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, 2005
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 (I.R.S. Employer
or organization) Identification No.)
900 Veterans Blvd., Suite 500, Redwood City, CA 94063-1743
(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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes XX No
-------------- --------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No XX
-------------- --------------
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No XX
-------------- --------------
1
Part I - Item 1. FINANCIAL STATEMENTS
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 and DECEMBER 31, 2004 (unaudited)
(in thousands)
ASSETS
September 30, December 31,
2005 2004
---------------- ---------------
Cash and cash equivalents $ 9,029 $ 16,301
---------------- ---------------
Loans
Loans, secured by deeds of trust 207,311 171,745
Loans, unsecured 34 34
Allowance for loan losses (2,502) (2,343)
---------------- ---------------
Net loans 204,843 169,436
---------------- ---------------
Interest and other receivables
Accrued interest and late fees 5,347 4,895
Advances on loans 57 131
---------------- ---------------
5,404 5,026
---------------- ---------------
Loan origination fees, net 15 62
Real estate held for sale, net of allowance of $1,000 21,085 9,793
---------------- ---------------
Total assets $ 240,376 $ 200,618
================ ===============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Line of credit $ 17,000 $ 16,000
Accounts payable 66 25
Payable to affiliate 659 638
---------------- ---------------
Total liabilities 17,725 16,663
---------------- ---------------
Minority interest 3,038 -
---------------- ---------------
Investors in applicant status 3,390 424
---------------- ---------------
Partners' capital
Limited partners' capital, subject to redemption net of unallocated
syndication costs of $1,566 and $1,084 for September 30, 2005 and December
31, 2004, respectively; and formation loan receivable of $11,230 and
$9,751 for September 30, 2005 and December 31, 2004, respectively 216,038 183,368
General partners' capital, net of unallocated syndication costs of $16 and
$11 for September 30, 2005 and December 31, 2004, respectively 185 163
---------------- ---------------
Total partners' capital 216,223 183,531
---------------- ---------------
Total liabilities and partners' capital $ 240,376 $ 200,618
================ ===============
The accompanying notes are an integral part of the consolidated financial
statements.
2
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (unaudited)
(in thousands, except for per limited partner amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
-------------- ------------- ------------- -------------
Revenues
Interest on loans $ 4,911 $ 4,378 $ 13,305 $ 11,723
Interest-bank 4 6 88 25
Late fees 28 60 85 172
Gain on sale of real estate held for sale - - 183 -
Imputed interest on formation loan 100 57 299 171
Other 56 3 162 48
-------------- ------------- ------------- -------------
5,099 4,504 14,122 12,139
-------------- ------------- ------------- -------------
Expenses
Mortgage servicing fees 479 422 1,228 1,115
Interest expense 113 223 149 352
Amortization of loan origination fees 15 17 50 44
Provisions for losses on loans and real estate held
for sale 77 400 168 842
Asset management fees 212 163 592 454
Clerical costs through Redwood Mortgage Corp. 79 77 217 229
Professional services 21 20 101 126
Amortization of discount on imputed interest 100 57 299 171
Other 48 39 123 109
-------------- ------------- ------------- -------------
1,144 1,418 2,927 3,442
-------------- ------------- ------------- -------------
Net income $ 3,955 $ 3,086 $ 11,195 $ 8,697
============== ============= ============= =============
Net income: general partners (1%) $ 40 $ 31 $ 112 $ 87
limited partners (99%) 3,915 3,055 11,083 8,610
-------------- ------------- ------------- -------------
$ 3,955 $ 3,086 $ 11,195 $ 8,697
============== ============= ============= =============
Net income per $1,000 invested by limited
partners for entire period
-where income is compounded and retained $ 17.07 $ 17.54 $ 52.32 $ 53.78
============== ============= ============= =============
-where partner receives income in monthly
distributions $ 16.97 $ 17.44 $ 51.14 $ 52.54
============== ============= ============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
3
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (unaudited)
(in thousands)
2005 2004
-------------- --------------
Cash flows from operating activities
Net income $ 11,195 $ 8,697
Adjustments to reconcile net income to net cash
provided by operating activities
Imputed interest income (299) (171)
Amortization of discount 299 171
Amortization of loan origination fees 50 44
Provision for loan and real estate losses 168 842
Gain on sale of real estate (183) -
Change in operating assets and liabilities
Accrued interest and late fees (994) (2,100)
Advances on loans (26) 60
Loan origination fees (3) (12)
Accounts payable 41 90
Payable to affiliate 21 146
Prepaid expenses - (4)
-------------- --------------
Net cash provided by operating activities 10,269 7,763
-------------- --------------
Cash flows from investing activities
Loans originated (137,471) (86,044)
Principal collected on loans 93,545 41,768
Payments for development of real estate (756) -
Proceeds from disposition of real estate 1,541 -
-------------- --------------
Net cash used in investing activities (43,141) (44,276)
-------------- --------------
Cash flows from financing activities
Increases on line of credit, net 1,000 10,000
Contributions by partner applicants 32,167 29,430
Partners' withdrawals (5,519) (4,697)
Syndication costs paid (672) (332)
Formation loan lending (2,397) (2,073)
Formation loan collections 884 646
Increase in minority interest 137 -
-------------- --------------
Net cash provided by financing activities 25,600 32,974
-------------- --------------
Net decrease in cash and cash equivalents (7,272) (3,539)
Cash and cash equivalents - beginning of period 16,301 8,921
-------------- --------------
Cash and cash equivalents - end of period 9,029 5,382
============== ==============
Supplemental disclosures of cash flow information
Cash paid for interest $ 149 $ 352
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
4
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (unaudited)
NOTE 1 - GENERAL
In the opinion of the management of the partnership, 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,
2004 filed with the Securities and Exchange Commission. The results of
operations for the nine month period ended September 30, 2005 are not
necessarily indicative of the operating results to be expected for the full
year.
Formation Loans
The following summarizes Formation Loan transactions to September 30, 2005
(in thousands):
1st 2nd 3rd 4th 5th 6th Total
---------- ---------- ---------- ---------- ---------- ---------- -----------
Limited partner
contributions $14,932 $29,993 $29,999 $49,985 $74,904 $ 4,529 $204,342
========== ========== ========== ========== ========== ========== ===========
Formation loan made 1,075 2,272 2,218 3,777 5,660 308 15,310
Discount on imputed
interest (7) (204) (234) (430) (1,380) (135) (2,390)
---------- ---------- ---------- ---------- ---------- ---------- -----------
Formation loan made, net 1,068 2,068 1,984 3,347 4,280 173 12,920
Repayments to date (862) (1,156) (697) (755) (310) - (3,780)
Early withdrawal
penalties applied (79) (121) (86) (14) - - (300)
---------- ---------- ---------- ---------- ---------- ---------- -----------
Formation loan, net
at September 30, 2005 127 791 1,201 2,578 3,970 173 8,840
Unamortized discount
on imputed interest 7 204 234 430 1,380 135 2,390
---------- ---------- ---------- ---------- ---------- ---------- -----------
Balance
September 30, 2005 $ 134 $ 995 $ 1,435 $ 3,008 $ 5,350 $ 308 $ 11,230
========== ========== ========== ========== ========== ========== ===========
Percent loaned 7.2% 7.6% 7.4% 7.6% 7.6% 6.8% 7.5%
========== ========== ========== ========== ========== ========== ===========
The Formation Loan has been deducted from limited partners' capital in the
consolidated balance sheets. As amounts are collected from Redwood Mortgage
Corp., the deduction from capital will be reduced. Interest has been imputed at
the market rate of interest in effect at the date of the offerings' close. An
estimated amount of imputed interest was recorded for the offerings still
outstanding. During the nine month periods ended September 30, 2005 and 2004,
amortization expense of $299,000 and $171,000, respectively, was recorded
related to the discount on the imputed interest.
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 against partners'
capital and are being allocated to the individual partners consistent with the
partnership agreement.
