1
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-14029
AMRESCO CAPITAL TRUST
(Exact name of Registrant as specified in its charter)
TEXAS 75-2744858
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 N. PEARL STREET, SUITE 2400, LB 342,
DALLAS, TEXAS 75201-7424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 953-7700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
10,015,111 shares of common stock, $.01 par value per share,
as of November 1, 1999.
2
AMRESCO CAPITAL TRUST
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 ................................. 3
Consolidated Statements of Income - For the Three and Nine Months Ended September 30, 1999, the Three
Months Ended September 30, 1998 and the Period from February 2, 1998 (Date of Initial Capitalization)
through September 30, 1998............................................................................ 4
Consolidated Statement of Changes in Shareholders' Equity - For the Nine Months Ended
September 30, 1999.................................................................................... 5
Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 1999 and the
Period from February 2, 1998 (Date of Initial Capitalization) through September 30, 1998.............. 6
Notes to Consolidated Financial Statements.............................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 29
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................. 31
SIGNATURE ................................................................................................ 32
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMRESCO CAPITAL TRUST
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30,
1999 December 31,
(unaudited) 1998
------------ ------------
ASSETS
Mortgage loans held for investment, net ........................................... $ 124,080 $ 96,976
Acquisition, development and construction loan arrangements accounted for as real
estate or investments in joint ventures ........................................ 42,144 39,550
------------ ------------
Total loan investments ............................................................ 166,224 136,526
Allowance for loan losses ......................................................... (2,690) (1,368)
------------ ------------
Total loan investments, net of allowance for losses ............................... 163,534 135,158
Commercial mortgage-backed securities - available for sale (at fair value) ........ 26,027 28,754
Real estate, net of accumulated depreciation of $572 and $56, respectively ........ 50,650 10,273
Investments in unconsolidated partnerships and subsidiary ......................... 11,773 3,271
Receivables and other assets ...................................................... 5,435 3,681
Cash and cash equivalents ......................................................... 3,794 9,789
------------ ------------
TOTAL ASSETS ................................................................... $ 261,213 $ 190,926
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and other liabilities ............................................. $ 2,696 $ 941
Amounts due to affiliates .......................................................... 6,383 6,268
Repurchase agreement ............................................................... 10,701 --
Line of credit ..................................................................... 78,500 39,338
Non-recourse debt on real estate ................................................... 34,600 7,500
Dividends payable .................................................................. -- 4,002
------------ ------------
TOTAL LIABILITIES .............................................................. 132,880 58,049
------------ ------------
Minority interests ................................................................. 500 2,611
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 49,650,000 shares authorized, no shares issued .... -- --
Series A junior participating preferred stock, $.01 par value, 350,000 shares
authorized, no shares issued ................................................... -- --
Common stock, $.01 par value, 200,000,000 shares authorized, 10,015,111 and
10,006,111 shares issued and outstanding, respectively ......................... 100 100
Additional paid-in capital ......................................................... 140,998 140,941
Unearned stock compensation ........................................................ (359) (848)
Accumulated other comprehensive income (loss) ...................................... (9,341) (6,475)
Distributions in excess of accumulated earnings .................................... (3,565) (3,452)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ..................................................... 127,833 130,266
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................................... $ 261,213 $ 190,926
============ ============
See notes to consolidated financial statements
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4
AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
Period from
February 2,
Three Months Ended Nine Months 1998
September 30, Ended through
----------------------- September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenues:
Interest income on mortgage loans ................................... $ 3,841 $ 1,188 $ 10,776 $ 1,328
Income from commercial mortgage-backed securities ................... 905 560 2,753 597
Operating income from real estate ................................... 1,416 91 2,593 108
Equity in earnings of unconsolidated subsidiary, partnerships and
other real estate ventures ........................................ 63 326 197 486
Interest income from short-term investments ......................... 76 827 198 1,734
---------- ---------- ---------- ----------
Total revenues .................................................... 6,301 2,992 16,517 4,253
---------- ---------- ---------- ----------
Expenses:
Interest expense .................................................... 1,769 1 3,427 1
Management fees ..................................................... 610 439 1,613 632
General and administrative .......................................... 338 755 1,120 953
Depreciation ........................................................ 408 21 705 24
Participating interest in mortgage loans ............................ 190 3 1,019 3
Provision for loan losses ........................................... 642 501 1,822 611
---------- ---------- ---------- ----------
Total expenses .................................................... 3,957 1,720 9,706 2,224
---------- ---------- ---------- ----------
Income before gains ................................................... 2,344 1,272 6,811 2,029
Gain associated with repayment of ADC loan arrangement ............. -- -- 584 --
---------- ---------- ---------- ----------
Net income ............................................................ $ 2,344 $ 1,272 $ 7,395 $ 2,029
========== ========== ========== ==========
Earnings per common share:
Basic .............................................................. $ 0.24 $ 0.12 $ 0.74 $ 0.34
========== ========== ========== ==========
Diluted ............................................................ $ 0.24 $ 0.12 $ 0.74 $ 0.34
========== ========== ========== ==========
Weighted average number of common shares outstanding:
Basic .............................................................. 10,000 10,000 10,000 5,892
========== ========== ========== ==========
Diluted ............................................................ 10,016 10,006 10,011 5,896
========== ========== ========== ==========
See notes to consolidated financial statements.
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AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock
$.01 Par Value Accumulated Distributions
------------------- Additional Unearned Other in Excess of Total
Number of Paid-in Stock Comprehensive Accumulated Shareholders'
Shares Amount Capital Compensation Income (Loss) Earnings Equity
----------- ------ --------- ------------ ------------- ----------- ----------
Balance at January 1, 1999....... 10,006,111 $ 100 $ 140,941 $ (848) $ (6,475) $ (3,452) $ 130,266
Issuance of trust managers'
restricted shares.............. 9,000 -- 91 (91) --
Issuance of warrants............. 400 400
Decrease in fair value of
compensatory options .......... (434) 434 --
Amortization of unearned trust
manager compensation........... 68 68
Amortization of compensatory
options ....................... 78 78
Dividends declared
($0.75 per common share)....... (7,508) (7,508)
Unrealized loss on securities
available for sale............. (2,866) (2,866)
Net income....................... 7,395 7,395
----------- ------ --------- ------- --------- --------- ----------
Balance at September 30, 1999.... 10,015,111 $ 100 $ 140,998 $ (359) $ (9,341) $ (3,565) $ 127,833
=========== ====== ========= ======= ========= ========= ==========
See notes to consolidated financial statements.
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AMRESCO CAPITAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
Period from
February 2,
Nine Months 1998
Ended through
September 30, September 30,
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................................... $ 7,395 $ 2,029
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses .................................................................. 1,822 611
Depreciation ............................................................................... 705 24
Gain associated with repayment of ADC loan arrangement ..................................... (584) --
Loss on sale of interest rate cap .......................................................... 5 --
Amortization of prepaid assets ............................................................. 176 104
Discount amortization on commercial mortgage-backed securities ............................. (231) (54)
Amortization of compensatory stock options and unearned trust manager compensation ......... 146 285
Amortization of loan commitment fees ....................................................... (555) (74)
Receipt of loan commitment fees ............................................................ 428 1,220
Increase in receivables and other assets ................................................... (1,020) (1,766)
Increase in interest receivable related to commercial mortgage-backed securities ........... -- (377)
Increase in accounts payable and other liabilities ......................................... 1,755 1,008
Increase in amounts due to affiliates ...................................................... 1,217 388
Equity in undistributed earnings of unconsolidated subsidiary, partnerships and other real
estate ventures ......................................................................... (197) (486)
Distributions from unconsolidated subsidiary, partnerships and other real estate venture ... 294 380
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................................. 11,356 3,292
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of mortgage loans ................................................................. -- (25,807)
Investments in mortgage loans ................................................................. (41,676) (55,607)
Investments in ADC loan arrangements .......................................................... (22,482) (29,004)
Sale of mortgage loan to affiliate ............................................................ 4,585 --
Principal collected on mortgage loans ......................................................... 8,385 --
Principal and interest collected on ADC loan arrangement ...................................... 11,513 --
Investments in real estate .................................................................... (40,894) --
Investments in unconsolidated partnerships and subsidiary ..................................... (2,374) (3,501)
Distributions from unconsolidated partnerships and other real estate ventures ................. 26 133
Purchase of commercial mortgage-backed securities ............................................. -- (34,480)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ................................................. (82,917) (148,266)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under line of credit ................................................. 39,162 --
Proceeds from borrowings under repurchase agreement ........................................... 12,103 5,123
Repayment of borrowings under repurchase agreement ............................................ (1,402) --
Proceeds from financing provided by affiliate ................................................. 907 5,020
Proceeds from non-recourse debt on real estate ................................................ 27,100 --
Purchase of interest rate cap ................................................................. (110) --
Proceeds from sale of interest rate cap ....................................................... 30 --
Deferred financing costs associated with line of credit ....................................... (120) --
Deferred financing costs associated with non-recourse debt on real estate ..................... (594) --
Net proceeds from issuance of common stock .................................................... -- 139,717
Dividends paid to common shareholders ......................................................... (11,510) (1,001)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............................................. 65,566 148,859
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................................. (5,995) 3,885
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................................... 9,789 --
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......................................................... $ 3,794 $ 3,885
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid, net of amount capitalized ...................................................... $ 2,783 $ --
============ ============
Income taxes paid ............................................................................. $ 25 $ --
============ ============
Minority interest contributions associated with ADC loan arrangements ......................... $ -- $ 2,611
============ ============
Minority interest distribution associated with ADC loan arrangement ........................... $ 2,111 $ --
============ ============
Receivables transferred in satisfaction of amounts due to affiliate ........................... $ 280 $ --
============ ============
Amounts due to affiliate discharged in connection with sale of mortgage loan .................. $ 1,729 $ --
============ ============
Issuance of warrants in connection with line of credit ........................................ $ 400 $ --
============ ============
See notes to consolidated financial statements.
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7
AMRESCO CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. ORGANIZATION AND RELATIONSHIPS
AMRESCO Capital Trust (the "Company"), a real estate investment trust ("REIT"),
was organized under the laws of the State of Texas. The Company was formed to
take advantage of certain mid- to high-yield lending and investment
opportunities in real estate related assets, including various types of
commercial mortgage loans (including, among others, participating loans,
mezzanine loans, acquisition loans, construction loans, rehabilitation loans and
bridge loans), commercial mortgage-backed securities ("CMBS"), commercial real
estate, equity investments in joint ventures and/or partnerships, and certain
other real estate related assets. The Company was initially capitalized on
February 2, 1998 and commenced operations on May 12, 1998, concurrent with the
completion of its initial public offering ("IPO") of 9,000,000 common shares and
private placement of 1,000,011 common shares.
Pursuant to the terms of a Management Agreement dated as of May 12, 1998 and
subject to the direction and oversight of the Board of Trust Managers, the
Company's day-to-day operations are managed by AMREIT Managers, L.P. (the
"Manager"), an affiliate of AMRESCO, INC. (together with its affiliated
entities, the "AMRESCO Group"). For its services, the Manager is entitled to
receive a base management fee equal to 1% per annum of the Company's Average
Invested Non-Investment Grade Assets, as defined, and 0.5% per annum of the
Company's Average Invested Investment Grade Assets, as defined. In addition to
the base management fee, the Manager is entitled to receive incentive
compensation in an amount equal to 25% of the dollar amount by which Funds From
Operations (as defined by the National Association of Real Estate Investment
Trusts), as adjusted, exceeds a certain threshold. The Manager is also entitled
to receive reimbursement for its costs of providing certain services to the
Company. The base management fee, reimbursable expenses and incentive fee, if
any, are payable quarterly in arrears. During the three and nine months ended
September 30, 1999, base management fees charged to the Company totaled $563,000
and $1,521,000, respectively. Reimbursable expenses charged to the Company
during these periods totaled $66,000 and $170,000, respectively. During the
three months ended September 30, 1998 and the period from February 2, 1998 (date
of initial capitalization) through September 30, 1998, base management fees
charged to the Company totaled $298,000 and $421,000, respectively; reimbursable
expenses charged to the Company during these periods totaled $80,000 and
$96,000, respectively. Since its inception, no incentive fees have been charged
to the Company. Immediately after the closing of the IPO, the Manager was
granted options to purchase 1,000,011 common shares; 70% of the options are
exercisable at an option price of $15.00 per share and the remaining 30% of the
options are exercisable at an option price of $18.75 per share. During the three
and nine months ended September 30, 1999, management fees included compensatory
option charges totaling $47,000 and $92,000, respectively. During the three
months ended September 30, 1998 and the period from February 2, 1998 (date of
initial capitalization) through September 30, 1998, management fees included
compensatory option charges totaling $141,000 and $211,000, respectively.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10,
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required by generally accepted accounting principles
for complete financial statements. The consolidated financial statements include
the accounts of the Company, its wholly-owned subsidiaries and a majority-owned
partnership. The Company accounts for its investment in AMREIT II, Inc., a
taxable subsidiary, using the equity method of accounting, and thus reports its
share of income or loss based on its ownership interest. The Company uses the
equity method of accounting due to the non-voting nature of its ownership
interest and because the Company is entitled to substantially all of the
economic benefits of ownership of AMREIT II, Inc. The Company owns
non-controlling interests in two partnerships; the Company accounts for these
investments using the equity method of accounting and thus reports its share of
income or loss based on its ownership interests. The accompanying financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998 (the "10-K"). The notes to the
financial statements included herein highlight significant changes to the notes
included in the 10-K.
