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, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
Commission File Number 0-23972
AMERICAN MORTGAGE ACCEPTANCE COMPANY
------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 13-6972380
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 421-5333
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
----- -----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
============= ============
September 30, December 31,
2003 2002
------------- ------------
ASSETS
Investments in debt
securities - available for sale $ 166,099 $ 114,034
Investments in mortgage loans, net 15,689 22,384
Investment in ARCap 20,240 20,240
Real estate owned - held for sale 40,145 --
Cash and cash equivalents 9,794 10,404
Notes receivable 37,147 25,997
Accrued interest receivable 1,951 1,170
Other assets 702 834
--------- ---------
Total assets $ 291,767 $ 195,063
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Repurchase facility payable $ 140,707 $ 87,880
Warehouse facility payable 20,529 8,788
Interest rate derivatives 698 --
Accrued interest payable 506 60
Accounts payable and accrued expenses 725 762
Due to Advisor and affiliates 713 690
Distributions payable 3,335 2,545
--------- ---------
Total liabilities 167,213 100,725
--------- ---------
Commitments and
contingencies
Shareholders' equity:
Common shares of
beneficial interest; $.10 par value;
25,000,000 shares authorized; 8,713,376 issued and
8,338,180 outstanding in 2003 and 6,738,826 issued
and 6,363,630 outstanding in 2002 871 674
Treasury shares of beneficial interest; 375,196 shares (38) (38)
Additional paid-in capital 126,796 99,470
Deferred compensation - stock options (48) --
Distributions in excess of net income (15,145) (14,471)
Accumulated other comprehensive income 12,118 8,703
--------- ---------
Total shareholders' equity 124,554 94,338
--------- ---------
Total liabilities and shareholders' equity $ 291,767 $ 195,063
========= =========
See accompanying notes to consolidated financial statements
2
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in the thousands except per share amounts)
(Unaudited)
========================= ==========================
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2003 2002 2003 2002
------------------------- --------------------------
Revenues:
Interest income:
Debt securities $ 2,364 $ 1,548 $ 6,216 $ 4,002
Mortgage loans 418 536 2,181 1,546
Notes receivable 721 548 2,517 1,662
Temporary investments 37 16 52 40
Other income 70 67 180 203
----------- ----------- ----------- -----------
Total revenues 3,610 2,715 11,146 7,453
----------- ----------- ----------- -----------
Expenses:
Interest 693 290 1,742 869
General and administrative 152 119 577 403
Fees to Advisor 468 318 1,367 1,046
Amortization and other 121 -- 327 6
Fannie Mae loan program -- -- -- 358
----------- ----------- ----------- -----------
Total expenses 1,434 727 4,013 2,682
----------- ----------- ----------- -----------
Other income:
Equity in earnings of ARCap 600 600 1,800 1,800
Net gain (loss) on repayments and sales
of debt securities -- -- (391) 614
----------- ----------- ----------- -----------
Total other income 600 600 1,409 2,414
----------- ----------- ----------- -----------
Net income $ 2,776 $ 2,588 $ 8,542 $ 7,185
=========== =========== =========== ===========
Net income per share
Basic and diluted $ .33 $ .41 $ 1.12 $ 1.22
=========== =========== =========== ===========
Weighted average shares outstanding
Basic 8,338,180 6,363,630 7,622,590 5,901,176
=========== =========== =========== ===========
Diluted 8,346,866 6,363,630 7,633,997 5,901,176
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements
3
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(Dollars in thousands)
(Unaudited)
Treasury Shares of
Shares of Beneficial Interest Beneficial Interest Additional Deferred
----------------------------- ----------------------- Paid-in Compensation-
Shares Amount Shares Amount Capital Stock Options
---------- ---------- ---------- ---------- ----------- -------------
Balance at January 1, 2003 $6,738,826 $ 674 (375,196) $ (38) $ 99,470
Comprehensive income:
Net income
Other comprehensive income:
Net unrealized loss on interest
rate derivatives
Unrealized holding gain arising
during the period
Plus: reclassification adjustment for loss