5
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (unaudited)
NOTE 1 - GENERAL (continued)
Syndication costs (continued)
Through September 30, 2005, syndication costs of $3,646,000 had been
incurred by the partnership with the following distribution (in thousands):
Costs incurred $ 3,646
Early withdrawal penalties applied (112)
Allocated to date (1,952)
--------------
September 30, 2005 balance $ 1,582
==============
Syndication costs attributable to the fifth offering ($75,000,000) will be
limited to the lesser of 10% of the gross proceeds or $3,000,000 with any excess
to be paid by the general partners. The fifth offering closed August, 2005. As
of September 30, 2005, the fifth offering had incurred syndication costs of
$800,000 (1.07% of contributions).
The sixth offering of 100,000,000 units ($100,000,000) commenced August 4,
2005. Syndication costs attributable to the sixth offering will be limited to
the lesser of 10% of the gross proceeds or $4,000,000 with excess to be paid by
the general partners. As of September 30, 2005 the sixth offering had incurred
syndication costs of $377,000 (8.32% of contributions). Syndication costs are
typically higher in the early stages of an offering.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The partnership's consolidated financial statements include the accounts of
its 100%-owned subsidiaries, Russian Hill Property Company, LLC ("Russian") and
Borrette Property Company, LLC ("Borrette"), its 72%-owned subsidiary, Larkin
Property Company, LLC ("Larkin") and its 66%-owned subsidiary, Stockton Street
Property Company, LLC ("Stockton"). 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.
6
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans secured by deeds of trust
At September 30, 2005 and December 31, 2004, the partnership had eight
loans, past due 90 days or more in interest payments ("90 day Past Due Loans")
totaling $16,360,000 and $23,101,000, respectively. Included in the 90 day Past
Due Loans are five loans and three loans totaling $12,471,000 and $6,135,000 at
September 30, 2005 and December 31, 2004, respectively, which are past maturity
(see Note 8). Additionally, at September 30, 2005 and December 31, 2004, the
Partnership had four loans and three loans past maturity with outstanding
principal balances of $12,670,000 and $1,912,000, for a combined total of twelve
loans and eleven loans as of each period past due 90 days or more in interest
payments, and/or past maturity totaling $29,030,000 and $25,013,000. A past
maturity loan is a loan in which the principal and/or any accrued interest is
due and payable, but the borrower has failed to make such payment of principal
and/or accrued interest. These delinquent and/or past maturity loans also had
accrued interest, advances and late charges due as of September 30, 2005 and
December 31, 2004 of $3,507,000 and $3,202,000, respectively. The partnership
does not consider these loans to be impaired because, in the opinion of
management, there is sufficient collateral to cover the amount outstanding to
the partnership and the partnership is still accruing interest on these loans.
At September 30, 2005 and December 31, 2004, there were no loans categorized as
impaired by the partnership.
Allowance for loan losses
The composition of the allowance for loan losses as of September 30, 2005
and December 31, 2004 was as follows (in thousands):
September 30, December 31,
2005 2004
--------------- ---------------
Impaired loans $ - $ -
Specified loans 137 137
General 2,365 2,206
Unsecured loans - -
--------------- ---------------
$ 2,502 $ 2,343
=============== ===============
Activity in the allowance for loan losses for the nine months through
September 30, 2005 and for the year ended December 31, 2004 was as follows (in
thousands):
September 30, December 31,
2005 2004
--------------- ---------------
Beginning balance $ 2,343 $ 2,649
Additions charged to income 168 1,146
Write-offs (9) (952)
Transferred to real estate held
for sale reserve - (500)
--------------- ---------------
$ 2,502 $ 2,343
=============== ===============
7
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
No provision for federal and state income taxes (other than an $800 state
minimum tax) is made in the consolidated financial statements since income taxes
are the obligation of the partners if and when income taxes apply.
Net income per $1,000 invested
Amounts reflected in the consolidated 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 elected to either leave their earnings to compound or have 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.
Profits and losses
Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.
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 date 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 and the valuation of real estate held for sale. Actual results
could differ significantly from these estimates.
NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES
The following are commissions and/or fees, which are paid to the general
partners.
Mortgage brokerage commissions
For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, Redwood Mortgage Corp. may collect an amount equivalent
to 12% of the loaned amount until six months after the termination date of the
offering. Thereafter, loan brokerage commissions (points) will be limited to an
amount not to exceed 4% of the total partnership assets per year. The loan
brokerage commissions are paid by the borrowers and thus, are not an expense of
the partnership.
Mortgage servicing fees
Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., based on the unpaid
principal balance 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. Once a loan is categorized as impaired, mortgage servicing fees are no
longer accrued thereon. Additional service fees are recorded upon the receipt of
any subsequent payments on impaired loans.
8
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (unaudited)
NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES (continued)
Asset management fees
The general partners receive monthly fees for managing the partnership's
loan portfolio and operations up to 1/32 of 1% of the "net asset value" (3/8 of
1% annual), which is the partnership's total assets less its total liabilities.
Other fees
The Partnership Agreement provides for other fees such as reconveyance,
mortgage assumption and mortgage extension fees. Such fees are incurred by the
borrowers and are paid to the general partners.
Operating expenses
Redwood Mortgage Corp., a general partner, is reimbursed by the partnership
for all operating expenses incurred on behalf of the partnership, including
without limitation, out-of-pocket general and administration expenses of the
partnership, accounting and audit fees, legal fees and expenses, postage and
preparation of reports to limited partners. During the second quarter of 2005
Redwood Mortgage Corp. waived approximately $20,000 in operating expense
reimbursement.
NOTE 4 - REAL ESTATE HELD FOR SALE
During 2002, a single-family residence that secured a partnership loan
totaling $4,402,000, including accrued interest and advances, was transferred
via a statutory warranty deed to a new entity named Russian Hill Property
Company, LLC ("Russian"). Russian is wholly owned by the partnership. Russian
was formed by the partnership to complete the development and sale of the
property. The assets, liabilities and operating results of Russian have been
consolidated into the accompanying consolidated financial statements of the
partnership. Costs related to the sale and development of this property were
capitalized during 2003. Commencing January 2004, costs related to sales and
maintenance of the property are being expensed. As of September 30, 2005 and
December 31, 2004, the partnership had advanced approximately $202,000 and
$150,000, respectively, to Russian for sales and maintenance costs. At September
30, 2005 and December 31, 2004, the partnership's total investment in Russian
was $3,979,000, net of a valuation allowance of $500,000.
In September, 2004, the partnership acquired a single family residence
through a foreclosure sale. At the time the partnership took ownership of the
property, the partnership's investment totaled $1,937,000 including accrued
interest and advances. The borrower began a substantial renovation of the
property, which was not completed at the time of foreclosure. The partnership
has decided to pursue development of the property by processing plans for the
creation of two condominium units on the property. These plans will incorporate
the majority of the existing improvements currently located on the property. As
of September 30, 2005, the partnership has capitalized approximately $184,000 in
costs related to this property. Management has established a reserve of $500,000
to cover potential losses for this property, based upon management's estimate of
the fair value of the property.
In December, 2004, the partnership acquired undeveloped parcels of land
through a deed in lieu of foreclosure. The land is located in Stanislaus County,
California. It is comprised of three separate lots, which total approximately 14
acres. The parcels are currently for sale. As of September 30, 2005 the
partnership's investment in this property totaled $4,403,000, including accrued
interest and advances, as of the date of the acquisition. Management believes
that the full value of this investment will be recovered from the eventual sale
of the property based upon its current estimate of the fair value of the
property. This property is jointly owned by two other affiliated partnerships.
9
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (unaudited)
NOTE 4 - REAL ESTATE HELD FOR SALE (continued)
In February, 2005, the partnership acquired a multi-unit property through
foreclosure. This property is located in an upscale neighborhood in San
Francisco. At the time the partnership took ownership of the property, the
partnership's investment, together with three other affiliate partnerships,
totaled $10,536,000 including accrued interest and advances. The partnership
intends to undertake additional improvements to the property. No valuation
allowance has been established against this property as management is of the
opinion that the property will have adequate equity to recover the entire
partnership investment. Upon acquisition, the property was transferred via a
statutory warranty deed to a new entity named Larkin Property Company, LLC
("Larkin"). The partnership owns a 72.50% interest in the property and the other
three affiliates collectively own the remaining 27.50%. As of September 30,
2005, the Partnership has capitalized approximately $546,000 in costs related to
this property. As of September 30, 2005 the Partnership's investment, together
with the other affiliated partnerships, totaled $11,082,000.
