value, and the remaining unit is under contract for sale at a price approximating carrying value. |
- | Designated from REO held as investment an eight unit multi-family rental property located in San Francisco County. This property is under contract for sale and is anticipated to close before December 31, 2013. |
- | Designated from REO held as investment a commercial rental property located in San Francisco County. The general partners expect this property to sell in the first half of 2014. |
The net rental income for the two designated properties, and any other REO held for sale rental results, has been reclassified from REO – Rental Operations, to Revenues – Other for all periods presented in the financial statements and the Results of Operations in Item 2 of this report. The net rental income for REO held for sale properties for the three months ended September 30, 2013 and 2012 was $156,000 and $129,000, respectively, and for the nine months ended September 30, 2013 and 2012, $392,000 and $716,000, respectively. Interest expense on the mortgages securing the rental properties was $142,000 and $149,000 for the three months ended September 30, 2013 and 2012, respectively, and $436,000 and $505,000 for the nine months ended September 30, 2013 and 2012, respectively.
REO held as investment
For REO, held as investment, the activity in net book value (NBV) including changes in the impairment reserves are summarized in the following table for the nine months ended September 30 ($ in thousands).
NBV | Accumulated Depreciation | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Balance, January 1 | $ | 181,333 | $ | 161,402 | $ | 5,926 | $ | 3,594 | ||||||||
Acquisitions | 3,099 | 1,649 | — | — | ||||||||||||
Dispositions | (1,398 | ) | 7 | — | (7 | ) | ||||||||||
Improvements/betterments | 2,961 | 1,712 | — | — | ||||||||||||
Designated from REO held for sale | — | 17,896 | — | — | ||||||||||||
Designated to REO held for sale | (14,584 | ) | — | (411 | ) | — | ||||||||||
Changes in net realizable values | (397 | ) | — | — | — | |||||||||||
Depreciation | (1,868 | ) | (1,731 | ) | 1,868 | 1,731 | ||||||||||
Balance, September 30 | $ | 169,146 | $ | 180,935 | $ | 7,383 | $ | 5,318 |
During 2013, the partnership’s REO held as investment transactions are summarized below.
- | Acquired through foreclosure a commercial office property located in Contra Costa County. The recorded investment was approximately $1,500,000. The partnership placed its interest in the title to the property in a single asset entity named San Pablo Dam Road Property Company, LLC. Upon completion of rehabilitation work, the property will be rented. |
- | Acquired through foreclosure a multi-family complex located in Solano County. The recorded investment was approximately $1,000,000. The partnership placed its interest in the title to the property in a single asset entity named Willow Street Property Company, LLC. Upon completion of rehabilitation work, the property will be rented. |
- | Sold a tenant-in-common unit located in San Francisco County. The unit sold for approximately its carrying value after taking into account a previously recorded valuation reserve. |
22
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 5 – REAL ESTATE OWNED (REO) (continued)
REO held as investment (continued)
- | Acquired through foreclosure a six unit apartment building located in Solano County. The recorded investment was approximately $399,000. The partnership placed its interest in the title to the property in a single asset entity named San 515 Louisiana Property Company, LLC. Upon completion of rehabilitation, the property will be rented. |
- | Designated two properties as REO held for sale. |
See the tables below for further details regarding the REO properties.
REO, held as investment, summarized by property type is presented in the following table ($ in thousands).
September 30, 2013 | December 31, 2012 | |||||||||
Properties | NBV | Properties | NBV | |||||||
Property type | ||||||||||
Rental | 20 | 142,791 | 19 | 154,566 | ||||||
Development | 3 | 19,828 | 3 | 20,223 | ||||||
Other, principally land | 3 | 6,527 | 3 | 6,544 | ||||||
Total REO, held as investment, net | 26 | $ | 169,146 | 25 | $ | 181,333 |
Rental properties include single-family residences (1-4 units), multi-family buildings, wholly-owned condominium complexes, fractured condominium complexes and commercial property.
Development properties consist of the following three properties at September 30, 2013 and December 31, 2012:
- | A property under construction consisting of two condominium units, with a carrying value of $5,479,000 and cost to complete of approximately $538,000. |
- | A property consisting of six remaining (of 13 original) tenants-in-common units, with a carrying value of approximately $5,166,000 and cost to complete of approximately $274,000. In April 2013 one of the units was sold at its carrying value. |
- | A property located in Los Angeles County, presently zoned and entitled as commercial, being developed and re-entitled to residential. |
Other, property consists of the following three properties at September 30, 2013 and December 31, 2012:
- | Approximately 12 acres located in Stanislaus County zoned commercial. |
- | Approximately 13 acres located in Marin County, presently zoned residential. |
- | A partially completed home subdivision located in Fresno County. The property has rental operations of five single-family residences. |
23
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 5 – REAL ESTATE OWNED (REO) (continued)
REO held as investment (continued)
REO, held as investment, summarized by geographic area is presented in the following table, ($ in thousands).