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8
In the opinion of management, the accompanying consolidated financial statements
include all adjustments (consisting of normal and recurring accruals) necessary
for a fair presentation of the interim financial statements. Operating results
for the periods presented are not necessarily indicative of the results that may
be expected for the entire fiscal year or any other interim period.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities at the date of the
financial statements and revenues and expenses for the reporting period.
Significant estimates include the valuation of commercial mortgage-backed
securities, the allowance for loan losses and the determination of the fair
value of certain share option awards and warrants. Actual results may differ
from those estimates.
Certain prior period amounts have been reclassified to conform with the current
period's presentation.
3. LOAN INVESTMENTS
During the three months ended September 30, 1999, the Company originated two
loans. During the nine months ended September 30, 1999, four of the Company's
loans were fully repaid, three loan originations were closed and one loan was
sold to AMRESCO Commercial Finance, Inc. ("ACFI"), a member of the AMRESCO
Group; additionally, one loan was reclassified, net of a $500,000 charge-off, to
investment in unconsolidated subsidiary following the subsidiary's acquisition
(through foreclosure on February 25, 1999) of the partnership interests of one
of the Company's borrowers. As of September 30, 1999, the Company's loan
investments are summarized as follows (dollars in thousands):
Date of Initial Scheduled Collateral
Investment Maturity Location Property Type Position
- ------------------------ ------------------- ---------------- -------------- ---------------
May 12, 1998 March 31, 2001 Richardson, TX Office Second Lien
June 1, 1998 June 1, 2001 Houston, TX Office First Lien
June 12, 1998 June 30, 2000 Pearland, TX Apartment First Lien
June 17, 1998 June 30, 2000 San Diego, CA R&D/Bio-Tech First Lien
June 19, 1998 June 18, 2000 Houston, TX Office First Lien
June 22, 1998 June 19, 2000 Wayland, MA Office First Lien
July 1, 1998 July 1, 2001 Dallas, TX Office Ptrshp Interests
July 2, 1998 June 30, 2000 Washington, D.C. Office First Lien
July 10, 1998 July 31, 2000 Pasadena, TX Apartment First Lien
September 1, 1998 February 28, 2001 Los Angeles, CA Mixed Use First Lien
September 30, 1998 Various San Antonio, TX/ Residential Lots First Lien
Sunnyvale, TX
September 30, 1998 October 7, 1999 Ft. Worth, TX Apartment Ptrshp Interests
September 30, 1998 December 31, 1999 Dallas, TX Medical Office First Lien
September 30, 1998 September 22, 1999 Norwood, MA Industrial/Office First Lien
October 1, 1998 December 31, 1999 Richardson, TX Office First Lien
May 18, 1999 May 19, 2001 Irvine, CA Office First Lien
July 29, 1999 July 28, 2001 Lexington, MA R&D/Bio-Tech First Lien
August 19, 1999 August 15, 2001 San Diego, CA Medical Office First Lien
Amount
Outstanding at Interest Interest
Date of Initial Scheduled Commitment September 30, Pay Accrual
Investment Maturity Amount 1999 Rate Rate
- ------------------------ ------------------- ----------- --------------- -------- --------
May 12, 1998 March 31, 2001 $ 14,700 $ 13,368 10.0% 12.0%
June 1, 1998 June 1, 2001 11,800 10,531 12.0% 12.0%
June 12, 1998 June 30, 2000 12,827 12,291 10.0% 11.5%
June 17, 1998 June 30, 2000 5,560 4,587 10.0% 13.5%
June 19, 1998 June 18, 2000 24,000 20,281 12.0% 12.0%
June 22, 1998 June 19, 2000 45,000 38,688 10.5% 10.5%
July 1, 1998 July 1, 2001 10,068 7,197 10.0% 15.0%
July 2, 1998 June 30, 2000 7,000 6,165 10.5% 10.5%
July 10, 1998 July 31, 2000 3,350 2,993 10.0% 14.0%
September 1, 1998 February 28, 2001 18,419 17,418 10.0% 12.0%
September 30, 1998 Various 8,400 3,233 10.0% 14.0%
September 30, 1998 October 7, 1999 2,650 2,649 10.5% 16.0%
September 30, 1998 December 31, 1999 3,015 2,638 10.0% 13.0%
September 30, 1998 September 22, 1999 8,765 8,335 10.0% 12.5%
October 1, 1998 December 31, 1999 567 300 9.7% 15.0%
May 18, 1999 May 19, 2001 15,260 12,924 10.0% 12.0%
July 29, 1999 July 28, 2001 5,213 2,623 10.4% 13.4%
August 19, 1999 August 15, 2001 5,745 3,415 10.4% 10.4%
--------- ----------
$ 202,339 $ 169,636
========= ==========
As more fully described in Note 13, the following loans were sold to ACFI on
November 1, 1999 (dollars in thousands):
Amount
Outstanding at
Commitment September 30, Scheduled
Amount 1999 Maturity
----------------- ---------------- -------------------
$ 2,650 $ 2,649 October 7, 1999
3,015 2,638 December 31, 1999
8,765 8,335 September 22, 1999
------- --------
$14,430 $ 13,622
======= ========
At September 30, 1999, amounts outstanding under construction loans,
acquisition/rehabilitation loans, acquisition loans, land development loans and
bridge loans totaled $48,589,000, $54,944,000, $54,235,000, $3,533,000 and
$8,335,000, respectively.
8
9
Three of the 18 loan investments provide the Company with the opportunity for
profit participation in excess of the contractual interest accrual rates. The
loan investments are classified as follows (in thousands):
Loan Amount Balance Sheet
Outstanding at Amount at
September 30, 1999 September 30, 1999
------------------ ------------------
Mortgage loans held for investment, net ............... $ 125,280 $ 124,080
Real estate, net ...................................... 37,159 35,897
Investment in real estate venture ..................... 7,197 6,247
------------------ ------------------
Total ADC loan arrangements ........................ 44,356 42,144
------------------ ------------------
Total loan investments ................................ $ 169,636 166,224
==================
Allowance for loan losses ............................. (2,690)
------------------
Total loan investments, net of allowance for losses ... $ 163,534
==================
The differences between the outstanding loan amounts and the balance sheet
amounts are due primarily to loan commitment fees, interest fundings, minority
interests, capitalized interest and accumulated depreciation.
ADC loan arrangements accounted for as real estate consisted of the following at
September 30, 1999 (in thousands):
Land ................................... $ 4,648
Buildings and improvements ............. 14,514
Construction in progress ............... 16,968
------------
Total ............................... 36,130
Less: Accumulated depreciation ......... (233)
------------
$ 35,897
============
On October 1, 1999, amounts classified as construction in progress were
transferred to buildings and improvements.
A summary of activity for mortgage loans and ADC loan arrangements accounted for
as real estate or investments in joint ventures is as follows (in thousands):
Balance at December 31, 1998 ........... $ 136,791
Investments in loans ................... 65,741
Collections of principal ............... (19,743)
Cost of mortgage sold .................. (6,314)
Foreclosure (partnership interests) .... (6,839)
------------
Balance at September 30, 1999 .......... $ 169,636
============
The activity in the allowance for loan losses was as follows (in thousands):
Balance at December 31, 1998 ........... $ 1,368
Provision for losses ................... 1,822
Charge-offs ............................ (500)
Recoveries ............................. --
------------
Balance at September 30, 1999 .......... $ 2,690
============
As of September 30, 1999, the Company had outstanding commitments to fund
approximately $32,703,000 under 18 loans, of which $808,000 was reimbursable by
ACFI. The Company is obligated to fund these commitments to the extent that the
borrowers are not in violation of any of the conditions established in the loan
agreements. Commitments generally have fixed expiration dates or other
termination clauses and may require the payment of a fee if amounts are repaid
to the Company during certain prepayment lock-out periods. A portion of the
commitments could expire without being drawn
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10
upon and therefore the total commitment amounts do not necessarily represent
future cash requirements. ACFI's reimbursement obligations were discharged in
connection with the loan sale described in Note 13.
4. REAL ESTATE
On April 30, 1999, the Company (through a majority-owned partnership) acquired
interests in three newly constructed, grocery-anchored shopping centers in the
Dallas/Fort Worth (Texas) area. These properties, which were acquired by
subsidiary partnerships at an aggregate purchase price of $30.2 million, include
an 86,516 square foot facility in Flower Mound, Texas, a 61,440 square foot
facility in Fort Worth, Texas and an 85,611 square foot facility in Grapevine,
Texas. Through the majority-owned partnership, the Company acquired an interest
in an additional grocery-anchored shopping center on August 25, 1999. The newly
constructed property, an 87,540 square foot facility in Richardson, Texas, was
acquired by a subsidiary partnership at a purchase price of $10.7 million. In
connection with these acquisitions, the subsidiary partnerships which hold title
to these assets obtained non-recourse financing aggregating $19.5 million and
$7.6 million, respectively, from an unaffiliated third party (Note 5).
Immediately prior to the closings, the Company contributed $11.4 million and
$3.4 million, respectively, of capital to the partnership. The proceeds from
these contributions were used, in part, to fund the balance of the acquisition
costs, to pay costs associated with the financing and to provide initial working
capital to the title-holding partnerships. The majority-owned partnership owns,
directly or indirectly, all of the equity interests in the title-holding
subsidiary partnerships.
Real estate, which is comprised entirely of amounts derived from the Company's
partnership investment, consisted of the following at September 30, 1999 and
December 31, 1998 (in thousands):
September 30, 1999 December 31, 1998
------------------ ------------------
Land ................................... $ 14,385 $ 2,353
Buildings and improvements ............. 36,837 7,976
------------------ ------------------
Total ............................... 51,222 10,329
Less: Accumulated depreciation ......... (572) (56)
------------------ ------------------
$ 50,650 $ 10,273
================== ==================
In connection with the partnership's procurement of third party financing, the
Company was required to post two irrevocable standby letters of credit totaling
$1,084,000. The letters of credit, which were cancelled on May 4, 1999, were
collateralized by certificates of deposit in a like amount; the certificates of
deposit matured on August 31, 1999. Concurrent with the cancellation and as a
replacement for a portion thereof related to the financing associated with the
Richardson property, the Company posted an irrevocable standby letter of credit
in the amount of $304,000. This letter of credit, which was cancelled on August
30, 1999, was collateralized by a $304,000 certificate of deposit that matured
on September 30, 1999.
5. DEBT AND FINANCING FACILITIES
Effective as of July 1, 1998, the Company (and certain of its subsidiaries)
entered into a $400 million Interim Warehouse and Security Agreement (the "Line
of Credit") with Prudential Securities Credit Corporation ("PSCC"). Subject to
certain limitations, borrowings under the facility can be used to finance the
Company's structured loan and equity real estate investments. Prior to the
modifications discussed below, borrowings under the Line of Credit bore interest
at rates ranging from LIBOR plus 1% per annum to LIBOR plus 2% per annum
depending upon the type of asset, its loan-to-value ratio and the advance rate
selected by the Company. Advance rates on eligible assets ranged from 50% to 95%
depending upon the asset's characteristics.