The following schedule reflects the costs of real estate acquired through
foreclosure and the recorded reductions to estimated fair values, including
estimated costs to sell as of September 30, 2005 and December 31, 2004:
September 30, December 31,
2005 2004
---------------- ---------------
Cost of properties $ 22,085,000 $ 10,793,000
Reduction in value (1,000,000) (1,000,000)
---------------- ---------------
Real estate held for sale, net $ 21,085,000 $ 9,793,000
================ ===============
NOTE 5 - BANK LINE OF CREDIT
The partnership has a bank line of credit expiring November 15, 2006, of up
to $42,000,000 at prime, secured by its loan portfolio. The outstanding balances
were $17,000,000 and $16,000,000 at September 30, 2005 and December 31, 2004,
respectively. The interest rate was 6.75% (prime) at September 30, 2005. This
credit facility provides for a two year revolving credit line and thereafter an
option to amortize the then existing balance over a 36 month term. The line of
credit calls for certain financial covenants. To the best of its knowledge, the
partnership was in compliance with these covenants for the nine month period
ended September 30, 2005 and for the year ended December 31, 2004.
NOTE 6 - NON-CASH TRANSACTIONS
During the first quarter of 2005 the partnership acquired a real estate
property through foreclosure and in order to reduce potential liabilities,
subsequently transferred the property at its book value to a newly formed
limited liability company ("LLC"). This transaction resulted in an increase in
real estate held for sale of $10,536,000, a decrease in loans receivable,
accrued interest, advances, and late charge receivable of $7,635,000, and an
increase in minority interest of $2,901,000, which was the affiliate
partnerships' interest in the property.
10
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (unaudited)
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Secured loans carrying value was $207,311,000 and $171,745,000 at September
30, 2005 and December 31, 2004, respectively. The fair value of these loans of
$207,848,000 and $173,067,000, respectively, was estimated based upon projected
cash flows discounted at the estimated current interest rates at which similar
loans would be made. The applicable amount of the allowance for loan losses
along with accrued interest and advances related thereto should also be
considered in evaluating the fair value versus the carrying value.
NOTE 8 - ASSET CONCENTRATIONS AND CHARACTERISTICS (in thousands)
Most loans are secured by recorded deeds of trust. At September 30, 2005
and December 31, 2004 there were 93 and 75 secured loans outstanding,
respectively, with the following characteristics:
September 30, December 31,
2005 2004
---------------- ----------------
Number of secured loans outstanding 93 75
Total secured loans outstanding $ 207,311 $ 171,745
Average secured loan outstanding $ 2,229 $ 2,289
Average secured loan as percent of total secured loans 1.08% 1.33%
Average secured loan as percent of partners' capital 1.03% 1.25%
Largest secured loan outstanding $ 11,685 $ 12,045
Largest secured loan as percent of total secured loans 5.64% 7.01%
Largest secured loan as percent of partners' capital 5.40% 6.56%
Largest secured loan as percent of total assets 4.86% 6.00%
Number of counties where security is located (all California) 21 17
Largest percentage of secured loans in one county 28.28% 20.48%
Average secured loan to appraised value of security based on
appraised values and prior liens at time loan was consummated 67.29% 56.94%
Number of secured loans in foreclosure status 3 6
Amount of secured loans in foreclosure $ 6,135 $ 14,682
11
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (unaudited)
NOTE 8 - ASSET CONCENTRATIONS AND CHARACTERISTICS (in thousands) (continued)
The following secured loan categories were held at September 30, 2005, and
December 31, 2004:
September 30, December 31,
2005 2004
----------------- ---------------
First Trust Deeds $ 131,292 $ 115,082
Second Trust Deeds 71,279 50,282
Third Trust Deeds 4,740 6,381
----------------- ---------------
Total loans 207,311 171,745
Prior liens due other lenders at time of loan 215,898 99,140
----------------- ---------------
Total debt $ 423,209 $ 270,885
================= ===============
Appraised property value at time of loan $ 628,912 $ 475,710
----------------- ---------------
Total secured loans as a percent of appraisals based on appraised
values and prior liens at time loan was consummated 67.29% 56.94%
----------------- ---------------
Secured loans by type of property
Owner occupied homes $ 5,184 $ 9,234
Non-owner occupied homes 97,707 75,125
Apartments 18,734 30,981
Commercial 67,777 54,670
Land 17,909 1,735
----------------- ---------------
$ 207,311 $ 171,745
================= ===============
The interest rates on the loans range from 8.00% to 15.00% at September 30,
2005. This range of interest rates is typical of our portfolio.
Scheduled maturity dates of loans as of September 30, 2005 are as follows:
Year Ending December 31, Amount
------------------------------- --------------
2005 $ 34,294
2006 41,198
2007 81,447
2008 17,628
2009 6,053
Thereafter 26,691
--------------
$ 207,311
==============
12
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (unaudited)
NOTE 8 - ASSET CONCENTRATIONS AND CHARACTERISTICS (in thousands) (continued)
The scheduled maturities for 2005 include nine past maturity loans totaling
$25,141,000, and representing 12.13% of the portfolio at September 30, 2005.
Interest payments on five of these loans were categorized as 90 days or more
delinquent. Several borrowers are in process of selling the properties or
refinancing their loans through other institutions, as this is an opportune time
for them to do so and/or take advantage of lower interest rates. Occasionally
the partnership allows borrowers to continue to make the payments on debt past
maturity for periods of time. Of these nine past maturity loans, the partnership
has begun foreclosure proceedings by filing a notice of default on three with
aggregate principal balances totaling $6,135,000.
Cash deposits at September 30, 2005 exceeded FDIC insurance limits (up to
$100,000 per bank) by approximately $1,968,000.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Construction/Rehabilitation Loans
The partnership makes construction and rehabilitation loans which are not
fully disbursed at loan inception. The partnership has approved the borrowers up
to a maximum loan balance; however, disbursements are made periodically during
completion phases of the construction or rehabilitation or at such other times
as required under the loan documents. At September 30, 2005 there were
$13,058,000 of undisbursed loan funds which will be funded by a combination of
borrower monthly mortgage payments, line of credit draws, retirements of
principal on current loans, cash and capital contributions from investors. The
partnership does not maintain a separate cash reserve to hold the undisbursed
obligations, which are intended to be funded.
Workout Agreements
The partnership has negotiated various contractual workout agreements with
borrowers whose loans are past maturity or who are delinquent in making
payments. The partnership is not obligated to fund additional money on these
loans as of September 30, 2005. There are two loans totaling $6,808,000 in
workout agreements as of September 30, 2005.
Legal proceedings
The partnership is involved in various legal actions arising in the normal
course of business. In the opinion of management, such matters will not have a
material effect upon the financial position of the partnership.
NOTE 10 - SUBSEQUENT EVENTS
None
13
Part I - Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP
Critical Accounting Policies.
In preparing the consolidated financial statements, management is required
to make estimates based on the information available that affect the reported
amounts of assets and liabilities as of the balance sheet dates and revenues and
expenses for the reporting periods. Such estimates relate principally to the
determination of (1) the allowance for loan losses (i.e. the amount of allowance
established against loans receivable as an estimate of potential loan losses)
including the accrued interest and advances that are estimated to be
unrecoverable based on estimates of amounts to be collected plus estimates of
the value of the property as collateral and (2) the valuation of real estate
acquired through foreclosure. At September 30, 2005, the partnership owned six
real estate properties, which were taken back from defaulted borrowers.