September 30, 2013 | December 31, 2012 | |||||||||||||||||||||||||||||||
Rental | Non-Rental | Rental | Non-Rental | |||||||||||||||||||||||||||||
No. | NBV | No. | NBV | No. | NBV | No. | NBV | |||||||||||||||||||||||||
San Francisco | 3 | $ | 3,932 | 2 | $ | 10,644 | 5 | $ | 17,962 | 2 | $ | 11,398 | ||||||||||||||||||||
San Francisco Bay Area(1) | 10 | 25,624 | 1 | 1,210 | 7 | 22,553 | 1 | 1,210 | ||||||||||||||||||||||||
Northern California(1) | 5 | 45,411 | 2 | 5,318 | 5 | 45,480 | 2 | 5,335 | ||||||||||||||||||||||||
Southern California | 2 | 67,824 | 1 | 9,183 | 2 | 68,571 | 1 | 8,824 | ||||||||||||||||||||||||
Total REO Held as investment | 20 | $ | 142,791 | 6 | $ | 26,355 | 19 | $ | 154,566 | 6 | $ | 26,767 |
(1) Excluding line(s) above.
Rental properties summarized by property type is presented in the following table ($ in thousands).
September 30, 2013 | December 31, 2012 | |||||||||
Property type | Units | Properties | NBV | Units | Properties | NBV | ||||
Residential | ||||||||||
Single family | ||||||||||
1-4 Units | 1 | 1 | $ | 1,500 | 1 | 1 | $ | 1,592 | ||
Condominiums(2) | 212 | 3 | 63,926 | 220 | 4 | 68,447 | ||||
Fractured Condominiums(3) | 440 | 10 | 72,059 | 440 | 10 | 72,292 | ||||
Multi-family | 17 | 2 | 927 | 8 | 1 | 376 | ||||
Commercial | 14 | 4 | 4,379 | 3 | 3 | 11,859 | ||||
Total rental properties | 684 | 20 | $ | 142,791 | 672 | 19 | $ | 154,566 |
(2) Includes units in condominium complexes wholly-owned by the partnership.
(3) Includes units in condominium complexes where some units had been sold prior to the partnership’s acquisition.
24
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 5 – REAL ESTATE OWNED (REO) (continued)
REO held as investment (continued)
The earnings/(loss) from rental operations of the real estate owned, held as investment is presented in the following table for the three and nine months ended September 30 ($ in thousands).
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Rental income | $ | 2,950 | $ | 2,680 | $ | 8,357 | $ | 7,685 | |||||||
Operating expenses | |||||||||||||||
Administration and payroll | 351 | 355 | 1,055 | 1,083 | |||||||||||
Homeowner association fees | 208 | 231 | 614 | 609 | |||||||||||
Receiver fees | — | 52 | 60 | 202 | |||||||||||
Utilities and maintenance | 342 | 329 | 887 | 944 | |||||||||||
Advertising and promotions | 40 | 41 | 98 | 99 | |||||||||||
Property taxes | 340 | 431 | 849 | 1,409 | |||||||||||
Other | 51 | 54 | 169 | 228 | |||||||||||
Total operating expenses | 1,332 | 1,493 | 3,732 | 4,574 | |||||||||||
Net operating income | 1,618 | 1,187 | 4,625 | 3,111 | |||||||||||
Depreciation | 567 | 560 | 1,711 | 1,661 | |||||||||||
Rental operations, net | $ | 1,051 | $ | 627 | $ | 2,914 | $ | 1,450 |
Interest expense on the mortgages securing the rental properties was $451,000 and $378,000 for the three months ended September 30, 2013 and 2012, respectively, and $1,238,000 and $1,338,000 for the nine months ended September 30, 2013 and 2012, respectively.
NOTE 6 – MORTGAGES PAYABLE
Mortgages payable transactions are summarized in the following table for the nine months ended September 30, ($ in thousands).
2013 | 2012 | |||||||
Principal, January 1 | $ | 47,293 | $ | 43,681 | ||||
New mortgages taken | 5,000 | 5,160 | ||||||
Principal repaid | (882 | ) | (1,267 | ) | ||||
Principal, September 30 | $ | 51,411 | $ | 47,574 |
25
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 6 – MORTGAGES PAYABLE (continued)
Mortgages payable are summarized in the following table (mortgage balance $ in thousands).