Effective as of May 4, 1999, the Company (and certain of its subsidiaries)
entered into an Amended and Restated Interim Warehouse and Security Agreement
(the "Amended Line of Credit") with PSCC; the agreement amended the Company's
existing Line of Credit. The Amended Line of Credit includes the following
modifications: (1) a reduction in the size of the committed facility from $400
million to $300 million; (2) the elimination of the requirement that assets
financed with proceeds from the facility must be securitizable; (3) a reduction
in the amount of capital the Company must fund with respect to construction and
rehabilitation loans before PSCC is required to begin advancing funds; (4) an
extension of the maturity date from July 1, 2000 to November 3, 2000; and (5)
the modification to, and addition of, certain sublimits on specified types of
loans and assets. Under the Amended Line of Credit, borrowings bear interest at
LIBOR plus 1.25% per
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11
annum to the extent such borrowings do not exceed the Company's Tangible Net
Worth, as defined; borrowings in excess of the Company's Tangible Net Worth bear
interest at LIBOR plus 3%. At September 30, 1999, the weighted average interest
rate under this facility was 6.63% per annum.
As compensation for entering into the Amended Line of Credit and extending the
maturity date, the Company granted warrants to Prudential Securities
Incorporated, an affiliate of PSCC, to purchase 250,002 common shares of
beneficial interest at $9.83 per share. The exercise price represents the
average closing market price of the Company's common shares for the ten-day
period ending on May 3, 1999. The warrants were issued in lieu of a commitment
fee or other cash compensation. The estimated fair value of the warrants,
totaling $400,000, was measured at the grant date and is being amortized to
interest expense over the 18-month term of the facility using the straight-line
method.
Borrowings under the facility are secured by a first lien security interest on
all assets funded with proceeds from the Amended Line of Credit. The Amended
Line of Credit contains several covenants; among others, the more significant
covenants include the maintenance of a $100 million consolidated Tangible Net
Worth, subject to adjustment in connection with any future equity offerings;
maintenance of a Coverage Ratio, as defined, of not less than 1.4 to 1; and
limitation of Total Indebtedness, as defined, to no more than 400% of
shareholders' equity.
On July 2, 1999, the Company terminated its existing $33.6 million (notional)
interest rate cap agreement at a loss of $5,000. Concurrently, the Company
entered into a new cap agreement to reduce the impact that rising interest rates
would have on its floating rate indebtedness. The new agreement, which became
effective on August 1, 1999, has a notional amount of $59.0 million. Until its
expiration on November 1, 2000, the agreement entitles the Company to receive
from the counterparty the amounts, if any, by which one month LIBOR exceeds
6.25%. The premium paid for this cap, totaling $110,000, is being amortized on a
straight-line basis over the life of the agreement as an adjustment of interest
incurred.
Five consolidated title-holding partnerships are indebted under the terms of
five non-recourse loan agreements with Jackson National Life Insurance Company.
All five loans bear interest at 6.83% per annum. The interest rates on the first
four loans were adjusted in connection with the placement of the fifth loan on
August 25, 1999. Prior to that time, a $7.5 million loan bore interest at 7.28%
per annum while three loans aggregating $19.5 million bore interest at 6.68% per
annum. The loans require interest only payments through January 1, 2002;
thereafter, interest and principal payments are due based upon 25-year
amortization schedules. The loans, which mature on January 1, 2014, prohibit any
prepayment of the outstanding principal prior to January 1, 2006. Thereafter,
prepayment is permitted at any time, in whole or in part, upon payment of a
yield maintenance premium of at least 1% of the then outstanding principal
balance.
Obligations under various financing arrangements were as follows at September
30, 1999 and December 31, 1998 (in thousands):
September 30, 1999 December 31, 1998
------------------ ------------------
Repurchase agreement ................... $ 10,701 $ --
Line of credit ......................... 78,500 39,338
Non-recourse debt on real estate ....... 34,600 7,500
------------------ ------------------
$ 123,801 $ 46,838
================== ==================
Future scheduled principal repayments on debt and financing facilities at
September 30, 1999 are as follows (in thousands):
Remainder of 1999 ........................ $ --
2000 ..................................... 89,201
2001 ..................................... --
2002 ..................................... 499
2003 ..................................... 581
2004 and thereafter ...................... 33,520
------------
$ 123,801
============
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6. STOCK-BASED COMPENSATION
As of September 30, 1999, the estimated fair value of the options granted to the
Manager and certain employees of the AMRESCO Group approximated $0.71 per share.
The fair value of the options granted was estimated using the
Cox-Ross-Rubinstein option pricing model with the following assumptions: risk
free interest rates ranging from 5.97% to 6.17%; expected lives ranging from
four to seven years; expected volatility of 35%; and dividend yield of 12%.
During the three months ended June 30, 1999, compensation cost associated with
these options was adjusted to reflect the decline in fair value (from March 31,
1999) of approximately $0.39 per share. During the three and nine months ended
September 30, 1999, the three months ended September 30, 1998 and the period
from February 2, 1998 (date of initial capitalization) through September 30,
1998, management fees and general and administrative expenses included the
following compensatory option charges (in thousands):
Period from
February 2,
Three Months Ended Nine Months 1998
September 30, Ended through
--------------------- September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
Management fees ........................ $ 47 $ 141 $ 92 $ 211
General and administrative expenses .... 6 27 (14) 41
-------- -------- -------- --------
$ 53 $ 168 $ 78 $ 252
======== ======== ======== ========
In lieu of cash compensation for their services and participation at regularly
scheduled meetings of the Board of Trust Managers, the Company granted 2,250
restricted common shares to each of its four independent trust managers on May
11, 1999. The associated compensation cost is being recognized over the one-year
service period.
At September 30, 1999, 519,006 shares were available for grant in the form of
restricted common shares or options to purchase common shares.
7. EARNINGS PER SHARE
A reconciliation of the numerator and denominator used in computing basic
earnings per share and diluted earnings per share for the three and nine months
ended September 30, 1999, the three months ended September 30, 1998 and the
period from February 2, 1998 (date of initial capitalization) through September
30, 1998, is as follows (in thousands, except per share data):
Period from
February 2,
Three Months Ended Nine Months 1998
September 30, Ended through
----------------------------- September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net income available to common shareholders ........... $ 2,344 $ 1,272 $ 7,395 $ 2,029
============ ============ ============ ============
Weighted average common shares outstanding ............ 10,000 10,000 10,000 5,892
============ ============ ============ ============
Basic earnings per common share ....................... $ 0.24 $ 0.12 $ 0.74 $ 0.34
============ ============ ============ ============
Weighted average common shares outstanding ............ 10,000 10,000 10,000 5,892
Effect of dilutive securities:
Restricted shares ................................. 15 6 11 4
Net effect of assumed exercise of stock options ... 1 -- -- --
------------ ------------ ------------ ------------
Adjusted weighted average shares outstanding .......... 10,016 10,006 10,011 5,896
============ ============ ============ ============
Diluted earnings per common share ..................... $ 0.24 $ 0.12 $ 0.74 $ 0.34
============ ============ ============ ============
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Options and warrants to purchase 1,466,011 and 250,002 shares, respectively, of
common stock were outstanding at September 30, 1999. For the three and nine
months ended September 30, 1999, options related to 1,460,011 shares and the
warrants were not included in the computation of diluted earnings per share
because the exercise prices related thereto were greater than the average market
price of the Company's common shares. The Company was initially capitalized on
February 2, 1998 with the sale of 100 shares to AMRESCO, INC. The Company had no
earnings prior to the commencement of its operations on May 12, 1998. No options
or warrants were outstanding during the period from February 2, 1998 through May
11, 1998. When calculated for the period from May 12, 1998 (inception of
operations) through September 30, 1998, the Company's basic and diluted earnings
were $0.20 per common share.
8. LEASING ACTIVITIES
As of September 30, 1999, the future minimum lease payments to be received by
the Company (through a majority-owned partnership) under noncancellable
operating leases, which expire on various dates through 2024, are as follows (in
thousands):
Remainder of 1999 ........................ $ 1,158
2000 ..................................... 4,613
2001 ..................................... 4,630
2002 ..................................... 4,657
2003 ..................................... 4,630
2004 and thereafter ...................... 71,979
------------
$ 91,667
============
Approximately 86% of the future minimum lease payments disclosed above are due
from a regional grocer.
9. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances except
those resulting from investments by, and distributions to, its owners. Other
comprehensive income includes unrealized gains and losses on marketable
securities classified as available-for-sale. Comprehensive income during the
three and nine months ended September 30, 1999, the three months ended September
30, 1998 and the period from February 2, 1998 (date of initial capitalization)
through September 30, 1998, is as follows (in thousands):
Period from
February 2,
Three Months Ended Nine Months 1998
September 30, Ended through
---------------------- September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
Net income ........................................... $ 2,344 $ 1,272 $ 7,395 $ 2,029
Unrealized losses on securities available for sale ... (45) (4,301) (2,866) (4,301)
-------- -------- -------- --------
Comprehensive income (loss) .......................... $ 2,299 $ (3,029) $ 4,529 $ (2,272)
======== ======== ======== ========
The unrealized losses on securities available for sale had no impact on the
Company's taxable income or cash flow.
10. SEGMENT INFORMATION
The Company, as an investor in real estate related assets, operates in only one
reportable segment. Within this segment, the Company makes asset allocation
decisions based upon its diversification strategies and changes in market
conditions. The Company does not have, nor does it rely upon, any major
customers. All of the Company's investments are secured directly or indirectly
by real estate properties located in the United States; accordingly, all of its
revenues were derived from U.S. operations.
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11. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that
an entity recognize all derivatives as either assets or liabilities in its
balance sheet and that it measure those instruments at fair value. The
accounting for changes in the fair value of a derivative (that is, gains and
losses) is dependent upon the intended use of the derivative and the resulting
designation. SFAS No. 133 generally provides for matching the timing of gain or
loss recognition on the hedging instrument with the recognition of (1) the
changes in the fair value of the hedged asset or liability that are attributable
to the hedged risk or (2) the earnings effect of the hedged forecasted
transaction. In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities
- - Deferral of the Effective Date of FASB Statement No. 133" ("SFAS No. 137").
SFAS No. 137 deferred the effective date of SFAS No. 133 such that it is now
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000, although earlier application is encouraged. The Company has not yet
assessed the impact that SFAS No. 133 will have on its financial condition or
results of operations.
12. MERGER WITH IMPAC COMMERCIAL HOLDINGS, INC.
Effective as of August 4, 1999, the Company entered into an Agreement and Plan
of Merger (the "Merger Agreement") with Impac Commercial Holdings, Inc. ("ICH").
Pursuant to the Merger Agreement, ICH will be merged with and into the Company,
with the Company as the surviving entity (the "Merger"), and each outstanding
share of common stock of ICH will be converted into 0.66094 of a common share of
the Company. Also pursuant to this agreement, the holder of the outstanding
shares of Series B 8.5% Cumulative Convertible Preferred Stock of ICH ("ICH
Preferred Stock") will convert all of such shares into 1,683,635 shares of
common stock of ICH or, if such conversion does not occur prior to the effective
time of the Merger, all of the shares of ICH Preferred Stock will be converted
into 1,112,782 common shares of the Company. The Merger will be accounted for
under the purchase method of accounting. After the Merger, the Company will have
approximately 16.7 million common shares outstanding. The parties anticipate
that the Merger will be completed late in the fourth quarter of 1999. The
transactions contemplated by the Merger Agreement are subject to approval by the
shareholders of the Company and ICH.
On September 8, 1999, AMRESCO, INC., AMREIT Managers, L.P., AMREIT Holdings,
Inc. and MLM Holdings, Inc. (all of which are members of the AMRESCO Group) and
FIC Management, Inc. (ICH's external manager) entered into a purchase agreement
(the "Purchase Agreement"). Pursuant to the Purchase Agreement, FIC Management,
Inc. (or one of its affiliates) agreed to acquire certain assets from the
AMRESCO Group concurrent with and as a condition to the closing of the Merger.
These assets include, among others, the Company's existing management agreement
and 1,500,111 common shares of the Company (representing approximately 15% of
the Company's outstanding common shares).
13. SUBSEQUENT EVENTS
On October 21, 1999, the Company declared a dividend of $0.40 per share; the
dividend is payable on November 15, 1999 to shareholders of record on October
31, 1999.