Loans and related accrued interest, fees, and advances are analyzed on a
regular basis for recoverability. Delinquencies are identified and followed as
part of the loan system. Provisions are made to adjust the allowance for loan
losses and real estate held for sale to an amount considered by management to be
adequate, with due consideration to original collateral values at loan inception
and to provide for unrecoverable accounts receivable, including impaired loans,
other loans, accrued interest, late fees and advances on loans, and other
accounts receivable (unsecured).
Recent trends in the economy have been taken into consideration in the
aforementioned process of arriving at the allowance for loan losses and real
estate. Actual results could vary from the aforementioned provisions for losses.
If the probable ultimate recovery of the carrying amount of a loan, with due
consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement and the shortfall in
the amounts due are not insignificant, the carrying amount of the loan is
reduced to the present value of future cash flows discounted at the loan's
effective interest rate. If a loan is collateral dependent, it is valued at the
estimated fair value of the related collateral.
If events and/or changes in circumstances cause management to have serious
doubts about the collectibility of the contractual payments, a loan may be
categorized as impaired and interest is no longer accrued. Any subsequent
payments on impaired loans are applied to reduce the outstanding loan balances,
including accrued interest and advances.
Real estate held for sale includes real estate acquired through foreclosure
and is stated at the lower of the recorded investment in the loan, plus any
senior indebtedness, or at the property's estimated fair value, less estimated
costs to sell.
The partnership 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 fair value.
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 future
interest rates and 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 and the valuation of real estate held for sale,
estimates of future limited partner withdrawals, the total amount of the
Formation Loan, and 2005 annualized yield estimates. 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.
14
Related Parties.
The general partners of the partnership are Redwood Mortgage Corp., Gymno
Corporation and Michael R. Burwell. Most partnership business is conducted
through Redwood Mortgage Corp., which arranges, services, and maintains the loan
portfolio for the benefit of the partnership. Michael R. Burwell is President
and Chief Financial Officer of Redwood Mortgage Corp. and Gymno Corporation. The
following is a list of various partnership activities for which related parties
are compensated.
o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, the partnership may
collect an amount equivalent to 12% of the loaned amount until six months after
the termination date of the offering. Thereafter, the loan brokerage commissions
(points) will be limited to an amount not to exceed 4% of the total partnership
assets per year. The loan brokerage commissions are paid by the borrowers, and
thus, are not an expense of the partnership. Loan brokerage commissions paid by
the borrowers were $3,063,000 and $2,061,000 for the nine month periods ended
September 30, 2005 and 2004, and $968,000 and $718,000 for the three month
periods ended September 30, 2005 and 2004, respectively.
o Mortgage Servicing Fees Monthly mortgage servicing fees of up to 1/8 of
1% (1.5% on an annual basis) of the unpaid principal of the partnership's loans
are paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and
customary in the geographic area where the property securing the mortgage is
located. Mortgage servicing fees of $1,228,000 and $1,115,000 were incurred for
the nine month periods ended September 30, 2005 and 2004 and $479,000 and
$422,000 were incurred for the three month periods ended September 30, 2005 and
2004, respectively.
o Asset Management Fees The general partners receive monthly fees for
managing the partnership's portfolio and operations up to 1/32 of 1% of the `net
asset value' (3/8 of 1% on an annual basis). Management fees to the general
partners of $592,000 and $454,000 were incurred for the nine month periods ended
September 30, 2005 and 2004, and $212,000 and $163,000 were incurred for the
three month periods ended September 30, 2005 and 2004, respectively.
o Other Fees The partnership agreement provides that the general partners
may receive other fees such as processing and escrow, reconveyance, mortgage
assumption and mortgage extension fees. Such fees are incurred by the borrowers
and are paid to the general partners. Such fees totaled $57,000 and $38,000 for
the nine month periods ended September 30, 2005 and 2004, and $18,000 and $9,000
for the three month periods ended September 30, 2005 and 2004, respectively.
o Income and Losses All income and losses are credited or charged to
partners in relation to their respective partnership interests. The allocation
to the general partners (combined) shall be a total of 1%, which was $112,000
and $87,000 for the nine month periods ended September 30, 2005 and 2004, and
$40,000 and $31,000 for the three month periods ended September 30, 2005 and
2004, respectively.
o Operating Expenses Redwood Mortgage Corp. is reimbursed by the
partnership for all operating expenses actually incurred on behalf of the
partnership, including without limitation, out-of-pocket general and
administration expenses of the partnership, accounting and audit fees, legal
fees and expenses, postage and preparation of reports to limited partners.
Operating expenses totaling $217,000 and $229,000 for the nine month periods
ended September 30, 2005 and 2004, and $79,000 and $77,000 for the three month
periods ended September 30, 2005 and 2004, respectively, were reimbursed to
Redwood Mortgage Corp, which included a waiver of approximately $20,000 in
second quarter operating expense reimbursement.
o Contributed Capital The general partners jointly and severally were to
contribute 1/10 of 1% in cash contributions as proceeds from the offerings are
received from the limited partners. As of September 30, 2005 and December 31,
2004, a general partner, Gymno Corporation, had contributed $202,000 and
$174,000, respectively, as capital in accordance with Section 4.02(a) of the
partnership agreement.
15
o Sales Commission - "Formation Loan" to Redwood Mortgage Corp. Sales
commissions relating to the capital contributions by limited partners are not
paid directly by the partnership out of the offering proceeds. Instead, the
partnership loans to Redwood Mortgage Corp., a general partner, amounts
necessary to pay all sales commissions and amounts payable in connection with
unsolicited orders. The loan is referred to as the "Formation Loan". It is
unsecured and non-interest bearing and is applied to reduce limited partners'
capital in the consolidated balance sheets. The sales commissions range between
0% (for units sold by the general partners) and 9%. It is estimated that the
total amount of the formation loan will approximate 7.6% based on the assumption
that 65% of the investors will reinvest earnings, which qualify for the higher
commission percentage.
The amount of the annual installments paid by Redwood Mortgage Corp. are
determined at annual installments of one-tenth of the principal balance of each
formation loan at December 31 of each year until the offering period is closed.
Thereafter, the remaining formation loan is paid in ten equal amortizing
payments over a period of ten years.
Results of Operations - For the nine and three months ended September 30,
2005 and 2004
Changes in the partnership's operating results for the nine and three month
periods ended September 30, 2005 versus 2004 are discussed below:
Changes during the Changes during the
nine months ended three months ended
September 30, 2005 September 30, 2005
versus 2004 versus 2004
---------------------- ---------------------
Net income $ 2,498,000 $ 869,000
================ ===============
Revenue
Interest on loans 1,582,000 533,000
Interest - bank 63,000 (2,000)
Late fees (87,000) (32,000)
Gain on sale of real estate held for sale 183,000 -
Imputed interest on formation loan 128,000 43,000
Other 114,000 53,000
---------------- ---------------
$ 1,983,000 $ 595,000
---------------- ---------------
Expenses
Mortgage servicing fees 113,000 57,000
Interest expense (203,000) (110,000)
Amortization of loan origination fees 6,000 (2,000)
Provision for losses on loans and real estate
held for sale (674,000) (323,000)
Asset management fees 138,000 49,000
Clerical costs through Redwood Mortgage Corp. (12,000) 2,000
Professional services (25,000) 1,000
Amortization of discount on imputed interest 128,000 43,000
Other 14,000 9,000
---------------- ---------------
$ (515,000) $ (274,000)
---------------- ---------------
Net income increase $ 2,498,000 $ 869,000
================ ===============
16
The increase in interest on loans of $1,582,000 (13%) for the nine month
period, and $533,000 (12%) for the three month period ended September 30, 2005
as compared to the same periods in 2004, was due primarily to the increased size
of the partnership secured loan portfolio of $207,311,000 at September 30, 2005
as compared to $189,880,000 at September 30, 2004. The increase in interest on
loans for the nine month period ended September 30, 2005 was mitigated by a
lower average portfolio interest rate of 9.98% at September 30, 2005 as compared
to 10.36% at September 30, 2004. Average loan balances for the nine and three
month periods ended September 30, 2005 and 2004 were $175,079,000 and
$153,172,000 for the nine month periods and $201,273,000 and $175,322,000 for
the three month periods, respectively.