September 30, | December 31, | |||||||
Lender – summary of terms | 2013 | 2012 | ||||||
NorthMarq Capital – Secured by a condominium complex, | $ | 18,281 | $ | 18,607 | ||||
located in Los Angeles County, matures July 1, 2015, | ||||||||
interest rate (2.91%) varies monthly (LIBOR plus 2.73%), | ||||||||
monthly payment(1)(2) $119,987 | ||||||||
East West Bank – Secured by a fractured condominium project | 13,439 | 13,578 | ||||||
located in Sacramento County, matures June 1, 2017, | ||||||||
interest rate varies monthly (greater of Prime plus 1% or 5.50%), | ||||||||
monthly payment(2) $78,283 | ||||||||
Business Partners – Secured by a commercial property located | 6,818 | 7,100 | ||||||
in San Francisco County, matures May 1, 2015, | ||||||||
interest rate varies monthly (greater of 5-year Treasuries | ||||||||
plus 2.33% or 6.53%), | ||||||||
monthly payment(1)(2) $78,802 | ||||||||
Chase Bank – Secured by a condominium complex | 5,061 | 5,136 | ||||||
located in Contra Costa County, matures September 1, 2042, | ||||||||
interest rate variable (fixed until September 1, 2017 at 3.52%), | ||||||||
monthly payment $23,228 | ||||||||
CapitalSource – Secured by a condominium complex, | 4,981 | — | ||||||
located in Los Angeles County, matures July 1, 2023, | ||||||||
interest rate variable (fixed until June 1, 2016 at 3.95%), | ||||||||
monthly payment $26,254 | ||||||||
First National Bank of Northern California – Secured by eight | 2,156 | 2,179 | ||||||
condominium units located in San Francisco County, matures | ||||||||
November 1, 2016, | ||||||||
interest rate varies monthly (greater of Prime plus 2.35% or 5.70%), | ||||||||
monthly payment(2) $12,856 | ||||||||
Wells Fargo Bank – Secured by a condominium unit located in | 355 | 365 | ||||||
San Francisco County, matures October 1, 2032, | ||||||||
interest rate (2.88%) varies annually (LIBOR plus 2.75%), | ||||||||
monthly payment $2,014 | ||||||||
Wells Fargo Bank – Secured by a condominium unit located in | 320 | 328 | ||||||
San Francisco County, matures September 15, 2032, | ||||||||
interest rate (4.48%) varies annually (bank rate plus 3.10%), | ||||||||
monthly payment $2,174 | ||||||||
Total mortgages payable | $ | 51,411 | $ | 47,293 |
(1) Monthly payments include amounts for various impounds such as property taxes, insurance, and repairs.
(2) Monthly payments based upon a 30 year amortization, with a balloon payment due at maturity.
26
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 6 – MORTGAGES PAYABLE (continued)
Future minimum payments of principal at September 30, 2013 are presented in the following table ($ in thousands).
2013 | $ | 332 | ||
2014 | 1,367 | |||
2015 | 24,527 | |||
2016 | 2,583 | |||
2017 | 13,009 | |||
Thereafter | 9,593 | |||
Total | $ | 51,411 |
In June 2013, the partnership obtained a mortgage loan of $5,000,000 from CapitalSource Bank, secured by a fractured condominium complex in Los Angeles County.
NOTE 7 – FAIR VALUE |
The company does not record its loans nor REO at fair value on a recurring basis. Loans designated impaired (i.e. that are collateral dependent) are measured at fair value on a non-recurring basis. REO held for sale is recorded at the lower of cost or market and are measured at fair value on a non-recurring basis. For REO held as investment the recorded value, net of valuation reserves, is compared quarterly to the sum of the undiscounted cash flows and are measured at fair value on a non-recurring basis. At September 30, 2013 and December 31, 2012 the fair value of the loans and REO without a specific reserve was determined to be equivalent to their book value.
Non-recurring basis
Assets and liabilities measured at fair value on a non-recurring basis are presented in the following table as of September 30, 2013 and December 31, 2012 ($ in thousands).
Fair Value Measurement at Report Date Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
September 30, 2013 | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Impaired loans with specific reserve, net | $ | — | $ | 8,669 | $ | — | $ | 8,669 | ||||||||
REO held for sale(1) | $ | — | $ | 8,630 | $ | — | $ | 8,630 | ||||||||
REO held as investment(2) | $ | — | $ | 5,166 | $ | — | $ | 5,166 | ||||||||
December 31, 2012 | ||||||||||||||||
Impaired loans with specific reserve, net | $ | — | $ | 21,883 | $ | — | $ | 21,883 | ||||||||
REO held as investment(2) | $ | — | $ | — | $ | 15,259 | $ | 15,259 |
(1) | Includes REO under a contract for sale. |
(2) | Includes REO with an adjustment to its valuation reserve within the year noted. |
27
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited)
NOTE 8 – COMMITMENTS AND CONTINGENCIES, OTHER THAN LOAN AND REO COMMITMENTS
Legal proceedings
In the normal course of business, the partnership may become involved in various legal proceedings such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc., to enforce the provisions of the deeds of trust, collect the debt owed under the promissory notes, or to protect, or recoup its investment from the real property secured by the deeds of trust and to resolve disputes between borrowers, lenders, lien holders and mechanics. None of these actions typically would be of any material importance. As of the date hereof, the partnership is not involved in any legal proceedings other than those that would be considered part of the normal course of business.