On November 1, 1999, the Company sold three loans to ACFI. The proceeds from
this transaction totaled $8,755,000. In connection with the sale, amounts due to
ACFI were fully extinguished; at November 1, 1999 and September 30, 1999,
amounts due to ACFI totaled $5,825,000 and $5,754,000, respectively. The sale
was recorded as follows (dollars in thousands):
Cash ................................... $ 8,755
Mortgage loans ......................... (13,622)
Receivables and other assets ........... (958)
Amounts due to affiliates .............. 5,825
------------
Gain (loss) ............................ $ --
============
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
AMRESCO Capital Trust (the "Company") is a real estate investment trust ("REIT")
which was formed in early 1998 to take advantage of certain mid- to high-yield
lending and investment opportunities in real estate related assets, including
various types of commercial mortgage loans (including, among others,
participating loans, mezzanine loans, acquisition loans, construction loans,
rehabilitation loans and bridge loans), commercial mortgage-backed securities
("CMBS"), commercial real estate, equity investments in joint ventures and/or
partnerships, and certain other real estate related assets. Subject to the
direction and oversight of the Board of Trust Managers, the Company's day-to-day
operations are managed by AMREIT Managers, L.P. (the "Manager"), an affiliate of
AMRESCO, INC. (together with its affiliated entities, the "AMRESCO Group").
The Company commenced operations on May 12, 1998 concurrent with the completion
of its initial public offering of 9,000,000 common shares and private placement
of 1,000,011 common shares with AMREIT Holdings, Inc., a wholly-owned subsidiary
of AMRESCO, INC. To date, the Company's investment activities have been focused
in three primary areas: loan investments, CMBS and equity investments in real
estate. The Company expects that its mid- to high-yield loan investments and, to
a lesser extent, equity investments in real estate, will continue to comprise a
substantial portion of its investment portfolio. Similarly, the Company expects
to continue to have 15% to 20% of its invested capital (comprising equity and
proceeds from its two credit facilities) allocated to CMBS.
In general, the Company's investment activities were limited early in the year
as the mortgage REIT market continued to be affected by the aftermath of the
dislocation in the capital markets which occurred in mid to late 1998. Following
the completion (in early May) of modifications to its line of credit facility,
the Company's investment activities increased in the second and third quarters
of 1999, albeit at a slower rate than was achieved in the second and third
quarters of 1998. Currently, the Company does not expect to make any new
investments prior to the completion of its anticipated merger with Impac
Commercial Holdings, Inc. The merger is described below under the heading
"Recent Developments". The Company's year-to-date investment activities are more
fully described below under the heading "Results of Operations".
The Company believes it has operated and it intends to continue to operate in a
manner so as to continue to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"). As such, the Company has distributed and it
intends to continue to distribute at least 95% of its REIT taxable income
annually.
The Company may experience high volatility in financial statement net income and
tax basis income from quarter to quarter and year to year, primarily as a result
of fluctuations in interest rates, borrowing costs, reinvestment opportunities,
prepayment rates and favorable and unfavorable credit related events (e.g.,
profit participations or credit losses). Additionally, the Company's accounting
for certain real estate loan arrangements as either real estate or joint venture
investments may contribute to volatility in financial statement net income. The
operating results of the Company will depend, in large part, upon the ability of
the Company to manage its interest rate, prepayment and credit risks, while
maintaining its status as a REIT.
RECENT DEVELOPMENTS
Effective as of August 4, 1999, the Company entered into an Agreement and Plan
of Merger (the "Merger Agreement") with Impac Commercial Holdings, Inc. ("ICH").
Pursuant to the Merger Agreement, ICH will be merged with and into the Company,
with the Company as the surviving entity (the "Merger"), and each outstanding
share of common stock of ICH will be converted into 0.66094 of a common share of
the Company. Also pursuant to the Merger Agreement, the holder of the
outstanding shares of Series B 8.5% Cumulative Convertible Preferred Stock of
ICH ("ICH Preferred Stock") will convert all of such shares into 1,683,635
shares of common stock of ICH or, if such conversion does not occur prior to the
effective time of the Merger, all of the shares of ICH Preferred Stock will be
converted into 1,112,782 common shares of the Company. After the Merger, the
Company will have approximately 16.7 million common shares outstanding. The
parties anticipate that the Merger will be completed late in the fourth quarter
of 1999. The transactions contemplated by the Merger Agreement are subject to
approval by the shareholders of the Company and ICH.
On September 8, 1999, AMRESCO, INC., AMREIT Managers, L.P., AMREIT Holdings,
Inc. and MLM Holdings, Inc. (all of which are members of the AMRESCO Group) and
FIC Management, Inc. (ICH's external manager) entered into a purchase
15
16
agreement (the "Purchase Agreement"). Pursuant to the Purchase Agreement, FIC
Management, Inc. (or one of its affiliates) agreed to acquire certain assets
from the AMRESCO Group concurrent with and as a condition to the closing of the
Merger. These assets include, among others, the Company's existing management
agreement and 1,500,111 common shares of the Company (representing approximately
15% of the Company's outstanding common shares).
RESULTS OF OPERATIONS
The following discussion of results of operations should be read in conjunction
with the consolidated financial statements and notes thereto included in
"Item 1. Financial Statements".
Under generally accepted accounting principles, net income for the three and
nine months ended September 30, 1999 was $2,344,000 and $7,395,000,
respectively, or $0.24 and $0.74 per common share, respectively. The Company's
sources of revenue for the three and nine months ended September 30, 1999,
totaling $6,301,000 and $16,517,000, respectively, are set forth below.
o $4,282,000 and $11,442,000, respectively, from loan investments. As certain
of the Company's loan investments are accounted for as either real estate
or joint venture investments for financial reporting purposes, these
revenues are included in the consolidated statement of income for the three
and nine months ended September 30, 1999 as follows: interest income on
mortgage loans - $3,841,000 and $10,776,000, respectively; and operating
income from real estate - $441,000 and $666,000, respectively. The loan
investments earn interest at accrual rates ranging from 10.4% to 16% per
annum as of September 30, 1999.
o $905,000 and $2,753,000, respectively, from investments in CMBS.
o $975,000 and $1,927,000, respectively, of operating income from real estate
owned by the Company (through a majority-owned partnership).
o $63,000 and $197,000, respectively, of equity in earnings from its
unconsolidated subsidiary, partnerships and other real estate ventures.
o $76,000 and $198,000, respectively, of interest income from short-term
investments.
Additionally, the Company realized a gain of $584,000 during the three months
ended March 31, 1999 in connection with the repayment of an ADC loan
arrangement. The gain was comprised principally of interest income earned at the
accrual rate over the life of the loan investment. No gains were realized during
the three month periods ended June 30, 1999 or September 30, 1999.
The Company incurred expenses of $3,957,000 and $9,706,000, respectively, during
the three and nine months ended September 30, 1999. These expenses are set forth
below.
o $610,000 and $1,613,000, respectively, of management fees, including
$563,000 and $1,521,000, respectively, of base management fees payable to
the Manager pursuant to the Management Agreement and $47,000 and $92,000,
respectively, of expense associated with compensatory options granted to
the Manager. Costs associated with the compensatory options decreased
during the three months ended June 30, 1999 primarily as a result of a
decrease in the expected volatility of the Company's stock. No incentive
fees were incurred during either period.
o $338,000 and $1,120,000, respectively, of general and administrative costs,
including $0 and $200,000, respectively, of resolution costs associated
with a non-performing loan, $71,000 and $270,000, respectively, for
professional services, $59,000 and $176,000, respectively, for directors
and officers' insurance, $66,000 and $170,000, respectively, of
reimbursable costs pursuant to the Management Agreement, $6,000 and
$(14,000), respectively, related to compensatory options granted to certain
members of the AMRESCO Group, $87,000 and $87,000, respectively, of
dividend equivalent costs, $19,000 and $19,000, respectively, of fees paid
to the Company's Independent Trust Managers for their participation at
special meetings of the Board of Trust Managers and $23,000 and $68,000,
respectively, related to restricted stock awards to the Company's
Independent Trust Managers. Costs associated with the compensatory options
decreased during the three months ended June 30, 1999 primarily as a result
of a decrease in the expected volatility of the Company's stock. These
categories do not represent all general and administrative expenses.
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17
o $1,769,000 and $3,427,000, respectively, of interest expense (net of
capitalized interest totaling $207,000 and $593,000, respectively)
associated with the Company's credit facilities and five non-recourse loans
secured by real estate.
o $190,000 and $1,019,000, respectively, of participating interest associated
with amounts due to an affiliate.
o $408,000 and $705,000, respectively, of depreciation expense, including
$275,000 and $516,000, respectively, related to five grocery-anchored
shopping centers and $133,000 and $189,000, respectively, related to loan
investments accounted for as real estate.
o $642,000 and $1,822,000, respectively, of provision for loan losses. During
the three months ended March 31, 1999, the Company charged-off $500,000
against an existing allowance for losses related to the non-performing loan
referred to above. This loan is discussed further in this section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the sub-heading "Loan Investments".
The Company's policy is to distribute at least 95% of its REIT taxable income to
shareholders each year; to that end, dividends are paid quarterly. Tax basis
income differs from income reported for financial reporting purposes due
primarily to differences in methods of accounting for ADC loan arrangements and
stock-based compensation awards and the nondeductibility, for tax purposes, of
the Company's loan loss reserve (for a discussion of ADC loan arrangements, see
the notes to the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998). As a result of
these accounting differences, net income under generally accepted accounting
principles is not necessarily an indicator of distributions to be made by the
Company. The following dividends have been declared in 1999:
Dividend per
Declaration Record Payment Common
Date Date Date Share
---------------- ---------------- ----------------- -------
First Quarter April 22, 1999 April 30, 1999 May 17, 1999 $ 0.36
Second Quarter July 22, 1999 July 31, 1999 August 16, 1999 0.39
Third Quarter October 21, 1999 October 31, 1999 November 15, 1999 0.40
-------
$ 1.15
=======
For federal income tax purposes, all dividends declared to date should be
treated as ordinary income to the Company's shareholders.
The Company was initially capitalized through the sale of 100 common shares to
AMRESCO, INC. on February 2, 1998 and it commenced operations on May 12, 1998
concurrent with the completion of its initial public offering of 9,000,000
common shares and private placement of 1,000,011 common shares with AMREIT
Holdings, Inc., a wholly-owned subsidiary of AMRESCO, INC. At September 30,
1998, $149.0 million had been invested in structured finance arrangements and
commercial mortgage-backed securities. As of September 30, 1998, the Company had
advanced $111.1 million under 19 commercial mortgage loan commitments. During
its initial 142-day period of operations, the Company, either directly or
through its unconsolidated taxable subsidiary, acquired six commercial
mortgage-backed securities at an aggregate purchase price of $37.9 million. The
following comparisons are reflective of the fact that during the entire three
and nine months ended September 30, 1999, the Company's net proceeds from the
issuance of its common shares were fully invested and it (and its consolidated
partnerships) had outstanding borrowings under several credit facilities. By
contrast, during the three months ended September 30, 1998 and the period from
February 2, 1998 (date of initial capitalization) through September 30, 1998,
the Company was actively investing the $139.7 million of net proceeds received
from the issuance of its common shares; such proceeds were not fully invested
until September 30, 1998. Additionally, the Company did not begin to borrow
under its credit facilities until September 30, 1998. During the period from
February 2, 1998 (date of initial capitalization) through September 30, 1998,
the Company had operations for only 142 days (from May 12, 1998 through
September 30, 1998); the Company had no income or expenses during the period
from February 2, 1998 through May 11, 1998.
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18
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
The Company's revenues increased 111%, from $2,992,000 to $6,301,000, due
primarily to increases in interest income derived from mortgage loan
investments, income from commercial mortgage-backed securities, and operating
income from real estate; as of September 30, 1998, the Company had not made any
equity investments in real estate. More specifically, the higher revenues were
attributable to the following:
o additional fundings (made after September 30, 1998) under commitments which
were closed during the Company's initial 142-day period of operations;
o certain loans which contributed to third quarter 1999 revenues were
acquired on September 30, 1998 (as a result, such loans did not contribute
significantly to the prior period's revenues);
o acquisitions of real estate which occurred subsequent to September 30, 1998
(October 23, 1998, April 30, 1999 and August 25, 1999);
o three of the six commercial mortgage-backed securities held by the Company
were not acquired until September 1, 1998 (as a result, only one month of
revenue was generated from these securities during the comparable period in
1998); and,
o to a lesser extent, new loan originations in the fourth quarter of 1998 and
the second and third quarters of 1999.