The increase in mortgage servicing fees of $113,000 (10%) for the nine
month period and $57,000 (14%) for the three month period ended September 30,
2005 as compared to the same periods in 2004 is primarily due to an increase in
the average size of the loan portfolio from $153,172,000 as of September 30,
2004 to an average size of $175,079,000 as of September 30, 2005.
The decrease in interest expense of $203,000 (57.67%) and $110,000 (49.33%)
for the nine and three month periods ended September 30, 2005 as compared to the
same periods in 2004 is primarily due to the lower average outstanding balance
of the line of credit during the first nine months of 2005. During the first
half of 2005 the partnership did not significantly utilize the line of credit
facility. Instead, loan commitments were funded from loan pay-offs and proceeds
from the sales of limited partner units. During the first quarter of 2005
interest expense of $36,000 was paid on the line of credit balance of
$16,000,000 that was brought forward from December 31, 2004. During the second
quarter of 2005 no interest expense on line of credit was recorded as there was
no borrowing made during the greater part of the quarter, except for $8,000,000
which was made at June 30, 2005. During the third quarter of 2005 the
partnership incurred an average borrowing of $7,766,000 at an average interest
rate of 6.47% compared to an average borrowing of $20,348,000 at an average rate
of 4.34% during the third quarter of 2004.
The decrease in provision for losses on loans and real estate held for sale
of $674,000 (80%) for the nine month period and $323,000 (81%) for the three
month period ended September 30, 2005 as compared to the same periods in 2004 is
due to management's determination that a total provision of $3,502,000 was
adequate based on the loan and real estate held for sale balances as of
September 30, 2005. As of September 30, 2005 the loan portfolio has a
loan-to-value ratio of 67.29%, based on appraised values and prior liens at the
time the loans were consummated. Across virtually all of California, real estate
values are stable or rising. The partnership's real estate held for sale
properties will benefit from the strong real estate market. Consequently,
management did not believe that significant additions to the provision for
losses against loans and real estate held for sale was warranted.
The increase in the asset management fees of $138,000 (30.40%) for the nine
month period and $49,000 (30.06%) for the three month period ended September 30,
2005 as compared to the same periods in 2004 is due to an increase in the
limited partners' capital under management to $216,038,000 at September 30, 2005
from $169,942,000 at September 30, 2004.
The decrease in professional fees of $25,000 for the nine month period and
increase of $1,000 for the three month period ended September 30, 2005 as
compared to the same periods in 2004 is primarily due to timing of billing and
payment of fees associated with various partnership regulatory filings.
The increase in amortization of loan origination fees of $6,000 during the
nine month period ended September 30, 2005 as compared to the same period in
2004 is due to a revision of fee rates and an extension of the maturity date on
the increased line of credit when the credit line was increased from $32,000,000
to $42,000,000 in November, 2004. The decrease in fees of $2,000 during the
three month period ended September 30, 2005 as compared to the same period in
2004 is primarily due to amortization of pre-paid fees at an accelerated rate
during the 2004 period.
17
The increase in other income of $114,000 for the nine month period and
$53,000 for the three month period ended September 30, 2005 as compared to the
same periods in 2004 is primarily a result of an increase in miscellaneous
income received from the sale of partnership units. The partnership accepts
unsolicited orders for units from investors who utilize the services of a
registered investment advisor. If an investor utilizes the services of a
registered investment advisor in acquiring units, Redwood Mortgage Corp. will
contribute to the partnership an amount equal to the sales commissions otherwise
attributable to a sale of units through a participating broker dealer. This
amount is based on the investor's election to retain earnings (9%) or have their
earnings distributed (5%). As of September 30, 2005 $125,000 was paid and
recorded under other income for such amount, contributed by Redwood Mortgage
Corp. to the partnership.
The increase in gain on sale of real estate held for sale of $183,000 for
the nine month period ended September 30, 2005 as compared to the same period in
2004 was primarily due to a gain realized upon the disposal of a real estate
property during the first quarter of 2005. No real estate sales occurred during
the second and third quarters of 2005.
The increase in imputed interest and related amortization of discount on
imputed interest of $128,000 for the nine month period and $43,000 for the three
month period ended September 30, 2005 as compared to the same periods in 2004 is
primarily due to increases in the Formation Loan due to additional limited
partnership investments.
The increase in bank interest of $63,000 for the nine month period ended
September 30, 2005 as compared to the same period in 2004 is due to larger
average monthly deposits of $9,693,000 and $3,465,000 for the nine month periods
ended September 30, 2005 and 2004, respectively. The decrease in bank interest
of $2,000 for the three month period ended September 30, 2005 as compared to the
same period in 2004 is due to smaller average monthly deposits of $1,224,000 and
$2,837,000 for the three month periods ended September 30, 2005 and 2004,
respectively.
At September 30, 2005, outstanding loans with filed notices of default were
three and they totaled $6,135,000 or 2.96% of outstanding secured loans as
compared to the four totaling $7,439,000 or 3.92% of outstanding secured loans
that existed at September 30, 2004. As to one of the outstanding loans with a
filed notice of default at September 30, 2005, the borrower is in bankruptcy.
These foreclosures are a reflection of the economic times that existed at
September 30, 2005 and 2004, and are not unusual in the general partners'
experience.
The general partners received mortgage brokerage commissions from loan
borrowers of $3,063,000 and $968,000 for the nine and three month periods ended
September 30, 2005 as compared to $2,061,000 and $718,000 for the nine and three
month periods ended September 30, 2004, respectively. The increase is due to
more loans being funded in the nine and three month periods ended September 30,
2005 as compared to the corresponding periods of 2004.
Allowance for Losses.
The general partners regularly review the loan portfolio, examining the
status of delinquencies, borrowers' payment records, etc. Based upon this
information and other data, the allowance for loan losses is increased or
decreased. Borrower foreclosures are a normal aspect of partnership operations.
The partnership is not a credit based lender and hence while it reviews the
credit history and income of borrowers, and if applicable, the income from
income producing properties, the general partners expect that the partnership
will on occasion take back real estate security. During 2002 and 2003 the
economy stabilized. During 2004 and continuing in 2005, the economy and the
Northern California real estate market strengthened. As of September 30, 2005,
the partnership had twelve loans past due 90 days or more on interest payments
and/or past maturity, totaling $29,030,000. With respect to three of these
twelve loans, we have filed notices of default, beginning the process of
foreclosure.
The partnership periodically enters into workout agreements with borrowers
who are past maturity or delinquent in their regular payments. As of September
30, 2005 the partnership had entered into a total of two workout agreements with
borrowers inclusive of current, matured, and 90-day delinquent loans. These two
workout agreements involved loans totaling $6,808,000. Typically, a workout
agreement allows the borrower to extend the maturity date of the balloon payment
and/or allows the borrower to make current monthly payments while deferring for
periods of time, past due payments, and allows time to pay the loan in full.
These workout agreements and foreclosures generally exist within our loan
portfolio to greater or lesser degrees, depending primarily on the health of the
economy. The number of foreclosures and workout agreements will generally rise
during difficult economic times and conversely fall during good economic times.
The number and amount of foreclosures existing at September 30, 2005, in
management's opinion, does not have a material effect on our results of
operations or liquidity. These workouts and foreclosures have been considered
18
when management arrived at appropriate loan loss reserves and based on our
experience, are reflective of our loan marketplace segment. In 2005, we may
initiate foreclosure proceedings on delinquent borrowers or borrowers who become
delinquent during the balance of the year. We may take back additional real
estate through the foreclosure process in 2005. Borrower foreclosures are a
normal aspect of partnership operations and the general partners anticipate that
they will not have a material effect on liquidity. As a prudent guard against
potential losses, the general partners have made provisions for losses on loans
and real estate held for sale of $3,502,000 through September 30, 2005. These
provisions for losses were made to protect against collection losses. The total
cumulative provision for losses as of September 30, 2005 is considered by the
general partners to be adequate. Because of the number of variables involved,
the magnitude of the swings possible and the general partners' inability to
control many of these factors, actual results may and do sometimes differ
significantly from estimates made by the general partners.