included in net income
Total other comprehensive income
Comprehensive income
Issuance of stock options 67 $ (67)
Deferred compensation costs 19
Common shares issued 1,974,550 197 27,259
Distributions
---------- ---------- --------- --------- ----------- -----------
Balance at September 30, 2003 8,713,376 $ 871 (375,196) $ (38) $ 126,796 $ (48)
========== ========== ========= ========= =========== ===========
Distributions Accumulated Other
in Excess Comprehensive Comprehensive
of Net Income Income Income Total
------------- ------------- ----------------- -----------
Balance at January 1, 2003 $ (14,471) $ 8,703 $ 94,338
Comprehensive income:
Net income 8,542 $ 8,542 8,542
------------
Other comprehensive income:
Net unrealized loss on interest
rate derivatives (698)
Unrealized holding gain arising
during the period 3,722
Plus: reclassification adjustment for loss
included in net income 391
------------
Total other comprehensive income 3,415 3,415 3,415
------------
Comprehensive income $ 11,957
============
Issuance of stock options
Deferred compensation costs 19
Common shares issued 27,456
Distributions (9,216) (9,216)
------------ ----------- ----------
Balance at September 30, 2003 $ (15,145) $ 12,118 $ 124,554
============ =========== ==========
See accompanying notes to consolidated financial statements.
4
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
=====================
Nine Months Ended
September 30,
---------------------
2003 2002
-------- ---------
Cash flows from operating activities:
Net income $ 8,542 $ 7,185
Adjustments to reconcile net income to net cash
provided by operating activities:
Net (gain) loss on repayments of debt securities 391 (614)
Equity in earnings of ARCap, in excess of
distributions received -- 5
Amortization - deferred financing costs -- 6
Amortization - deferred compensation costs 19 --
Amortization - deferred loan costs 196 --
Amortization - loan premium and
origination costs and fees (244) (75)
Accretion of discount on debt securities 133 14
Changes in operating assets and liabilities:
Accrued interest receivable (781) (330)
Other assets (63) 53
Due to Advisor and affiliates 23 110
Accounts payable and accrued expenses (37) (845)
Accrued interest payable 446 28
-------- --------
Net cash provided by operating activities 8,625 5,537
-------- --------
Cash flows from investing activities:
Fundings of mortgage loans (3,774) (2,566)
Repayments of mortgage loans 9,463 34
Purchase of mortgage loans (33,517) --
Funding of notes receivable (20,230) (3,520)
Repayment of notes receivable 4,057 --
Principal repayments on debt securities 8,396 287
Increase in investment in debt securities (56,873) (41,949)
Additions to real estate owned (355) --
Decrease in other assets -- 370
-------- --------
Net cash used in investing activities (92,833) (47,344)
-------- --------
continued
5
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
=====================
Nine Months Ended
September 30,
---------------------
2003 2002
-------- ---------
Cash flows from financing activities:
Proceeds from repurchase facility payable 97,260 18,802
Proceeds from warehouse facility payable 11,741 --
Repayments of repurchase facility payable (44,433) --
Distribution paid to shareholders (9,216) (6,084)
Increase in deferred loan costs -- (52)
Increase in distribution payable 790 --
Issuance of common shares 27,456 30,882
-------- --------
Net cash provided by financing activities 83,598 43,548
-------- --------
Net (decrease) increase in cash and cash
equivalents (610) 1,741
Cash and cash equivalents at the beginning
of the period 10,404 1,018
-------- --------
Cash and cash equivalents at the end of the
period $ 9,794 $ 2,759
======== ========
Supplemental information:
Interest paid $ 1,759 $ 841
======== ========
Conversion of mortgage loans to real estate owned:
Increase in real estate owned $ 40,145
Decrease in mortgage loans (34,707)
Decrease in notes receivable (5,438)
--------
--
--------
See accompanying notes to consolidated financial statements
6
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
NOTE 1 - General
American Mortgage Acceptance Company (the "Company") was formed on June 11, 1991
as a Massachusetts business trust. The Company elected to be treated as a real
estate investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended (the "Code").