During the three months ended September 30, 1999, the average book value of the
Company's assets, excluding cash and cash equivalents, approximated $244
million. During the three months ended September 30, 1998, the average book
value of the Company's assets, excluding cash and cash equivalents, approximated
$100 million. Equity in earnings of unconsolidated subsidiary, partnerships and
other real estate ventures declined by $263,000 from the comparable period in
1998. For the most part, this decline was attributable to the non-performing
loan referred to above. This loan was performing until late in the fourth
quarter of 1998. Prior to its reclassification (described below), this loan was
accounted for as a joint venture investment for financial reporting purposes.
Interest income on short-term investments declined by $751,000 from the
comparable period in 1998 as the uninvested portion of the net proceeds received
from the issuance of the Company's common shares were temporarily invested
during such period in short-term investments.
The Company's expenses increased 130%, from $1,720,000 to $3,957,000, due
primarily to the fact that the Company incurred borrowing costs, including
participating interest in mortgage loans, of $1,959,000 (net of amounts
capitalized of $207,000) during the three months ended September 30, 1999;
during the comparable period in 1998, the Company incurred only $4,000 of
borrowing costs (including participating interest in mortgage loans) as it did
not begin to leverage its assets until September 30, 1998. Additionally, base
management fees increased by $265,000, from $298,000 to $563,000, as a result of
the Company's larger asset base upon which the fee is calculated. The Company's
loan loss provision increased by $141,000, from $501,000 to $642,000, as a
result of significantly higher loan balances. Finally, depreciation expense
increased by $387,000, from $21,000 to $408,000, primarily as a result of
several real estate acquisitions which were closed in October 1998, April 1999
and August 1999. These higher costs were offset by a $417,000 decrease in
general and administrative expenses. The reduction in general and administrative
expenses was due primarily to the fact that the Company incurred approximately
$400,000 of due diligence costs (in connection with an abandoned transaction)
during the three months ended September 30, 1998. No such costs were incurred by
the Company during the three months ended September 30, 1999.
For the reasons cited above, income before gains and net income increased 84%,
from $1,272,000 to $2,344,000.
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19
Nine Months Ended September 30, 1999 Compared to Period from February 2, 1998
(Date of Initial Capitalization) through September 30, 1998
For the reasons described above, the Company's revenues increased by $12,264,000
(or 288%), from $4,253,000 to $16,517,000, and its expenses increased by
$7,482,000 (or 336%), from $2,224,000 to $9,706,000. The changes in the
component revenues and expenses were as follows (dollars in thousands):
Increase /
(Decrease)
------------
Interest income on mortgage loans .......................... $ 9,448
Income from commercial mortgage-backed securities .......... 2,156
Operating income from real estate .......................... 2,485
Equity in earnings of unconsolidated subsidiary,
partnerships and other real estate ventures ............ (289)
Interest income from short-term investments ................ (1,536)
------------
Total revenues ......................................... $ 12,264
============
Interest expense .......................................... $ 3,426
Management fees ........................................... 981
General and administrative ................................ 167
Depreciation .............................................. 681
Participating interest in mortgage loans .................. 1,016
Provision for loan losses ................................. 1,211
------------
Total expenses ......................................... $ 7,482
============
Income before gains increased 236%, from $2,029,000 to $6,811,000, and net
income increased 264%, from $2,029,000 to $7,395,000. In addition to the factors
cited above, net income increased partially as a result of a $584,000 gain
realized in connection with the repayment of an ADC loan arrangement.
Loan Investments
During the three months ended September 30, 1999, the Company originated two
first lien loans aggregating $11.0 million in commitments; the initial advances
under these loans totaled approximately $5.9 million. During the nine months
ended September 30, 1999, four of the Company's loans were fully repaid, three
loan originations were closed and one loan was sold to AMRESCO Commercial
Finance, Inc. ("ACFI"), a member of the AMRESCO Group; additionally, one loan
was reclassified, net of a $500,000 charge-off, to investment in unconsolidated
subsidiary following the subsidiary's acquisition (through foreclosure on
February 25, 1999) of the partnership interests of one of the Company's
borrowers. In connection with the loan sale, amounts due to ACFI were reduced by
$2.0 million; as of September 30, 1999, amounts due to ACFI totaled $5.8
million. The proceeds from the four loan repayments and the loan sale totaled
$22.3 million, including accrued interest, a profit participation and a
prepayment fee aggregating $1.0 million. Principal collections on certain of the
Company's other loan investments totaled $0.3 million and $3.0 million during
the three and nine months ended September 30, 1999, respectively. During the
three and nine months ended September 30, 1999, the Company advanced a total of
$17.7 million and $65.7 million, respectively, under its loan commitments.
Excluding the loan classified as an investment in unconsolidated subsidiary, the
Company had 18 loans representing $202.3 million in aggregate commitments as of
September 30, 1999; $169.6 million had been advanced under these facilities at
September 30, 1999. A portion of the commitments may expire without being drawn
upon and therefore the total commitment amounts do not necessarily represent
future cash requirements. After giving effect to ACFI's economic interest (as
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998), commitments and amounts outstanding totaled approximately
$196.6 million and $164.7 million, respectively, at September 30, 1999. At
September 30, 1999, ACFI's contingent obligation for additional advances which
might have been
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required to be made under certain of the Company's loans approximated $0.8
million. On November 1, 1999, the Company sold the following loans to ACFI:
Amount
Outstanding at
Commitment September 30, Scheduled
Amount 1999 Maturity
----------------- ---------------- ----------------------
$ 2,650 $ 2,649 October 7, 1999
3,015 2,638 December 31, 1999
8,765 8,335 September 22, 1999
------- -------
$14,430 $13,622
======= =======
These investments were the last remaining loans subject to the ACFI economic
interest. Comprised initially of five loans, one loan was sold to ACFI in
January 1999 and the other was fully repaid by the borrower in May 1999. In
connection with this most recent sale, amounts due to ACFI totaling $5.8 million
were fully extinguished; additionally, ACFI's contingent reimbursement
obligations were discharged. The proceeds from this transaction, which produced
no gain or loss for the Company, totaled approximately $8.8 million. Following
this sale, the Company has 15 loans representing $187.9 million in aggregate
commitments; at September 30, 1999, $156.0 million had been advanced under these
15 facilities.
Based upon the amounts outstanding under these facilities and after giving
effect to the contractual right sold to ACFI, the Company's portfolio of
commercial mortgage loans had a weighted average interest pay rate of 10.6% and
a weighted average interest accrual rate of 11.8% as of September 30, 1999.
Three of the 18 loans provide the Company with the opportunity for profit
participation above the contractual accrual rate. The Company's loan investments
as of September 30, 1999 are summarized as follows (dollars in thousands):
Date of Initial Scheduled Collateral
Investment Maturity Location Property Type Position
- --------------------- ---------------------- ------------------- ---------------- ---------------
May 12, 1998 March 31, 2001 Richardson, TX Office Second Lien
June 1, 1998 June 1, 2001 Houston, TX Office First Lien
June 12, 1998 June 30, 2000 Pearland, TX Apartment First Lien
June 17, 1998 June 30, 2000 San Diego, CA R&D/Bio-Tech First Lien
June 19, 1998 June 18, 2000 Houston, TX Office First Lien
June 22, 1998 June 19, 2000 Wayland, MA Office First Lien
July 1, 1998 July 1, 2001 Dallas, TX Office Ptrshp Interests
July 2, 1998 June 30, 2000 Washington, D.C. Office First Lien
July 10, 1998 July 31, 2000 Pasadena, TX Apartment First Lien
September 1, 1998 February 28, 2001 Los Angeles, CA Mixed Use First Lien
September 30, 1998 Various San Antonio, TX/ Residential Lots First Lien
Sunnyvale, TX
September 30, 1998 October 7, 1999 Ft. Worth, TX Apartment Ptrshp Interests
September 30, 1998 December 31, 1999 Dallas, TX Medical Office First Lien
September 30, 1998 September 22, 1999 Norwood, MA Industrial/Office First Lien
October 1, 1998 December 31, 1999 Richardson, TX Office First Lien
May 18, 1999 May 19, 2001 Irvine, CA Office First Lien
July 29, 1999 July 28, 2001 Lexington, MA R&D/Bio-Tech First Lien
August 19, 1999 August 15, 2001 San Diego, CA Medical Office First Lien
Amount
Outstanding
at Interest Interest
Date of Initial Scheduled Commitment September 30, Pay Accrual
Investment Maturity Amount 1999(c) Rate Rate
- --------------------- ---------------------- ------------ ------------- ------ --------
May 12, 1998 March 31, 2001 $14,700 $13,368 10.0% 12.0%
June 1, 1998 June 1, 2001 11,800 10,531 12.0% 12.0%
June 12, 1998 June 30, 2000 12,827 12,291(b) 10.0% 11.5%
June 17, 1998 June 30, 2000 5,560 4,587(b) 10.0% 13.5%
June 19, 1998 June 18, 2000 24,000 20,281(b) 12.0% 12.0%
June 22, 1998 June 19, 2000 45,000 38,688 10.5% 10.5%
July 1, 1998 July 1, 2001 10,068 7,197(a) 10.0% 15.0%
July 2, 1998 June 30, 2000 7,000 6,165 10.5% 10.5%
July 10, 1998 July 31, 2000 3,350 2,993 10.0% 14.0%
September 1, 1998 February 28, 2001 18,419 17,418 10.0% 12.0%
September 30, 1998 Various 8,400 3,233 10.0% 14.0%
September 30, 1998 October 7, 1999 2,650 2,649 10.5% 16.0%
September 30, 1998 December 31, 1999 3,015 2,638 10.0% 13.0%
September 30, 1998 September 22, 1999 8,765 8,335 10.0% 12.5%
October 1, 1998 December 31, 1999 567 300 9.7% 15.0%
May 18, 1999 May 19, 2001 15,260 12,924 10.0% 12.0%
July 29, 1999 July 28, 2001 5,213 2,623 10.4% 13.4%
August 19, 1999 August 15, 2001 5,745 3,415 10.4% 10.4%
-------- --------
202,339 169,636
(5,765) (4,958)
-------- --------
ACFI's Economic Interest $196,574(d) $164,678(d)
======== ========
(a) Accounted for as investment in joint venture for financial reporting
purposes.
(b) Accounted for as real estate for financial reporting purposes.
(c) For all loan investments, payments of interest only are due monthly at the
interest pay rate. All principal and all remaining accrued and unpaid
interest are due at the scheduled maturities of the loans.
(d) Amounts exclude the loan which was reclassified to investment in
unconsolidated subsidiary during the three months ended March 31, 1999.
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The Company provides financing through certain real estate loan arrangements
that, because of their nature, qualify either as real estate or joint venture
investments for financial reporting purposes (see notes [a] and [b] accompanying
the table above). As of September 30, 1999, loan investments representing
approximately $52,455,000 in aggregate commitments were accounted for as either
real estate or joint venture interests; approximately $44,356,000 had been
advanced to borrowers under the related agreements. For a discussion of these
loan arrangements, see the Company's consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
A mezzanine (second lien) loan with an outstanding balance of $6,839,000 and a
recorded investment of $6,659,000 was over 30 days past due as of December 31,
1998. The allowance for loan losses related to this investment totaled $500,000
at December 31, 1998. On February 25, 1999, an unconsolidated taxable subsidiary
of the Company assumed control of the borrower (a partnership) through
foreclosure of the partnership interests. In addition to the second lien
mortgage, the property is encumbered by a $17 million first lien mortgage
provided by an unaffiliated third party. The first lien mortgage, which matures
on March 1, 2001, requires interest only payments throughout its term. To date,
all interest payments have been made in accordance with the terms of the first
lien mortgage. However, on March 11, 1999, the first lien lender notified the
Company that it considered the first lien loan to be in default because of
defaults under the Company's mezzanine loan. The first lien lender has not given
the Company any notice of an intention to accelerate the balance of the first
lien loan. During the first quarter of 1999, the Company charged-off $500,000
against the allowance for losses related to this investment which amount
represented management's estimate at that time of the amount of the expected
loss which could result upon a disposition of the collateral. If the Company
incurs an actual loss on this investment, tax basis income would be reduced at
the time the loss is realized. On September 21, 1999, a subsidiary of the
Company entered into a non-binding letter agreement with a prospective investor
who intends to make a substantial equity commitment to the project. Under the
terms of the agreement, the Company would continue to have an interest in the
project as an equity owner. If the proposed transaction is consummated, the
Company currently believes that it will fully recover its original investment.