PORTFOLIO REVIEW - For the nine months ended September 30, 2005 and 2004
Loan Portfolio.
The partnership's loan portfolio consists primarily of short-term (one to
five years), fixed rate loans secured by real estate. As of September 30, 2005
and 2004 the partnership's loans secured by real property collateral in the six
San Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Alameda,
Contra Costa, and Marin) represented $148,737,000 (71.75%) and $143,815,000
(75.74%) of the outstanding secured loan portfolio. The remainder of the
portfolio represented loans secured primarily by Northern California real estate
outside of the San Francisco Bay Area counties.
As of September 30, 2005 and 2004 the partnership held 93 and 85 secured
loans, respectively, in the following categories (in thousands):
September 30,
---------------------------------------------------------------
2005 2004
----------------------------- -----------------------------
Single family homes (1-4 units) $ 102,891 49.63% $ 105,078 55.34%
Commercial 67,777 32.69% 56,415 29.71%
Apartments (5+ units) 18,734 9.04% 24,320 12.81%
Land 17,909 8.64% 4,067 2.14%
------------- ------------ ------------- ------------
Total $ 207,311 100.00% $ 189,880 100.00%
============= ============ ============= ============
19
As of September 30, 2005, the partnership held 93 loans secured by deeds of
trust. The following table sets forth the priorities, asset concentrations and
maturities of the loans held by the partnership as of September 30, 2005.
PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of September 30, 2005 (in thousands)
# of
Secured
Loans Amount Percent
------------- ------------- -------------
1st Mortgages 54 $ 131,292 63.33%
2nd Mortgages 33 71,279 34.38%
3rd Mortgages 6 4,740 2.29%
============= ============= =============
Total 93 $ 207,311 100.00%
Maturing 12/31/05 and prior 12 $ 34,294 16.54%
Maturing prior to 12/31/06 16 41,198 19.87%
Maturing prior to 12/31/07 39 81,447 39.29%
Maturing after 12/31/07 26 50,372 24.30%
============= ============= =============
Total 93 $ 207,311 100.00%
Average secured loan as a % of secured loan portfolio $ 2,229 1.08%
Largest secured loan as a % of secured loan portfolio 11,685 5.64%
Smallest secured loan as a % of secured loan portfolio 71 0.03%
Average secured loan-to-value at time of loan based on
appraisals and prior liens at time of loan 67.29%
Largest secured loan as a percent of partnership assets 11,685 4.86%
Liquidity and Capital Resources.
Partnership capital continued to increase during the nine month period
ended September 30, 2005. The partnership received new limited partner capital
contributions of $32,121,000 for the nine month period and $8,341,000 for the
three month period ended September 30, 2005 as compared to $29,393,000 for the
nine month period and $13,043,000 for the three month period ended September 30,
2004. Retained earnings of limited partners that have chosen to compound
earnings were $7,003,000 for the nine month period and $2,476,000 for the three
month period ended September 30, 2005, as compared to $5,278,000 for the nine
month period and $1,870,000 for the three month period ended September 30, 2004.
The increased partnership capital assisted in the Partnership's ability to
increase loans outstanding to $207,311,000 at September 30, 2005, as compared to
$189,880,000 at September 30, 2004. The partnership closed the fifth offering in
August, 2005 with subscriptions of $74,904,000 for the $75,000,000 offering. The
sixth offering of $100,000,000 commenced on August 4, 2005. Of the $32,121,000
in limited partner contributions for the nine month period ended September 30,
2005 $27,592,000 related to the partnership's fifth offering and $4,529,000
related to the sixth offering. The decrease in contributions during the three
months ended September 30, 2005 as compared to the same period in 2004 was due
to the closing of the fifth offering and the commencing of the sixth offering in
August, 2005. It is normal for new limited partner capital contributions to
decrease when an offering closes and a new offering begins.
The partnership relies upon purchases of units, loan payoffs, borrowers'
mortgage payments, and to a lesser degree, its line of credit for the source of
funds for loans and for the undisbursed portion of Construction Loans and
Rehabilitation Loans (see the discussion under the caption "ASSET QUALITY" in
Item 3 of Part I of this Form 10-Q). Mortgage interest rates have decreased
somewhat from those available at the inception of the partnership. If interest
rates were to increase substantially, the yield of the partnership's loans may
provide lower yields than other comparable debt-related investments. As such,
additional limited partner unit purchases could decline, which would reduce the
overall liquidity of the partnership. Additionally, since the partnership has
made primarily fixed rate loans, if interest rates were to rise, the likely
result would be a slower prepayment rate for the partnership. This could cause a
lower degree of liquidity as well as a slowdown in the ability of the
partnership to invest in loans at the then current interest rates. Conversely,
in the event interest rates were to decline, the partnership could experience a
surge of unit purchases by prospective limited partners, and/or significant
borrower prepayments. In such event, if the partnership can only obtain the then
20
existing lower rates of interest, there may be a dilution of the partnership's
yield on loans, thereby lowering the partnership's overall yield to the limited
partners. The partnership to a lesser degree relies upon its line of credit to
fund loans. Generally, the partnership's loans are fixed rate, whereas the
credit line is a variable rate loan. In the event of a significant increase in
overall interest rates, the credit line rate of interest could increase to a
rate above the average portfolio rate of interest. Should such an event occur,
the general partners would desire to pay off the line of credit and would
generally not use it to fund loans. This could reduce the overall liquidity of
the partnership. Cash is constantly being generated from borrower payments of
interest, principal and loan payoffs. Currently, cash flow greatly exceeds
partnership expenses and cash distribution requirements to limited partners.
Excess cash flow is invested in new loan opportunities, and for funding the
undisbursed portion of Construction and Rehabilitation Loans, and is used to
reduce the partnership credit line or for other partnership business.
At the time of subscription to the partnership, limited partners must elect
either to receive monthly, quarterly or annual cash distributions from the
partnership, or to compound earnings in their capital account. If an investor
initially elects to receive monthly, quarterly or annual distributions, such
election, once made, is irrevocable. If the investor initially elects to
compound earnings in his/her capital account, in lieu of cash distributions, the
investor may, after three (3) years, change the election and receive monthly,
quarterly or annual cash distributions. Earnings allocable to limited partners,
who elect to compound earnings in their capital account, will be retained by the
partnership for making further loans or for other proper partnership purposes;
and such amounts will be added to such limited partners' capital accounts.
During the nine and three month periods ended September 30, 2005 and 2004,
the partnership, after allocation of syndication costs, made the following
allocation of earnings both to the limited partners who elected to compound
their earnings, and those that chose to distribute:
Nine months ended September 30, Three months ended September 30,
------------------------------------- -------------------------------------
2005 2004 2005 2004
-------------- --------------- --------------- --------------
Compounding $ 7,003,000 $ 5,278,000 $ 2,476,000 $ 1,870,000
Distributing $ 3,906,000 $ 3,194,000 $ 1,378,000 $ 1,136,000
As of September 30, 2005 and 2004 limited partners electing to receive cash
distributions of earnings represented 37% and 38%, respectively, of the limited
partners' outstanding capital accounts. These percentages have remained
relatively stable. The general partners anticipate that after all capital has
been raised, the percentage of limited partners electing to withdraw earnings
will decrease due to the dilution effect which occurs when compounding limited
partners' capital accounts grow through compounded earnings.