The Company's business plan focuses on originating and acquiring mortgages
secured by multifamily properties, which may take the form of government insured
first mortgages and uninsured mezzanine loans, construction loans and bridge
loans. Additionally, the Company has indirectly invested in subordinate
commercial mortgage-backed securities and may invest in other real estate
assets, including non-multifamily mortgages. The Company also issues guarantees
of construction and permanent financing and makes standby loan commitments.
The Company is governed by a board of trustees comprised of three independent
trustees and two non-independent trustees who are affiliated with Related
Capital Company ("Related"). The Company has engaged Related AMI Associates,
Inc. (the "Advisor"), an affiliate of Related, to manage its day-to-day affairs.
The Advisor has subcontracted with Related to provide the services contemplated.
Through the Advisor, Related offers the Company a core group of experienced
staff and executive management providing the Company with services on both a
full and part-time basis. These services include, among other things,
acquisition, financial, accounting, tax, capital markets, asset monitoring,
portfolio management, investor relations and public relations.
The consolidated financial statements include the accounts of the Company and
three wholly-owned subsidiaries which it controls: AMAC Repo Seller, LLC,
AMAC/FM Corporation and AMAC Credit Facility, LLC. All intercompany accounts and
transactions have been eliminated in consolidation. Unless otherwise indicated,
the "Company" as hereinafter used, refers to American Mortgage Acceptance
Company and its subsidiaries.
The consolidated financial statements of the Company have been prepared without
audit. In the opinion of management, the financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows of
the Company. However, the operating results for the interim periods may not be
indicative of the results for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") have been condensed or
omitted. It is suggested that these financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 2002.
The preparation of the consolidated financial statements in conformity with GAAP
requires the Advisor to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
SFAS No. 145 among other things, rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and accordingly, the reporting of gains and
losses from the early extinguishments of debt as extraordinary items will only
be required if they meet the specific criteria for extraordinary items included
in Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations". The rescission of SFAS No. 4 became effective January 1, 2003. The
implementation of this statement did not have an impact on the Company's
consolidated financial statements.
7
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 replaces current
accounting literature and requires the recognition of costs associated with exit
or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 became effective January 1,
2003. The implementation of this statement did not have an impact on the
Company's consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantors' Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". The Interpretation elaborates on the disclosures to be
made by a guarantor in its financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The disclosure
provisions of this Interpretation are included in Note 11. The initial
recognition and initial measurement provisions of this Interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company entered into several guarantees prior to December
31, 2002. For those guarantees, the Company deferred the fees received in
advance and is amortizing those fees over the guarantee period. Since December
31, 2002, the Company has not entered into or modified any such guarantees.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123". This statement amends SFAS NO. 123, "Accounting for Stock-Based
Compensation" to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. Because the Company accounts for its share options using the fair
value method, implementation of this statement did not have an impact on the
Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This Interpretation clarifies the
application of existing accounting pronouncements to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The provisions of FIN 46 became effective immediately for all variable interests