Commitments
There were no commitments other than those disclosed in Notes 4 and 5.
NOTE 9 – SUBSEQUENT EVENTS
None
28
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto, which are included in Item 1 of this Report, as well as the audited consolidated financial statements and the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the partnership’s Annual Report on Form 10-K for the year ended December 31, 2012.
Forward-Looking Statements
Certain statements in this Report on Form 10-Q which are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the partnership’s expectations, hopes, intentions, beliefs and strategies regarding the future. Forward-looking statements include statements regarding economic conditions and their effect on the partnership and its assets, trends in the California real estate market, estimates as to the allowance for loan losses, estimated costs to complete certain property developments, additional foreclosures in 2013, expectations regarding the level of loan delinquencies, plans to develop certain properties, expectations as to when liquidations will resume, and the use of excess cash flow. Actual results may be materially different from what is projected by such forward-looking statements. Factors that might cause such a difference include unexpected changes in economic conditions and interest rates, the impact of competition and competitive pricing and downturns in the real estate markets in which the partnership has made loans. All forward-looking statements and reasons why results may differ included in this Form 10-Q are made as of the date hereof, and we assume no obligation to update any such forward-looking statement or reason why actual results may differ.
Current Economic Conditions
The San Francisco bay area and the Los Angeles metropolitan area are our most significant locations for lending activity. The economic health and the demand for and supply of real estate, in these regions, and the general state of financial markets, particularly the level of interest rates, are of primary importance in determining the availability of new lending opportunities and the performance of previously made loans.
Employment, which is generally a significant factor in the level of economic activity, the demand for housing, and in the ability of borrowers to service their debts has been improving in our key markets. In California, unemployment improved from 12.0% in June 2011 to 8.9% in August 2013. The average unemployment rate in California for 2012 was 10.4%. Two of the three California counties currently with the lowest unemployment rates (San Francisco 5.6% and San Mateo 5.3%) are counties in which RMC lending is concentrated. Year-over-year job growth in the San Francisco-San Mateo-Redwood City areas increased 1.8% in August 2013. Other northern California areas reporting employment gains were San Jose-Sunnyvale-Santa Clara (3.1% increase in non-farm jobs and an unemployment rate of 6.8%) and Oakland-Fremont-Hayward (0.4% increase in non-farm jobs and an unemployment rate of 7.4%) and Sacramento-Arden Arcade-Roseville (0.3% increase in non-farm jobs and an unemployment rate of 8.5%) California’s population increased in the twelve months ended in August 2013 to 29.7 million (a 1.1% increase) and labor force participation declined slightly (62.5% in August 2013 from 62.95% in August 2012). Real property rents and values have increased – particularly for homes, condominiums and multi-family buildings – in line with these employment increases.
The technology sector, which is a significant driver in the San Francisco bay area economy and employment, continues to fuel the economy of the region and real estate values continue to reflect upward pressure from the increase in employment and wealth creation (e.g. Facebook and Twitter IPO’s).
The recovery in southern California continues as well. Another area in which RMC lends, Los Angeles-Long Beach-Glendale showed the largest year-over-year numerical job growth in California, up 52,000 jobs (1.4%) at August 2013. Unfortunately, unemployment in the area remains stubbornly high at 10.2% in August 2013, and is restraining the recovery in rents and real estate values.
(The principal source of the above data is the “California Labor Market Review, August 2013” published by the California Employment Development Department.)
The Federal Reserve continues to support economic recovery by maintaining a highly accommodative stance for monetary policy and interest rates, purposefully supplying liquidity to the bond markets at the rate of $85 billion per month and keeping the target range for the federal funds rate at 0 to 0.25%. Further, the Federal Reserve anticipates economic conditions likely will continue to warrant exceptionally low levels for the federal funds rate at least through late 2014.
29
Critical Accounting Policies
Management estimates
See Note 2 (Summary of Significant Accounting Policies) to the financial statements included in Part I, Item 1 of this report for a detailed presentation of critical accounting policies.
Related Parties
See Note 1 (Organizational and General) and Note 3 (General Partners and Other Related Parties) to the financial statements included in Part I, Item 1 of this report for a detailed presentation of various partnership activities for which the general partners and related parties are compensated, and other related-party transactions, including the formation loan.
Results of Operations
Changes to the partnership’s operating results are presented in the following table ($ in thousands).