The partnership also allows the limited partners to withdraw their capital
account subject to certain limitations and penalties. Once a limited partner's
initial five-year hold period has passed, the general partners expect to see an
increase in liquidations due to the ability of limited partners to withdraw
without penalty. This ability to withdraw five years after a limited partner's
investment has the effect of providing limited partner liquidity and the general
partners expect a portion of the limited partners to avail themselves of this
liquidity. The general partners expect to see increasing numbers of limited
partner withdrawals during a limited partner's 5th through 10th anniversary, at
which time the bulk of those limited partners who have sought withdrawal have
been liquidated. Since the five-year hold period for many limited partners has
yet to expire, as of September 30, 2005, many limited partners may not have yet
opted for such liquidation. Earnings and capital liquidations including early
withdrawals during the nine and three month periods ended September 30, 2005 and
2004 were:
Nine months ended September 30, Three months ended September 30,
------------------------------------ ------------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
Cash distributions $ 3,906,000 $ 3,194,000 $ 1,378,000 $ 1,136,000
Capital liquidation* $ 1,547,000 $ 1,469,000 $ 524,000 $ 362,000
-------------- -------------- -------------- --------------
Total $ 5,453,000 $ 4,663,000 $ 1,902,000 $ 1,498,000
============== ============== ============== ==============
* These amounts represent gross of early withdrawal penalties.
21
Additionally, limited partners may liquidate their investment over a
one-year period subject to certain limitations and penalties. During the nine
and three month periods ended September 30, 2005 and 2004, capital liquidated
subject to the 10% penalty for early withdrawal was:
Nine months ended September 30, Three months ended September 30,
------------------------------------- ------------------------------------
2005 2004 2005 2004
-------------- --------------- -------------- --------------
$ 443,000 $ 542,000 $ 198,000 $ 97,000
This represents 0.09% (three months ended September 30, 2005), 0.05% (three
months ended September 30, 2004), 0.21% (nine months ended September 30, 2005)
and 0.30% (nine months ended September 30, 2004) of the limited partners' ending
capital as of the end of the respective periods. These withdrawals are within
the normally anticipated range and represent a small percentage of limited
partner capital.
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 earnings each
investor is entitled to receive is determined by the ratio that 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 NASD 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 partnership
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 partnership units and none is likely to develop. Thus, there is
no certainty that 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.
Current Economic Conditions.
From July 1, 2004 through September 30, 2005, the Federal Reserve increased
the Federal Funds Rate to 3.75% from 1%. The recent upward movement in the
Federal Funds Rate during 2004 and 2005 has raised short-term rates; and while
long-term interest rates have risen, they have not increased at a pace
comparable to the rise in short-term rates. In the future the general partners
anticipate that interest rates will likely change from their current levels. The
general partners cannot, at this time, predict at what levels interest rates
will be in the future. The general partners anticipate that new loans will be
placed during 2005 at rates slightly above those that prevailed in 2004. The
recent increases in short term interest rates, and to a lesser extent long term
interest rates, have encouraged those borrowers with interest rates above the
current going rates to refinance their indebtedness to lock in these
historically low interest rates should they increase in the future. Demand for
loans from qualified borrowers continues to be strong and as loan repayments
occur, the general partners expect to replace the paid off loans with loans at
interest rates attainable in the then existing interest rate environment. At
this time, the general partners believe that the average loan portfolio interest
rate will remain relatively stable over the remainder of 2005. Based upon the
rates payable in connection with the existing loans, anticipated interest rates
to be charged by the partnership, and the general partners' experience, the
general partners anticipate that the partnership's annualized yield will range
between 6.75% and 7.25% in 2005.
22
During the third quarter of 2005, the United States economy as a whole
performed well. Early estimates of a 3.8% third quarter Real Gross Domestic
Product shows a continuation of the previous nine consecutive quarters of
expansion in excess of 3% (BEA 11/05). The United States unemployment rate for
October, 2005 was 5% and has hovered close to that level throughout the second
and third quarters of 2005. Regionally, the San Francisco Bay Area demonstrated
a very similar unemployment rate with an unemployment rate of 4.9% for the month
ended August, 2005. The San Francisco Bay area unemployment rate has been
declining from 5.3% in January, 2005 to the current 4.9% (United States
Department of Labor 11/05). The rate of inflation concerns many with energy
costs having risen significantly over the last year. The consumer price index
spiked upward 1.2% in September, 2005 and was 4.7% higher than in September,
2004 (United States Department of Labor 11/05). It remains to be seen whether
increased energy costs will ripple through the economy and drive inflation
upward, which could push interest rates higher. These statistics indicate an
economy that is continuing to grow, which is good for both mortgage lenders and
the real estate industry as a whole.
The partnership makes loans primarily in Northern California. As such the
regional real estate market is of primary concern to the partnership. As of
September 30, 2005 and 2004, approximately 71.75%, ($148,737,000) and 75.74%
($143,815,000) of the loans held by the partnership were in six San Francisco
Bay Area Counties, respectively. The remainder of the loans held was secured
primarily by Northern California real estate outside of the San Francisco Bay
Area.
California residential real estate continued to appreciate in value during
the third quarter of 2005. In the San Francisco Bay Area, as of September 2005
single family home median sales prices increased by 19.4%, 22.1%, 15.7% 10.3%,
21.0% and 18.5% to $616,000, $580,000, $899,000, $757,500, $816,500, and
$705,000 for the Alameda, Contra Costa, Marin, San Francisco, San Mateo and
Santa Clara counties from September 2004, respectively (DataQuick Information
Systems). The total sales volumes and the number of homes sold have been
declining. Sales volumes for the nine months ended September 2005 as compared to
September 2004 were typically 5% lower. Mortgage interest rates for both fixed
and adjustable rate loans have been rising, decreasing housing affordability.
During the week of October 14, 2005, 30 year fixed rate mortgages increased
above a 6% interest rate for the first time since March 2005 (Freddie Mac).
Rising interest rates will likely slow down the rate of housing appreciation we
have seen over the last two years. A strong residential real estate marketplace
increases lending opportunities and assists in providing adequate equity to help
repay mortgage debt should borrowers become delinquent in their payments.
Commercial real estate in the San Francisco Bay Area continued its rebound.
Occupancy is increasing and rents are either stagnant or increasing in most
markets throughout the San Francisco Bay Area. Grubb and Ellis reports that
class A space in San Francisco average rents are $32.60 up 3.6% from the second
quarter and that vacancy is at 17.6% down from 18.5% in the second quarter and
21.2% in the third quarter of 2004. The San Francisco leasing market has
absorbed an estimated 1.9 million square feet net during 2005. Sales of
commercial office buildings are brisk with record per square foot prices being
attained and 2005 being on track to be a record volume sales year. A healthy
commercial real estate market increases lending opportunities and assists in
providing adequate equity to repay mortgage debt should borrowers become
delinquent in their payments.
For partnership loans outstanding as of September 30, 2005, the partnership
had an average loan-to-value ratio of 67.29%, computed based on appraised values
and senior liens as of the date the loan was made. This percentage does not
account for any increases or decreases in property values since the date the
loan was made, nor does it include any reductions in principal on senior
indebtedness through amortization of payments after the loan was made. This low
loan-to-value ratio will assist the partnership in weathering loan delinquencies
and foreclosures should they eventuate.
Contractual Obligations
A summary of the contractual obligations of the partnership as of September
30, 2005 is set forth below (in thousands):
Contractual Obligation Total Less than 1 Year 1-3 Years 3-5 Years
---------------------------- ----------------- ----------------- ----------------- ----------------
Line of credit $ 17,000 $ - $ 11,333 $ 5,667
Construction loans 830 830 - -
Rehabilitation loans 12,228 12,228 - -
----------------- ----------------- ----------------- ----------------
Total $ 30,058 $ 13,530 $ 11,333 $ 5,667
================= ================= ================= ================
23
Part I - Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table contains information about the cash held in money
market accounts, loans held in the partnership's portfolio and loans to the
partnership pursuant to its line of credit as of September 30, 2005. The
presentation, for each category of information, aggregates the assets and
liabilities by their maturity dates for maturities occurring in each of the
years 2005 through 2009 and separately aggregates the information for all
maturities arising after 2009. The carrying values of these assets and
liabilities approximate their fair market values as of September 30, 2005 (in
thousands):
2005 2006 2007 2008 2009 Thereafter Total
------------------------------------------------------------------------------------------
Interest earning assets:
Money market accounts $ 44 $ 44
Average interest rate 1.35% 1.35%
Loans secured by deeds of
Trust $ 34,294 41,198 81,447 17,628 6,053 26,691 $ 207,311
Average interest rate 11.34% 10.34% 9.19% 10.50% 9.28% 9.14% 9.88%
Loans, unsecured $ 34 $ 34
Average interest rate - -
Interest bearing liabilities:
Line of credit $ 5,666 5,667 5,667 $ 17,000
Average interest rate 6.75% 6.75% 6.75% 6.75%
Market Risk.