At September 30, 1999, the Company's commercial mortgage loan commitments were
geographically dispersed in three states and the District of Columbia: Texas
(46%); Massachusetts (28%); California (23%); and Washington, D.C. (3%). The
underlying collateral for these loans was comprised of the following property
types: office (65%); mixed use (10%); multifamily (9%); R&D/Bio-Tech (6%);
residential (4%); medical office (4%); and industrial (2%).
Acquisition/rehabilitation loans, acquisition loans, construction loans,
single-family lot development loans and bridge loans comprised 34%, 32%, 27%, 4%
and 3% of the portfolio, respectively. All of the properties securing the
Company's construction loans are now complete. Eighty-six percent of the
portfolio is comprised of first lien loans while the balance of the portfolio
(14%) is secured by second liens and/or partnership interests. The percentages
reflected above are based upon committed loan amounts and give effect to ACFI's
economic interest. Additionally, the percentages exclude the loan which was
reclassified to investment in unconsolidated subsidiary during the first quarter
of 1999.
Until the loan investment portfolio becomes larger, geographic and product type
concentrations are expected. The Company expects to see more diversification
both geographically and by product type as the loan portfolio grows. Geographic
and product type concentrations present additional risks, particularly if there
is a deterioration in the general condition of the real estate market or in the
sub-market in which the loan collateral is located, or if demand for a
particular product type does not meet expectations due to adverse market
conditions that are different from those projected by the Company. In an effort
to reduce concentration risks, the Company is targeting transactions which will
more broadly diversify its loan investment portfolio.
Commercial Mortgage-backed Securities
As of September 30, 1999, the Company holds five commercial mortgage-backed
securities ("CMBS") which were acquired at an aggregate purchase price of $34.5
million. All of these securities were acquired on or before September 1, 1998.
Due to an increase in comparable-term U.S. Treasury rates and increasing spreads
in the CMBS market during the six months ended June 30, 1999, the value of the
Company's CMBS holdings declined by $2,822,000. During the three months ended
September 30, 1999, the value of the Company's CMBS holdings declined by
$137,000 as an increase in comparable-term U.S. Treasury rates was largely
offset by a decline in spreads for certain of its bonds. As a result, during the
three and nine months ended September 30, 1999, the Company recorded an
unrealized loss of $137,000 and $2,959,000, respectively, on its CMBS portfolio.
Additionally, during the three and nine months ended September 30, 1999, the
Company recorded an unrealized gain of $92,000 and $93,000, respectively, net of
tax effects, related to one commercial mortgage-backed
21
22
security owned by its unconsolidated taxable subsidiary; the security held by
this subsidiary has an investment rating of "B-". As these securities are
classified as available for sale, the aggregate unrealized loss was reported as
a component of accumulated other comprehensive income (loss) in shareholders'
equity for financial reporting purposes. The cumulative unrealized losses
(totaling $9.3 million) have had no impact on the Company's taxable income or
cash flow. Management intends to retain these investments for the foreseeable
future. Excluding the potential tax effects associated with the security held by
the Company's unconsolidated taxable subsidiary, the weighted average
unleveraged yield over the expected life of these investments is expected to
approximate 11.4%. The Company's direct CMBS investments are summarized as
follows (dollars in thousands):
Percentage of
Security Aggregate Aggregate Total Based
Rating Amortized Cost Fair Value on Fair Value
------------- ------------------ ----------------- ----------------
BB- $ 4,259 $ 3,341 13%
B 19,608 15,746 60%
B- 11,364 6,940 27%
------- ------- ----
$35,231 $26,027 100%
======= ======= ====
The Company's estimated returns on its CMBS investments are based upon a number
of assumptions that are subject to certain business and economic risks and
uncertainties including, but not limited to, the timing and magnitude of
prepayments and credit losses on the underlying mortgage loans that may result
from general and/or localized real estate market factors. These risks and
uncertainties are in many ways similar to those affecting the Company's
commercial mortgage loans. These risks and uncertainties may cause the actual
yields to differ materially from expected yields.
In February 1999, the Company contributed $0.7 million to a newly formed
investment partnership with Olympus Real Estate Corporation. The partnership,
which is 5% owned by the Company, acquired several classes of subordinated CMBS
at an aggregate purchase price of $12.7 million. Currently, the Company does
not expect to make any additional investments in the partnership.
Equity Investments in Real Estate
On March 2, 1999, the Company acquired a 49% limited partner interest in a
partnership which owns a 116,000 square foot office building in Richardson,
Texas. In connection with this acquisition, the Company contributed $1.4 million
of capital to the partnership. The property is encumbered by a first lien
mortgage with a current outstanding balance of approximately $13.8 million. The
non-recourse mortgage loan, which is provided by an unaffiliated third party,
bears interest at 6.75% per annum and requires interest and principal payments
based upon a 25-year amortization schedule. The loan matures on March 5, 2019.
On the tenth anniversary of the loan, the lender has the option, upon 60 days
prior written notice, to increase the interest rate to the then current market
rate. No prepayment of principal (other than scheduled amortization) is
permitted during years 1-5 and years 11-15. The loan can be prepaid during years
6 and 16 upon payment of a penalty equal to 3% of the amount prepaid.
Thereafter, the prepayment penalty decreases by 1% per year. In years 9, 10, 19
and 20 the loan can be prepaid without penalty.
On April 30, 1999, the Company (through a majority-owned partnership) acquired
interests in three newly constructed, grocery-anchored shopping centers in the
Dallas/Fort Worth (Texas) area. These properties, which were acquired by
subsidiary partnerships at an aggregate purchase price of $30.2 million, include
an 86,516 square foot facility in Flower Mound, Texas, a 61,440 square foot
facility in Fort Worth, Texas and an 85,611 square foot facility in Grapevine,
Texas. Through the majority-owned partnership, the Company acquired an interest
in an additional grocery-anchored shopping center on August 25, 1999. The newly
constructed property, an 87,540 square foot facility in Richardson, Texas, was
acquired by a subsidiary partnership at a purchase price of $10.7 million. In
connection with these acquisitions, the subsidiary partnerships which hold title
to these assets obtained non-recourse financing aggregating $19.5 million and
$7.6 million, respectively, from an unaffiliated third party. Immediately prior
to the closings, the Company contributed $11.4 million and $3.4 million,
respectively, of capital to the partnership. The proceeds from these
contributions were used, in part, to fund the balance of the acquisition costs,
to pay costs associated with the financing and to provide initial working
capital to the title-holding partnerships.
With the transactions described above, the Company now owns interests in five
grocery-anchored shopping centers in the Dallas/Fort Worth (Texas) area. The
first center was acquired in October 1998. The Company holds a 99.5% interest in
the majority-owned (or master) partnership. The master partnership owns,
directly or indirectly, 100% of the equity
22
23
interests in each of the five title-holding subsidiary partnerships. To date,
the Company has contributed a total of $18.2 million of capital to the
partnerships.
The five consolidated title-holding partnerships are indebted under the terms of
five non-recourse loan agreements with Jackson National Life Insurance Company.
All five loans, aggregating $34.6 million, bear interest at 6.83% per annum. The
interest rates on the first four loans were adjusted in connection with the
placement of the fifth loan on August 25, 1999. Prior to that time, a $7.5
million loan bore interest at 7.28% per annum and three loans aggregating $19.5
million bore interest at 6.68% per annum. The loans require interest only
payments through January 1, 2002; thereafter, interest and principal payments
are due based upon 25-year amortization schedules. The loans, which mature on
January 1, 2014, prohibit any prepayment of the outstanding principal prior to
January 1, 2006. Thereafter, prepayment is permitted at any time, in whole or in
part, upon payment of a yield maintenance premium of at least 1% of the then
outstanding principal balance.
Ultimately, the Company expects to construct an additional 62,000 square feet of
side-store space. This development is expected to occur at the four most
recently acquired centers. It is currently anticipated that the development
costs will be financed with an additional $1 million equity contribution from
the Company and $3.8 million of third party financing proceeds.
The Company's unconsolidated taxable subsidiary holds interests (indirectly) in
a partnership which owns a 909,000 square foot mixed-use property in Columbus,
Ohio. This investment is described above under the sub-heading "Loan
Investments".
LIQUIDITY AND CAPITAL RESOURCES
The following discussion of liquidity and capital resources should be read in
conjunction with the consolidated financial statements and notes thereto
included in "Item 1. Financial Statements".
The Company's ability to execute its business strategy, particularly the growth
of its investment and loan portfolio, depends to a significant degree on its
ability to obtain additional capital. The Company's principal demands for
liquidity are cash for operations, including funds for its lending activities
and other investments, interest expense associated with its indebtedness, debt
repayments and distributions to its shareholders. In the near term, the
Company's principal sources of liquidity are the funds available to it under its
financing facilities described below.
Effective as of July 1, 1998, the Company (and certain of its subsidiaries)
entered into a $400 million credit facility (the "Line of Credit") with
Prudential Securities Credit Corporation ("PSCC"). Subject to PSCC's approval on
an asset by asset basis, borrowings under the facility can be used to finance
the Company's structured loan and equity real estate investments. As a result of
the dislocation in the capital markets in mid to late 1998, PSCC became more
restrictive in the application of its approval rights with respect to financing
for new investments sought by the Company; accordingly, very few new investments
were consummated during the fourth quarter of 1998 and the first quarter of
1999. Prior to the modifications discussed below, borrowings under the Line of
Credit bore interest at rates ranging from LIBOR plus 1% per annum to LIBOR plus
2% per annum. At December 31, 1998, $39,338,000 had been borrowed under the Line
of Credit. To reduce the impact that rising interest rates would have on this
floating rate indebtedness, the Company entered into an interest rate cap
agreement which became effective on January 1, 1999; the agreement had a
notional amount of $33,600,000 and was scheduled to expire on July 1, 2000. The
agreement entitled the Company to receive from a counterparty the amounts, if
any, by which one month LIBOR exceeded 6.0%. Prior to its termination (as
described below), no payments were due from the counterparty as one month LIBOR
had not exceeded 6.0%. On July 2, 1999, the agreement was terminated and
replaced with an interest rate cap agreement which became effective on August 1,
1999. The new agreement, which was entered into to more closely match the then
outstanding borrowings, has a notional amount of $59,000,000. Until its
expiration on November 1, 2000, the agreement entitles the Company to receive
from a counterparty the amounts, if any, by which one month LIBOR exceeds 6.25%.
To date, one month LIBOR has not exceeded 6.25%. There are no margin
requirements associated with interest rate caps and therefore there is no
liquidity risk associated with this particular hedging instrument.
23
24
Effective as of May 4, 1999, the Company (and certain of its subsidiaries)
entered into an Amended and Restated Interim Warehouse and Security Agreement
(the "Amended Line of Credit") with PSCC; the agreement amended the Company's
existing line of credit. The Amended Line of Credit includes the following
modifications:
o a reduction in the size of the committed facility from $400 million to $300
million;
o the elimination of the requirement that assets financed with proceeds from
the facility must be securitizable;
o a reduction in the amount of capital the Company must fund with respect to
construction and rehabilitation loans before PSCC is required to begin
advancing funds;
o an extension of the maturity date from July 1, 2000 to November 3, 2000;
and
o the modification to, and addition of, sublimits on specified types of loans
and assets, including:
o a new $40 million sublimit on mezzanine loans and equity investments;
and
o a reduction in the sublimit on construction loans from $150 million to
$115 million, with the addition of a new $50 million sublimit within
this category for construction loans that are less than 70% pre-leased
at the time the initial advance is to be made under the Amended Line
of Credit with respect to a construction loan fitting this category.
Under the Amended Line of Credit, borrowings bear interest at LIBOR plus 1.25%
per annum to the extent such borrowings do not exceed the Company's Tangible Net
Worth, as defined; borrowings in excess of the Company's Tangible Net Worth bear
interest at LIBOR plus 3%. Borrowings are secured by a first lien security
interest in all assets funded with proceeds from the Amended Line of Credit. At
September 30, 1999, $78,500,000 had been borrowed under the Amended Line of
Credit. All of these borrowings bear interest at LIBOR plus 1.25% per annum. The
weighted average interest rate at September 30, 1999 was 6.63%.