Changes during the three months ended September 30, 2013 versus 2012 | Changes during the nine months ended September 30, 2013 versus 2012 | |||||||||||
Dollars | Percent | Dollars | Percent | |||||||||
Revenue, net | ||||||||||||
Interest income | ||||||||||||
Loans | $ | 232 | 67 | % | $ | 394 | 36 | % | ||||
Imputed interest on formation loan | (15 | ) | (13 | ) | 82 | 40 | ||||||
Other interest income | — | — | (1 | ) | (100 | ) | ||||||
Total interest income | 217 | 47 | 475 | 36 | ||||||||
Interest expense | ||||||||||||
Bank loan, secured | (107 | ) | (100 | ) | (562 | ) | (100 | ) | ||||
Mortgages payable | 65 | 12 | (173 | ) | (9 | ) | ||||||
Amortization of discount on formation loan | (15 | ) | (13 | ) | 82 | 40 | ||||||
Other interest expense | (1 | ) | (100 | ) | (1 | ) | (100 | ) | ||||
Total interest expense | (58 | ) | (8 | ) | (654 | ) | (25 | ) | ||||
Net interest income/(expense) | 275 | (95 | ) | 1,129 | (86 | ) | ||||||
Late fees | 2 | 200 | (6 | ) | (43 | ) | ||||||
Other | 326 | 249 | (28 | ) | (4 | ) | ||||||
Total revenues, net | 603 | (387 | ) | 1,095 | (189 | ) | ||||||
Provision for loan losses/(recoveries), net | — | — | (281 | ) | (202 | ) | ||||||
Operating expenses | ||||||||||||
Mortgage servicing fees | (36 | ) | (20 | ) | (77 | ) | (14 | ) | ||||
Asset management fees | (5 | ) | (3 | ) | (71 | ) | (11 | ) | ||||
Costs from RMC | 68 | 21 | 164 | 16 | ||||||||
Professional services | (289 | ) | (65 | ) | (795 | ) | (53 | ) | ||||
REO | ||||||||||||
Rental operations, net | (424 | ) | 68 | (1,464 | ) | 101 | ||||||
Holding costs | (124 | ) | (88 | ) | (753 | ) | (87 | ) | ||||
Loss/(gain) on disposal | (19 | ) | (100 | ) | 35 | (100 | ) | |||||
Impairment loss | (380 | ) | (100 | ) | (175 | ) | (38 | ) | ||||
Other | (11 | ) | (52 | ) | (92 | ) | (70 | ) | ||||
Total operating expenses, net | (1,220 | ) | (114 | ) | (3,228 | ) | (88 | ) | ||||
Net income (loss) | $ | 1,823 | (148 | )% | $ | 4,604 | (105 | )% |
Please refer to the above table and the Statement of Operations in the financial statements included in Part I, Item I of this report throughout the discussion of Results of Operations.
30
Revenue – Interest income – Loans
The interest on loans increased for the three and nine months ended September 30, 2013 compared to the same periods in 2012 primarily due to an increase in the effective yield rates as $5,286,000 and $16,638,000 of new performing loans have been funded during the three and nine months ended September 30, 2013, compared to $596,000 and $10,606,000 during the same periods in 2012. The effective yield rates also increased due to the recovery of previously foregone interest related to a rise in property value on the collateral of a foreclosed property, rising property values on collateral which allowed some loans to be re-designated to accrual status, and a legal settlement in September 2013 resulting in the recovery of $86,000 of foregone interest. At September 30, 2013 the percent of non-accrual loans in the loan portfolio was 38% compared to 78% at September 30, 2012. The table below recaps the three and nine month averages and the effect of the foregone interest on the average yield rate ($ in thousands).
Average | Stated | |||||||||||||||
Secured | Effective | Average | ||||||||||||||
Loan | Interest | Yield | Yield | |||||||||||||
Three Months Ended September 30, | Balance | Income | Rate | Rate | ||||||||||||
2013 | $ | 57,214 | $ | 580 | 4.06 | % | 6.86 | % | ||||||||
2012 | $ | 72,514 | $ | 348 | 1.92 | % | 7.57 | % | ||||||||
Nine Months Ended September 30, | ||||||||||||||||
2013 | $ | 60,974 | $ | 1,488 | 3.25 | % | 6.91 | % | ||||||||
2012 | $ | 70,801 | $ | 1,094 | 2.06 | % | 7.93 | % |
Revenue – Interest expense
Bank loan, secured – The bank loan was paid off in September 2012.
Mortgages payable – In June 2013, the partnership obtained a mortgage loan of $5,000,000 from Capital Source Bank, secured by a multi-family complex. The table below recaps the three and nine month averages and interest expense ($ in thousands).