The partnership's line of credit bears interest at a variable rate, tied to
the prime rate. As a result, the partnership's primary market risk exposure with
respect to its obligations is changes in interest rates, which will affect the
interest cost of outstanding amounts on the line of credit. The partnership may
also suffer market risk tied to general trends affecting real estate values that
may impact the partnership's security for its loans.
The partnership's primary market risk in terms of its profitability is the
exposure to fluctuations in earnings resulting from fluctuations in general
interest rates. The majority of the partnership's mortgage loans earn interest
at fixed rates. Changes in interest rates may also affect the value of the
partnership's investment in mortgage loans and the rates at which the
partnership reinvests funds obtained from loan repayments and new capital
contributions from limited partners. If interest rates increase, the interest
rates the partnership obtains from reinvested funds will generally increase, but
the value of the partnership's existing loans at fixed rates will generally tend
to decrease. The risk is mitigated by the fact that the partnership does not
intend to sell its loan portfolio, rather such loans are held until they are
paid off. If interest rates decrease, the amounts becoming available to the
partnership for investment due to repayment of partnership loans may be
reinvested at lower rates than the partnership had been able to obtain in prior
investments, or than the rates on the repaid loans. In addition, interest rate
decreases may encourage borrowers to refinance their loans with the partnership
at a time where the partnership is unable to reinvest in loans of comparable
value.
The partnership does not hedge or otherwise seek to manage interest rate
risk. The partnership does not enter into risk sensitive instruments for trading
purposes.
ASSET QUALITY
A consequence of lending activities is that occasionally losses will be
experienced and that the amount of such losses will vary from time to time,
depending upon the risk characteristics of the loan portfolio as affected by
economic conditions and the financial experiences of borrowers. Many of these
factors are beyond the control of the general partners. There is no precise
method of predicting specific losses or amounts that ultimately may be charged
off on particular segments of the loan portfolio, especially in light of the
current economic environment.
24
The conclusion that a loan may become uncollectible, in whole or in part,
is a matter of judgment. Although institutional lenders are subject to
requirements and regulations that, among other things, require them to perform
ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and
to obtain and maintain current information regarding their borrowers and the
securing properties, the partnership is not subject to these regulations and has
not adopted all of these practices. Rather, the general partners, in connection
with the periodic closing of the accounting records of the partnership and the
preparation of the financial statements, determine whether the allowance for
loan losses is adequate to cover potential loan losses of the partnership. As of
September 30, 2005 the general partners have determined that the allowance for
loan losses and real estate held for sale of $3,502,000 (1.62% of net assets) is
adequate in amount. Because of the number of variables involved, the magnitude
of the swings possible and the general partners' inability to control many of
these factors, actual results may and do sometimes differ significantly from
estimates made by the general partners. As of September 30, 2005, eight loans
totaling $16,360,000 were delinquent over 90 days on interest payments. This
includes five matured loans totaling $12,471,000. In addition, four additional
loans totaling $12,670,000 were also past maturity but were current in interest
payment as of September 30, 2005, for a combined total of twelve loans past due
90 days or more in interest payments, and/or past maturity totaling $29,030,000.
The partnership also makes loans requiring periodic disbursements of funds.
As of September 30, 2005, there were eighteen such loans. These loans include
ground up construction of buildings and loans for rehabilitation of existing
structures. Interest on these loans is computed using a simple interest method
and only on the amounts disbursed on a daily basis.
A summary of the status of the partnership's loans which are periodically
disbursed, as of September 30, 2005, is set forth below:
Complete Construction Rehabilitation
----------------------- ---------------------
Disbursed funds $ 5,244,000 $ 48,603,000
Undisbursed funds 830,000 12,228,000
--------------- ---------------
Total commitments $ 6,074,000 $ 60,831,000
=============== ===============
"Construction Loans" are determined by the management to be those loans
made to borrowers for the construction of entirely new structures or dwellings,
whether residential, commercial or multifamily properties. The partnership has
approved the borrowers up to a maximum loan balance; however, disbursements are
made in phases throughout the construction process. As of September 30, 2005,
the partnership had commitments for Construction Loans totaling $6,074,000, of
which $5,244,000 had been disbursed and $830,000 remains to be disbursed.
The partnership also makes loans, the proceeds of which are used to
remodel, add to and/or rehabilitate an existing structure or dwelling, whether
residential, commercial or multifamily properties and which, in the
determination of management, are not Construction Loans. These loans are
referred to by management as "Rehabilitation Loans". As of September 30, 2005
the partnership had commitments for Rehabilitation Loans totaling $60,831,000,
of which $48,603,000 had been disbursed and $12,228,000 remains to be disbursed.
While the partnership does not classify Rehabilitation Loans as Construction
Loans, Rehabilitation Loans do carry some of the same risks as Construction
Loans. There is no limit on the amount of Rehabilitation Loans the partnership
may make.
Part I - Item 4. CONTROLS AND PROCEDURES
As of September 30, 2005, 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 pursuant to Rule 13a-15 of the Securities Exchange Act
of 1934, as amended. Based upon that evaluation, the general partners concluded
that the partnership's disclosure controls and procedures are effective in
timely alerting the general partners to material information relating to the
partnership that is required to be included in our periodic filings with the
Securities and Exchange Commission. There were no significant changes in the
partnership's internal control over financial reporting during the partnership's
third fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the partnership's internal control over financial reporting.
25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Notes to Consolidated Financial Statements -
Note 9 discussed earlier
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
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
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
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized on the 14th day of
November 2005.
REDWOOD MORTGAGE INVESTORS VIII
By: /S/ Michael R. Burwell
---------------------------------------
Michael R. Burwell, General Partner
By: Gymno Corporation, General Partner
By: /S/ Michael R. Burwell
-----------------------------------------------
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer
By: Redwood Mortgage Corp.
By: /S/ Michael R. Burwell
-----------------------------------------------
Michael R. Burwell,
President, Secretary/Treasurer
27
Exhibit 31.1
GENERAL PARTNER CERTIFICATION
I, Michael R. Burwell, General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VIII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's most
recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting;
and
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of Registrant's board of
directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial data; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
/s/ Michael R. Burwell
- ------------------------------------
Michael R. Burwell, General Partner
November 14, 2005
28
Exhibit 31.2
PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION
I, Michael R. Burwell, President, Secretary/Treasurer and Chief Financial
Officer of Gymno Corporation, General Partner, and Redwood Mortgage Corp.,
General Partner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VIII, a California Limited Partnership (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's most
recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting;
and
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of Registrant's board of
directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial data; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
/s/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell, President, Secretary/Treasurer
and Chief Financial Officer of Gymno Corporation, General
Partner, and Redwood Mortgage Corp., General Partner
November 14, 2005
29
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Redwood Mortgage Investors VIII
(the "Partnership") on Form 10-Q for the period ending September 30, 2005 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of
the Partnership, certify, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership at the dates and for the periods indicated.
/s/ Michael R. Burwell
- ------------------------------------
Michael R. Burwell, General Partner
November 14, 2005
30
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Redwood Mortgage Investors VIII
(the "Partnership") on Form 10-Q for the period ending September 30, 2005 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General
Partner of the Partnership, and Redwood Mortgage Corp., General Partner of the
Partnership, certify that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership at the dates and for the periods indicated.
/s/ Michael R. Burwell
- -----------------------------------------------
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial
Officer of Gymno Corporation, General Partner,
and Redwood Mortgage Corp., General Partner
November 14, 2005
31