Effective as of July 1, 1998, the Company (and certain of its subsidiaries)
entered into a $100 million Master Repurchase Agreement (the "Repurchase
Agreement") with PSCC; subsequently, PSCC was replaced by Prudential-Bache
International, Ltd. ("PBI"), an affiliate of PSCC, as lender. Borrowings under
the Repurchase Agreement can be used to finance a portion of the Company's
portfolio of mortgage-backed securities. The Repurchase Agreement provides that
the Company may borrow a varying percentage of the market value of the purchased
mortgage-backed securities, depending on the credit quality of such securities.
Borrowings under the Repurchase Agreement bear interest at rates ranging from
LIBOR plus 0.20% per annum to LIBOR plus 1.5% per annum depending upon the
advance rate and the credit quality of the securities being financed. Borrowings
under the facility are secured by an assignment to PBI of all mortgage-backed
securities funded with proceeds from the Repurchase Agreement. The Repurchase
Agreement matures on June 30, 2000. At September 30, 1999, $10,701,000 was
outstanding under the Repurchase Agreement. At December 31, 1998, there were no
outstanding borrowings under this facility. The weighted average interest rate
at September 30, 1999 was 6.52%.
Under the terms of the Amended Line of Credit and the Repurchase Agreement, PSCC
and PBI, respectively, retain the right to mark the underlying collateral to
market value. A reduction in the value of its pledged assets may require the
Company to provide additional collateral or fund margin calls. From time to
time, the Company may be required to provide such additional collateral or fund
margin calls.
The Company believes that the funds available under its two credit facilities
will be sufficient to meet the Company's liquidity and capital requirements
through the maturity date of the Amended Line of Credit. The Company believes
that the Amended Line of Credit provides it with more flexibility, which in turn
will allow it to utilize favorable financing terms in connection with the
origination of investments. The Company, however, remains subject to capital
constraints. In particular, the Company's ability to raise additional capital
through the public equity and debt markets continues to be severely limited.
Furthermore, the Company's ability to obtain additional secured debt beyond its
existing credit facilities (or to replace its existing credit facilities) has
not yet been fully explored. Currently, the Company does not expect to originate
or acquire any new investments prior to the completion of its merger with ICH.
24
25
In the near term, the Company believes it will be constrained from accessing the
public equity markets. In addition, new issues of long-term public unsecured
debt would be difficult to obtain and, in any event, would likely not be
available to the Company at a reasonable cost. Additional secured debt beyond
the Company's Amended Line of Credit would also be difficult to obtain and may
not be offered at a reasonable cost. Aside from limiting the Company's access to
additional capital in the near term to fund growth, the Company has been
relatively insulated from the effects of the dislocation in the capital markets.
While the market value of the Company's CMBS holdings has declined, the Company
invested in these bonds for the long term yields that they are expected to
produce. Management believes that the fundamental value of the real estate
mortgages underlying its bonds has been largely unaffected to date, although
general economic conditions could adversely impact real estate values in the
future.
REIT STATUS
Management believes that the Company is operated in a manner that will enable it
to continue to qualify as a REIT for federal income tax purposes. As a REIT, the
Company will not pay income taxes at the trust level on any taxable income which
is distributed to its shareholders, although AMREIT II, Inc., its "Non-Qualified
REIT Subsidiary", may be subject to tax at the corporate level. Qualification
for treatment as a REIT requires the Company to meet certain criteria, including
certain requirements regarding the nature of its ownership, assets, income and
distributions of taxable income. The Company may, however, be subject to tax at
normal corporate rates on any ordinary income or capital gains not distributed.
YEAR 2000 ISSUE
General
Many of the world's computers, software programs and other equipment using
microprocessors or embedded chips currently have date fields that use two digits
rather than four digits to define the applicable year. These computers, programs
and chips may be unable to properly interpret dates beyond the year 1999. For
example, computer software that has date sensitive programming using a two-digit
format may recognize a date using "00" as the year 1900 rather than the year
2000. This inability to properly process dates is commonly referred to as the
"Year 2000 issue", the "Year 2000 problem" or the "Millennium Bug." These errors
could potentially result in a system failure or miscalculation causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in similar normal business activities, which,
in turn, could lead to disruptions in the Company's operations or performance.
All of the Company's information technology infrastructure is provided by the
Manager. The Manager's systems are supplied by AMRESCO, INC. The Company's
assessments of the cost and timeliness of completion of Year 2000 modifications
set forth below are based on representations made to the Company and the best
estimates of the individuals within or engaged by AMRESCO, INC. charged with
handling the Year 2000 issue. These estimates were derived using numerous
assumptions relating to future events, including, without limitation, the
continued availability of certain internal and external resources and third
party readiness plans. Furthermore, as the AMRESCO, INC. Year 2000 initiative
(described below) progresses, AMRESCO, INC., the Manager and the Company
continue to revise estimates of the likely problems and costs associated with
the Year 2000 issue and to adapt contingency plans. However, there can be no
assurance that any estimate or assumption will prove to be accurate.
The AMRESCO, INC. Year 2000 Initiative
AMRESCO, INC. is conducting a comprehensive Year 2000 initiative with respect to
its internal business-critical systems, including those upon which the Company
depends. This initiative encompasses information technology ("IT") systems and
applications, as well as non-IT systems and equipment with embedded technology,
such as fax machines and telephone systems, which may be impacted by the Year
2000 issue. Business-critical systems encompass internal accounting systems,
including general ledger, accounts payable and financial reporting applications;
cash management systems; loan servicing systems; and decision support systems;
as well as the underlying technology required to support the software. The
initiative includes assessing, remediating or replacing, testing and upgrading
the business-critical IT systems of AMRESCO, INC. with the assistance of a
consulting firm that specializes in Year 2000 readiness. Based upon a review of
the completed and planned stages of the initiative, and the testing done to
date, AMRESCO, INC. does not anticipate any material difficulties in achieving
Year 2000 readiness with respect to its internal business-critical systems used
in connection with the operations of the Manager or the Company. The Company has
received a written representation from AMRESCO, INC. that Year 2000 readiness
was achieved by December 1998 with respect to all its internal business-critical
systems used in connection with the operations of the Manager or the Company.
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In addition to the internal IT systems and non-IT systems of AMRESCO, INC., the
Company may be at risk from Year 2000 failures caused by or occurring to third
parties. These third parties can be classified into two groups. The first group
includes borrowers, significant business partners, lenders, vendors and other
service providers with whom the Company, the Manager or AMRESCO, INC. has a
direct contractual relationship. The second group, while encompassing certain
members of the first group, is comprised of third parties providing services or
functions to large segments of society, both domestically and internationally,
such as airlines, utilities and national stock exchanges.
As is the case with most other companies, the actions the Company, the Manager
and AMRESCO, INC. can take to avoid any adverse effects from the failure of
companies, particularly those in the second group, to become Year 2000 ready is
extremely limited. However, AMRESCO, INC. has communicated with those companies
that have significant business relationships with AMRESCO, INC., the Manager or
the Company, particularly those in the first group, to determine their Year 2000
readiness status and the extent to which AMRESCO, INC., the Manager or the
Company could be affected by any of their Year 2000 readiness issues. In
connection with this process, AMRESCO, INC. has sought to obtain written
representations and other independent confirmations of Year 2000 readiness from
the third parties with whom AMRESCO, INC., the Manager or the Company has
material contracts regarding the internal business-critical operations of the
Company. AMRESCO, INC. and the Company have received written responses
certifying Year 2000 readiness and/or have conducted testing from all but three
of the vendors and other third parties providing goods and services supporting
the internal business-critical functions identified in the initiative of the
Company, the Manager and AMRESCO, INC. With respect to the three vendors who
have not responded, alternative vendors have been identified or a contingency
plan has been developed to address a business interruption arising from the Year
2000 issue. To date, eight of sixteen borrowers to which letters were sent have
represented in writing that they are Year 2000 ready. Based on responses
received and testing to date, it is not currently anticipated that AMRESCO,
INC., the Manager or the Company will be materially affected by any third party
Year 2000 readiness issues in connection with the operations of the Company or
the Manager.
For all business-critical systems interfaces used in connection with the
operations of the Manager and the Company, AMRESCO, INC. advised the Company
that readiness was achieved by December 31, 1998. Replacement providers believed
to be compliant have been identified for significant third party providers that
did not complete their Year 2000 initiatives.
There can be no assurance that the systems of AMRESCO, INC. or those of third
parties will not experience adverse effects after December 31, 1999.
Furthermore, there can be no assurance that a failure to convert by another
company, or a conversion that is not compatible with the systems of AMRESCO,
INC. or those of other companies on which the systems of AMRESCO, INC. rely,
would not have a material adverse effect on the Company.
Under the terms of the Company's Management Agreement with the Manager, all of
the costs associated with addressing the Company's Year 2000 issue are to be
borne by the Manager. Therefore, the Company does not anticipate that it will
incur any expenditures in connection with any modifications necessary to achieve
Year 2000 readiness.
Potential Risks
In addition to the internal systems of AMRESCO, INC. and the systems and
embedded technology of third parties with whom AMRESCO, INC., the Manager and
the Company do business, there is a general uncertainty regarding the overall
success of global remediation efforts relating to the Year 2000 issue, including
those efforts of providers of services to large segments of society, as
described above in the second group. Due to the interrelationships on a global
scale that may be impacted by the Year 2000 issue, there could be short-term
disruptions in the capital or real estate markets or longer-term disruptions
that would affect the overall economy.
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Due to the general uncertainty with respect to how this issue will affect
businesses and governments, it is not possible to list all potential problems or
risks associated with the Year 2000 issue. However, some examples of problems or
risks to the Company that could result from the failure by third parties to
adequately deal with the Year 2000 issue include:
o in the case of lenders, the potential for liquidity stress due to
disruptions in funding flows;
o in the case of exchanges and clearing agents, the potential for funding
disruptions and settlement failures;
o in the case of counterparties, accounting and financial difficulties to
those parties that may expose the Company to increased credit risk; and
o in the case of vendors or providers, service failures or interruptions,
such as failures of power, telecommunications and the embedded technology
in building systems (such as HVAC, sprinkler and fire suppression,
elevators, alarm monitoring and security, and building and parking garage
access).
With respect to the Company's loan portfolio, risks due to the potential failure
of third parties to be ready to deal with the Year 2000 issue include:
o potential borrower defaults resulting from increased expenses or legal
claims related to failures of embedded technology in building systems, such
as HVAC, sprinkler and fire suppression, elevators, alarm monitoring and
security, and building and parking garage access;
o potential reductions in collateral value due to failure of one or more of
the building systems;
o interruptions in cash flow due to borrowers being unable to obtain timely
lease payments from tenants or incomplete or inaccurate accounting of
rents;
o potential borrower defaults resulting from computer failures of retail
systems of major tenants in retail commercial real estate properties such
as shopping malls and strip shopping centers;
o construction delays resulting from contractors' failure to be Year 2000
ready and increased costs of construction associated with upgrading
building systems to be Year 2000 compliant; and
o delays in reaching projected occupancy levels due to construction delays,
interruptions in service or other market factors.
These risks are also applicable to the Company's portfolio of CMBS as these
securities are dependent upon the pool of mortgage loans underlying them. If the
investors in these types of securities demand higher returns in recognition of
these potential risks, the market value of any CMBS portfolio of the Company
also could be adversely affected.
Additionally, the Company has made equity investments in a partnership that owns
interests in five grocery-anchored shopping centers and in a partnership which
owns a suburban office building. Furthermore, the Company's unconsolidated
taxable subsidiary holds interests (indirectly) in a partnership which owns a
mixed-use property. These operations will be subject to many of the risks set
forth above. Although the Company intends to monitor Year 2000 readiness, there
can be no guarantee that all building systems will be Year 2000 compliant.
The Company believes that the risks most likely to affect the Company adversely
relate to the failure of third parties, including its borrowers and sources of
capital, to achieve Year 2000 readiness. If its borrowers' systems fail, the
result could be a delay in making payments to the Company or the complete
business failure of such borrowers. The failure, although believed to be
unlikely, of the Company's sources of capital to achieve Year 2000 readiness
could result in the Company being unable to obtain the funds necessary to
continue its normal business operations.
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Reasonably Likely Worst Case Scenario / Business Continuity / Disaster Recovery
Plan
The failure to correct a material Year 2000 problem could result in systems
failures leading to a disruption in or failure of some normal business
activities or operations. The most reasonably likely worst case scenario would
involve a failure of the Manager's and the Company's accounting and management
systems. In this case, the Company would temporarily convert its systems to a
manual system.