Average | Weighted | |||||||||||
Mortgage | Average | |||||||||||
Payable | Interest | Interest | ||||||||||
Three Months Ended September 30, | Balance | Expense | Rate | |||||||||
2013 | $ | 51,565 | $ | 593 | 4.36 | % | ||||||
2012 | $ | 45,180 | $ | 528 | 4.48 | % | ||||||
Nine Months Ended September 30, | ||||||||||||
2013 | $ | 49,362 | $ | 1,674 | 4.38 | % | ||||||
2012 | $ | 43,159 | $ | 1,847 | 4.99 | % |
Revenue – Other
The increase in revenue other for the three months ended September 30, 2013 compared to the same period in 2012 is primarily due to the $300,000 judgment granted the partnership regarding a guarantee from a former borrower.
Provision for Losses (Recoveries), net on Loans/Allowance for Loan Losses
The provision for losses (recoveries), net on loans is primarily driven by the specific reserves maintained in the allowance for loan losses, associated with impaired loans as analyzed each quarter. During the nine months ended September 30, 2013, the partnership has recovered approximately $3,959,000 per an agreement with a borrower pledging certain future cash flows to the partnership and cash via three separate settlements with former borrowers, $120,000, $471,000 and $38,000.
See Note 4 (Loans) to the financial statements included in Part I, Item 1 of this report for detailed presentations of loan balances, activity, and characteristics, and the corresponding data regarding the allowance for loan losses.
31
Operating Expenses
Mortgage servicing fees – The decrease for the three and nine months ended September 30, 2013 compared to the same periods in 2012 was due to the reduction in the average loan balance (see the table in Revenue – Interest income – Loans).
Asset management fees – The decrease for the three and nine months ended September 30, 2013 compared to the same periods in 2012 was due to the reduction in the total capital under management from $198,924,000 at September 30, 2012 to $194,849,000 at September 30, 2013.
Costs from RMC – The increase in costs from RMC for the three and nine months ended September 30, 2013 compared to the same periods in 2012 was due to reimbursement of qualifying charges permitted in the partnership agreement.
Professional services – The decrease in professional services for the three and nine months ended September 30, 2013 compared to the same periods in 2012 was primarily due to above normal operating costs in 2012 related to complex workout agreements, legal costs, and tax and accounting matters regarding the loan and REO portfolios’ stabilization and rental operations. Fees for auditing and tax services decreasing approximately $45,000 for the three month period and $399,000 for the nine month period. Legal fees decreased for the three month period by approximately $103,000 and $94,000 for the nine month period. Consultants’ fees decreased by approximately $58,000 for the three month period and $165,000 for the nine month period.
REO – Rental operations, net – The increase in rental operations for the three and nine month periods ending September 30, 2013 compared to the same periods in 2012 was due to the stabilization of the properties post-acquisition and the ongoing efforts to increase rental income and reduce operating expenses.
- | Rental income – residential rental occupancy and lease rates – Of the nine properties with 10 or more units (93% of the total units) occupancy was 92% for the three and nine months ended September 30, 2013 compared to 93% for the same periods in 2012. The partnership continues to increase rents in the generally rising rental market which creates slightly higher vacancy as units turn over. Gross rents despite higher vacancy have increased as the rental rate increased more than offsetting the lower occupancy rates. |
- | Rental income – commercial rental occupancy and lease rates – For the three and nine month periods ended September 30, 2013 compared to the same periods in 2012, all properties have been leased with the exception of the one newly acquired property. All of the leases are at market rates with scheduled annual rent increases. |
- | Operating expenses – residential – Decreases happened in certain expenses for the three and nine month periods ended September 30, 2013 compared to the same periods in 2012. Receiver fee decreased due to the removal of the receivers from all properties as of September 30, 2013. |
- | Operating expenses – commercial – No major differences to report for the three and nine month periods ended September 30, 2013 compared to the same periods in 2012 as they are similar in totals. |
The table below summarizes the rental operations, net for the three and nine months ended September 30, ($ in thousands).
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Rental income | $ | 2,950 | $ | 2,680 | $ | 8,357 | $ | 7,685 | ||||||||
Operating expenses | ||||||||||||||||
Administration and payroll | 351 | 355 | 1,055 | 1,083 | ||||||||||||
Homeowner association fees | 208 | 231 | 614 | 609 | ||||||||||||
Receiver fees | — | 52 | 60 | 202 | ||||||||||||
Utilities and maintenance | 342 | 329 | 887 | 944 | ||||||||||||
Advertising and promotions | 40 | 41 | 98 | 99 | ||||||||||||
Property taxes | 340 | 431 | 849 | 1,409 | ||||||||||||
Other | 51 | 54 | 169 | 228 | ||||||||||||
Total operating expenses | 1,332 | 1,493 | 3,732 | 4,574 | ||||||||||||
Net operating income | 1,618 | 1,187 | 4,625 | 3,111 | ||||||||||||
Depreciation | 567 | 560 | 1,711 | 1,661 | ||||||||||||
Rental operations, net | $ | 1,051 | $ | 627 | $ | 2,914 | $ | 1,450 |
Interest expense on the mortgages securing the rental properties was $451,000 and $378,000 for the three months ended September 30, 2013 and 2012, respectively, and $1,238,000 and $1,338,000 for the nine months ended September 30, 2013 and 2012, respectively.
32
Rental operations are comprised of residential and commercial properties. There were 16 residential properties at September 30, 2013 with a net book value of $138,412,000, and four commercial properties with a net book value of $4,379,000. Financial highlights are presented in the tables below for the three and nine months ended September 30, 2013, ($ in thousands).
Three Months Ended September 30, 2013 | Net | |||||||||||||||||||
Rental | Operating | Operating | Earnings/ | |||||||||||||||||
Income | Expenses | Income | Depreciation | (Loss) | ||||||||||||||||
Property type | ||||||||||||||||||||
Residential | ||||||||||||||||||||
Single family | ||||||||||||||||||||
1-4 Units | $ | 13 | $ | 14 | $ | (1 | ) | $ | 4 | $ | (5 | ) | ||||||||
Condominiums | 1,052 | 391 | 661 | 271 | 390 | |||||||||||||||
Fractured condominiums | 1,733 | 794 | 939 | 284 | 655 | |||||||||||||||
Multi-family | 9 | 8 | 1 | 1 | — | |||||||||||||||
Total residential | 2,807 | 1,207 | 1,600 | 560 | 1,040 | |||||||||||||||
Commercial | 143 | 125 | 18 | 7 | 11 | |||||||||||||||
Total rental operations | $ | 2,950 | $ | 1,332 | $ | 1,618 | $ | 567 | $ | 1,051 | ||||||||||
Nine Months Ended September 30, 2013 | ||||||||||||||||||||
Property type | ||||||||||||||||||||
Residential | ||||||||||||||||||||
Single family | ||||||||||||||||||||
1-4 Units | $ | 37 | $ | 36 | $ | 1 | $ | 13 | $ | (12 | ) | |||||||||
Condominiums | 3,138 | 1,171 | 1,967 | 837 | 1,130 | |||||||||||||||
Fractured condominiums | 4,799 | 2,190 | 2,609 | 837 | 1,772 | |||||||||||||||
Multi-family | 35 | 24 | 11 | 3 | 8 | |||||||||||||||
Total residential | 8,009 | 3,421 | 4,588 | 1,690 | 2,898 | |||||||||||||||
Commercial | 348 | 311 | 37 | 21 | 16 | |||||||||||||||
Total rental operations | $ | 8,357 | $ | 3,732 | $ | 4,625 | $ | 1,711 | $ | 2,914 |
REO – Holding costs – The decrease in holding costs in the three and nine months ended September 30, 2013 compared to the same periods in 2012 was primarily due to the sale of five properties during 2012 (two properties were sold in the 1st quarter, and one in each of the other three quarters).
REO – Impairment loss on real estate –The decrease in impairment loss on real estate for the three months ended September 30, 2013 compared to the same period in 2012 was due the improving real estate markets in the third quarter of 2013 eliminating the need for any additional impairment losses.
Liquidity and Capital Resources
The partnership relies upon loan payoffs, borrowers’ mortgage payments, the sale and financing of real estate owned and to a lesser degree, retention of income when profitable for the source of funds for operations, lending and payments to partners.
Contractual Obligations, Commitments, and Contingencies
A summary of the contractual obligations of the partnership as of September 30, 2013 is set forth below ($ in thousands).
Contractual Obligation | Total | Less than 1 Year | 1-3 Years | 3-5 Years | ||||||||||||
Mortgages payable | $ | 51,411 | $ | 1,351 | $ | 25,277 | $ | 24,783 | ||||||||
Construction contracts | 538 | 538 | — | — | ||||||||||||
Construction loans | — | — | — | — | ||||||||||||
Rehabilitation loans | — | — | — | — | ||||||||||||
Total | $ | 51,949 | $ | 1,889 | $ | 25,277 | $ | 24,783 |
The partnership has one property in San Francisco, California with a carrying value of $5,479,000 in construction with remaining construction costs of approximately $538,000.
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Distributions to limited partners
The percent of limited partners electing cash distributions, if any, by weighted average to total partners’ capital was 56%, for each of the nine months ended September 30, 2013 and 2012. For the three months ended September 30, 2013 and 2012, $560,000 and $574,000, respectively, was distributed to limited partners. For the nine months ended September 30, 2013 and 2012, $1,689,000 and $1,857,000, respectively, was distributed to limited partners. Should the full year results of operations be a net loss, these amounts distributed would constitute a return of capital.