AMRESCO, INC. currently has a business continuity/disaster recovery plan that
includes business resumption processes that do not rely on computer systems and
the maintenance of hard copy files, where appropriate. The business
continuity/disaster recovery plan is monitored and updated as potential Year
2000 readiness issues of AMRESCO, INC. and third parties are specifically
identified. Due to the inability to predict all of the potential problems that
may arise in connection with the Year 2000 issue, there can be no assurance that
all contingencies will be adequately addressed by this contingency plan.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q are not based on historical facts
and are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company intends that
forward-looking statements be subject to such Act and any similar state or
federal laws. Forward-looking statements, which are based on various
assumptions, include statements regarding the intent, belief or current
expectations of the Company, its Manager, and their respective Trustees or
directors and officers, and may be identified by reference to a future period or
periods or by use of forward-looking terminology such as "intends," "may,"
"could," "will," "believe," "expect," "anticipate," "plan," or similar terms or
variations of those terms or the negative of those terms. Actual results could
differ materially from those set forth in forward-looking statements due to
risks, uncertainties and changes with respect to a variety of factors,
including, but not limited to, changes in international, national, regional or
local economic environments, changes in prevailing interest rates, credit and
prepayment risks, basis and asset/liability risks, spread risk, event risk,
conditions which may affect public securities and debt markets generally or the
markets in which the Company operates, the Year 2000 issue, the availability of
and costs associated with obtaining adequate and timely sources of liquidity,
dependence on existing sources of funding, the size and liquidity of the
secondary market for commercial mortgage-backed securities, geographic or
product type concentrations of assets (temporary or otherwise), hedge mismatches
with liabilities, other factors generally understood to affect the real estate
acquisition, mortgage and leasing markets and securities investments, changes in
federal income tax laws and regulations, and other risks described from time to
time in the Company's SEC reports and filings, including its registration
statement on Form S-11 and periodic reports on Form 10-Q, Form 8-K and Form
10-K.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a party to various financial instruments which are subject to
market risk. These instruments include mortgage loan investments, investments in
commercial mortgage-backed securities ("CMBS") and certain of the Company's
borrowing facilities. The Company is also a party to an interest rate cap
agreement which it entered into in order to mitigate the market risk exposure
associated with its credit facilities. The Company's financial instruments
involve, to varying degrees, elements of interest rate risk. Additionally, the
Company's investment portfolio, which is comprised of both financial instruments
(mortgage loans and CMBS) and equity investments in real estate, is subject to
real estate market risk. The Company is a party to certain other financial
instruments, including trade receivables and payables and amounts due to
affiliates which, due to their short-term nature, are not subject to market
risk. For a full discussion of market risk exposures, reference is made to Item
7A. "Quantitative and Qualitative Disclosures About Market Risk" in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. The
market risk exposures described below are intended to supplement the disclosures
included in the Company's Form 10-K.
Commercial Mortgage-backed Securities
The fair values of the Company's investments in non-investment grade CMBS are
subject to both interest rate risk and spread risk. The non-investment grade, or
subordinated classes, of CMBS typically include classes with credit ratings
below investment grade "BBB". As the subordinated classes provide credit
protection to the senior classes by absorbing losses from underlying mortgage
loan defaults or foreclosures, they also carry more credit risk than the senior
classes. Among other factors, the fair value of the Company's interests in CMBS
is dependent upon, and is sensitive to changes in, comparable-term U.S. Treasury
rates and the spreads over such U.S. Treasury rates in effect from time to time.
Spreads over comparable-term U.S. Treasury rates, which are based upon supply
and demand factors, typically vary across different classes of CMBS and are
generally greater for each successively lower rated class of CMBS. Spreads are
influenced by a number of factors including, but not limited to, investor
expectations with respect to future economic conditions, interest rates and real
estate market factors, all or any of which can impact the ability of borrowers
to perform under the terms of the mortgage loans underlying CMBS. As a result,
even in an environment characterized by relatively constant U.S. Treasury rates
and low commercial mortgage default rates, the value of the Company's CMBS
holdings can be adversely impacted simply by increasing spreads. This situation
occurred during the latter half of 1998 and was the primary reason for the
decline in the value of the Company's CMBS holdings. Notwithstanding this
decline in value, the cash flows from the Company's CMBS were unaffected by this
spread widening.
As of September 30, 1999, the Company held five commercial mortgage-backed
securities with credit ratings ranging from "BB-" to "B-". The weighted average
duration of these bonds approximated 5.8 years as of that date. The estimated
fair value of the Company's CMBS holdings was $26.0 million at September 30,
1999. All other things being equal, a 100 basis point increase or decrease in
comparable-term U.S. Treasury rates (from those in effect as of September 30,
1999) would be expected to cause the value of the Company's CMBS to decline or
increase, respectively, by approximately $1.5 million. Similarly, if
comparable-term U.S. Treasury rates remained constant but spreads over such U.S.
Treasury rates increased by 100 basis points (from those quoted as of September
30, 1999) for each of the classes of CMBS owned by the Company, the fair value
of its securities portfolio would also be expected to decline by approximately
$1.5 million. Conversely, a 100 basis point decline in spreads across all
classes of CMBS (all other things being equal) would be expected to increase the
value of the portfolio by a like amount.
The Company's unconsolidated taxable subsidiary holds one commercial
mortgage-backed security that has a credit rating of "B-". The estimated fair
value of this bond and its duration at September 30, 1999 were $3.3 million and
2.5 years, respectively. All other things being equal, a 100 basis point
increase or decrease in comparable-term U.S. Treasury rates (from those in
effect as of September 30, 1999) would be expected to cause the value of this
security to decline or increase, respectively, by approximately $82,000.
Similarly, if comparable-term U.S. Treasury rates remained constant but spreads
over such U.S. Treasury rates (for this security) increased or decreased by 100
basis points (from those quoted as of September 30, 1999), then the value of
the bond would also be expected to decline or increase, respectively, by
approximately $82,000. These amounts exclude the tax effects associated with
reporting unrealized gains and losses.
As these securities are classified as available for sale, unrealized gains and
losses are excluded from earnings and reported as a component of accumulated
other comprehensive income (loss) in shareholders' equity. In the absence of a
sale or a
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decline in fair value that is deemed to be other than temporary, the Company's
earnings would not be impacted by the changes in fair value described above.
Borrowing Facilities
The Company is a party to two credit facilities, each of which bears interest at
floating rates. Specifically, both facilities bear interest at varying spreads
over one month LIBOR. One of the facilities can be used to finance the Company's
structured loan and equity real estate investments (the "Amended Line of
Credit") while the other facility can be used to finance the Company's CMBS (the
"Repurchase Agreement"). As of September 30, 1999, amounts outstanding under the
Amended Line of Credit and the Repurchase Agreement totaled $78.5 million and
$10.7 million, respectively. To reduce the impact of changes in interest rates
on these floating rate debt facilities, the Company purchased an interest rate
cap agreement. As described below, this agreement reduces (but does not
eliminate) the Company's risk of incurring higher interest costs due to rising
interest rates.
If the one-month LIBOR on September 30, 1999 increased by 100 basis points on
that date (from 5.40% to 6.40%) and then remained constant at the higher rate
for twelve consecutive months, the Company's interest costs on its outstanding
borrowings ($89.2 million), in the absence of the interest rate cap agreement
described below, would increase by approximately $892,000 for the twelve month
period ending September 30, 2000. In order to reduce the impact that rising
interest rates would have on this floating rate indebtedness, the Company
entered into an interest rate cap agreement effective August 1, 1999. The cap
agreement has a notional amount of $59.0 million. Until its expiration on
November 1, 2000, the agreement entitles the Company to receive from the
counterparty the amounts, if any, by which one-month LIBOR exceeds 6.25%
multiplied by the notional amount. If the one-month LIBOR increased as described
above, the Company would receive approximately $89,000 from the counterparty
under the terms of the cap agreement. Under this scenario, earnings and cash
flows for the twelve month period ending September 30, 2000 would be reduced by
a net amount of approximately $803,000. Any further increase in one-month LIBOR
would effect only that portion of the Company's indebtedness in excess of the
cap agreement's notional amount ($30.2 million). As the Company paid an
up-front, one-time premium of $110,000 for the cap, there is no liquidity risk
to the Company associated with holding this derivative financial instrument.
Conversely, a sustained 100 basis point reduction in the one-month LIBOR (if it
occurred on September 30, 1999) would increase earnings and cash flows for the
twelve month period ending September 30, 2000 by approximately $892,000. Under
this scenario, no payments would be received from the counterparty under the cap
agreement.
The Company (through a majority-owned partnership) is indebted under the terms
of five non-recourse loans aggregating $34.6 million. As the loans bear interest
at a fixed rate, the Company's future earnings and cash flows would not be
reduced in the event of rising interest rates.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and Exhibit Index
Exhibit No.
2.1 Agreement and Plan of Merger, dated as of August
4, 1999, by and between the Company and Impac
Commercial Holdings, Inc. (filed as Exhibit 2.1 to
the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999, which
exhibit is incorporated herein by reference).
4.1 Rights Agreement, dated as of February 25, 1999,
between the Company and The Bank of New York, as
Rights Agent, which includes: as Exhibit A
thereto, the Form of Statement of Designation of
Series A Junior Participating Preferred Shares,
par value $.01 per share, of the Company; as
Exhibit B thereto, the Form of Right Certificate;
and as Exhibit C thereto, the Summary of Rights to
Purchase Preferred Shares (filed as Exhibit 1 to
the Registrant's Current Report on Form 8-K dated
February 25, 1999, which exhibit is incorporated
herein by reference).
10.1 Amended and Restated Interim Warehouse and
Security Agreement dated as of May 4, 1999, by and
among Prudential Securities Credit Corporation and
AMRESCO Capital Trust, AMREIT I, Inc., AMREIT II,
Inc., ACT Equities, Inc. and ACT Holdings, Inc.
(filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1999, which exhibit is
incorporated herein by reference).
10.2 Warrant Agreement dated as of May 4, 1999 between
AMRESCO Capital Trust and Prudential Securities
Incorporated (filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999, which
exhibit is incorporated herein by reference).
10.3 Management Agreement, dated as of May 12, 1998, by
and between AMRESCO Capital Trust and AMREIT
Managers, L.P.
27 Financial Data Schedule.
(b) Reports on Form 8-K. The following reports on Form 8-K were
filed with respect to events occurring during the quarterly
period for which this report is filed:
(i) Form 8-K dated August 5, 1999 and filed with the
Commission on August 9, 1999, reporting the
announcement that AMRESCO Capital Trust and Impac
Commercial Holdings, Inc. had entered into a
merger agreement, under Item 5 of such form.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMRESCO CAPITAL TRUST
Registrant
Date: November 12, 1999 By: /s/ Thomas R. Lewis II
----------------------
Thomas R. Lewis II
Vice President and Controller
(Chief Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan of Merger, dated as of August
4, 1999, by and between the Company and Impac
Commercial Holdings, Inc. (filed as Exhibit 2.1 to
the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999, which
exhibit is incorporated herein by reference).
4.1 Rights Agreement, dated as of February 25, 1999,
between the Company and The Bank of New York, as
Rights Agent, which includes: as Exhibit A
thereto, the Form of Statement of Designation of
Series A Junior Participating Preferred Shares,
par value $.01 per share, of the Company; as
Exhibit B thereto, the Form of Right Certificate;
and as Exhibit C thereto, the Summary of Rights to
Purchase Preferred Shares (filed as Exhibit 1 to
the Registrant's Current Report on Form 8-K dated
February 25, 1999, which exhibit is incorporated
herein by reference).
10.1 Amended and Restated Interim Warehouse and
Security Agreement dated as of May 4, 1999, by and
among Prudential Securities Credit Corporation and
AMRESCO Capital Trust, AMREIT I, Inc., AMREIT II,
Inc., ACT Equities, Inc. and ACT Holdings, Inc.
(filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1999, which exhibit is
incorporated herein by reference).
10.2 Warrant Agreement dated as of May 4, 1999 between
AMRESCO Capital Trust and Prudential Securities
Incorporated (filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999, which
exhibit is incorporated herein by reference).
10.3 Management Agreement, dated as of May 12, 1998, by
and between AMRESCO Capital Trust and AMREIT
Managers, L.P.
27 Financial Data Schedule.