Withdrawals of limited partners’ capital
The partnership agreement also allows the limited partners to withdraw their capital account subject to certain limitations and penalties (see “Withdrawal From Partnership” in the Limited Partnership Agreement). In response to reduced cash flows due to reduced loan payoffs, increased loan delinquencies and increased needs for cash reserves necessary to protect and preserve the partnership’s assets, as of March 16, 2009, the partnership suspended all liquidation payments and announced that it would not be accepting new liquidation requests until further notice. Liquidation requests of approximately $2,700,000 remained unfulfilled at September 30, 2013 and liquidations for future periods are suspended until future notice. Liquidation requests submitted to Redwood after March 16, 2009 are not deemed to be accepted, nor do they serve as placeholders for the submitting limited partner.
The partnership is unable to predict when liquidations will resume as it will depend on the ability to pay or refinance real estate owned debt obligations, collect monies due from borrowers and to dispose of real estate owned, to receive net rental income from real estate owned, and on the improvement of general economic and capital market conditions and recovery of the real estate market. It is anticipated liquidations will not resume in 2013. For the foreseeable future, the partnership intends to utilize available cash flows to fund its business operations, protect its security interests in properties, make real estate loans, repay real estate owned debt, and maintain its real estate owned. It is anticipated liquidation payments will resume only when the partnership’s cash flows improve to levels that enable the partnership to resume lending business operations, provide consistent profitability, and the economy and the real estate and capital markets stabilize and return to normal levels of activity.
Valuation of partners’ capital as units
In some cases in order to satisfy broker-dealers and other reporting requirements, the general partners have valued the limited partners’ interest in the partnership on a basis which utilizes a per unit system of calculation, rather than based upon the investors’ capital account. This information has been reported in this manner in order to allow the partnership to integrate with certain software used by the broker-dealers and other reporting entities. In those cases, the partnership will report to broker-dealers, trust companies and others a “reporting” number of units based upon a $1.00 per unit calculation. The number of reporting units provided will be calculated based upon the limited partner’s capital account value divided by $1.00. Each investor’s capital account balance is set forth periodically on the partnership account statement provided to investors. The reporting units are solely for broker-dealers requiring such information for their software programs and do not reflect actual units owned by a limited partner or the limited partners’ right or interest in cash flow or any other economic benefit in the partnership. Each investor’s capital account balance is set forth periodically on the partnership account statement provided to investors. The amount of partnership profits each investor is entitled to receive is determined by the ratio each investor’s capital account bears to the total amount of all investor capital accounts then outstanding. The capital account balance of each investor should be included on any FINRA member client account statement in providing a per unit estimated value of the client’s investment in the partnership in accordance with NASD Rule 2340.
While the general partners have set an estimated value for the units, such determination may not be representative of the ultimate price realized by an investor for such units upon sale. No public trading market exists for the units and none is likely to develop. Thus, there is no certainty the units can be sold at a price equal to the stated value of the capital account. Furthermore, the ability of an investor to liquidate his or her investment is limited subject to certain liquidation rights provided by the partnership, which may include early withdrawal penalties (See the section of the Prospectus entitled “Risk Factors – Investment Risks – Lack of Liquidity of Units Increases Their Risks”).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not included as the partnership is a smaller reporting company.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The partnership carried out an evaluation, under the supervision and with the participation of the general partners of the effectiveness of the design and operation of the partnership’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the general partners concluded the partnership’s disclosure controls and procedures were effective.
Changes to Internal Control Over Financial Reporting
There have not been any changes in the partnership’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, the partnership’s internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings
In the normal course of business, the partnership may become involved in various types of legal proceedings such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc., to enforce provisions of the deeds of trust, collect the debt owed under promissory notes, or to protect, or recoup its investment from real property secured by the deeds of trust and resolve disputes between borrowers, lenders, lien holders and mechanics. None of these actions would typically be of any material importance. As of the date hereof, the partnership is not involved in any legal proceedings other than those that would be considered part of the normal course of business.
ITEM 1A. Risk Factors
Not included as the partnership is a smaller reporting company.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable.
ITEM 3. Defaults Upon Senior Securities
Not Applicable.
ITEM 4. Mine Safety Disclosures
Not Applicable.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
31.1 Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3 Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.3 Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
REDWOOD MORTGAGE INVESTORS VIII | ||||
(Registrant) | ||||
Date: November 14, 2013 | By: | Redwood Mortgage Corp., General Partner | ||
By: | /s/ Michael R. Burwell | |||
Name: | Michael R. Burwell | |||
Title: | President, Secretary and Treasurer | |||
(On behalf of the registrant, and in the capacity of principal financial officer), Director | ||||
Date: November 14, 2013 | By: | Gymno LLC, General Partner | ||
By: | /s/ Michael R. Burwell | |||
Name: | Michael R. Burwell | |||
Title: | Manager | |||
Date: November 14, 2013 | By: | Michael R. Burwell, General Partner | ||
By: | /s/ Michael R. Burwell | |||
Name: | Michael R. Burwell | |||
Title: | General Partner | |||
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