in variable interest entities created after January 31, 2003, and the Company
will need to apply its provisions to any existing variable interests in variable
interest entities beginning December 31, 2003. The Company has determined that
it has no variable interests in variable interest entities requiring
consolidation.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS 149 amends and clarifies
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 149 is
generally effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The implementation
of this statement did not have an impact on the Company's consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that certain financial instruments be classified as liabilities
that were previously considered equity. The implementation of this statement on
July 1, 2003 did not have an impact on the Company's consolidated financial
statements.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
8
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
NOTE 2 - Investments in Mortgage Loans
Information relating to the Company's investments in mortgage loans as of
September 30, 2003 is as follows:
(Dollars in thousands)
Final
Maturity Lifetime
PROPERTY Description Date Call Date (A) Interest Rate Interest Cap (C)
- -------- ----------- ---------- ------------- -------------- ----------------
FIRST MORTGAGE LOANS:
Stony Brook II
East Haven, CT 125 Units 6/37 12/06 7.625% N/A
Sunset Gardens
Eagle Pass, TX 60 Units 12/03 N/A 11.50% N/A
Alexandrine
Detroit, MI 30 Units 12/03 N/A 11.00% N/A
Desert View (H)
Coolidge, AZ 45 Units 5/04 N/A 11.00% N/A
Subtotal First Mortgage Loans
MEZZANINE LOANS (I):
Stabilized Properties
- ---------------------
Stony Brook II
East Haven, CT 125 Units 6/37 12/06 15.33%(B) 16%
Plaza at San Jacinto (J)
Houston, TX 132 Units 1/43 6/11 11.40%(B) 16%
Subtotal Stabilized Mezzanine Loans
Properties in Lease-Up
- ----------------------
The Hollows (K)
Greenville, NC 184 Units 1/42 1/12 10.00%(B) 16%
Elmhurst Village (L) (M)
Oveido, FL 313 Units 1/42 3/19 10.00%(B) 16%
The Reserve at Autumn Creek (L) (M) (N)
Friendswood, TX 212 Units 1/42 9/14 10.00%(B) 16%
Club at Brazos (O) (K)
Rosenberg, TX 200 Units 5/43 4/13 10.00%(B) 14%
Northbrooke (L) (M)
Harris County, TX 240 Units 8/43 7/13 11.50%(B) 14%
Subtotal Properties in Lease-Up
Properties in Construction/Rehabilitation
- -----------------------------------------
Del Mar Villas
Dallas, TX 260 Units 4/04 N/A LIBOR + 4.625% (P)
Mountain Valley
Dallas, TX 312 Units 11/04 N/A LIBOR + 4.750% (P)
Villas at Highpoint
Lewisville, TX 304 Units 4/33 TBD 14.57% N/A
Subtotal Properties in Construction/Rehabilitation
Subtotal Mezzanine Loans
Total Mortgage Loans
Share of
Share of Excess Sale or
Excess Operating Refinancing Periodic
PROPERTY Cash Flows Proceeds Payment Terms Prior Liens
- -------- --------------- -------------- ------------- -----------
FIRST MORTGAGE LOANS:
Stony Brook II
East Haven, CT N/A N/A (F) --
Sunset Gardens
Eagle Pass, TX N/A N/A (G) --
Alexandrine
Detroit, MI N/A N/A (G) --
Desert View (H)
Coolidge, AZ N/A N/A (G) --
Subtotal First Mortgage Loans
MEZZANINE LOANS (I):
Stabilized Properties
- ---------------------
Stony Brook II
East Haven, CT 40% 35% (F) --
Plaza at San Jacinto (J)
Houston, TX 50% 50% (G) --
Subtotal Stabilized Mezzanine Loans
Properties in Lease-Up
- ----------------------
The Hollows (K)
Greenville, NC 50% 25% (G) $ 8,886
Elmhurst Village (L) (M)
Oveido, FL 50% 25% (G) 21,615
The Reserve at Autumn Creek (L) (M) (N)
Friendswood, TX 50% 25% (G) 15,978
Club at Brazos (O) (K)
Rosenberg, TX 50% 25% (G) 14,363
Northbrooke (L) (M)
Harris County, TX 50% 50% (G) 14,032
Subtotal Properties in Lease-Up
Properties in Construction/Rehabilitation
- -----------------------------------------
Del Mar Villas
Dallas, TX N/A N/A (G) 5,554
Mountain Valley
Dallas, TX N/A N/A (G) 6,023
Villas at Highpoint
Lewisville, TX N/A N/A (G) 18,800
Subtotal Properties in Construction/Rehabilitation
Subtotal Mezzanine Loans
Total Mortgage Loans
Interest
Earned Applicable
Outstanding Carrying to the Nine
Face Amount of Unamortized Amount of Months Ended
PROPERTY Mortgages (D) Costs and Fees Mortgages (E) September 30, 2003
- -------- -------------- -------------- ------------- ------------------
FIRST MORTGAGE LOANS:
Stony Brook II
East Haven, CT $ -- $ -- $ -- $ 497
Sunset Gardens
Eagle Pass, TX 1,479 -- 1,479 139
Alexandrine
Detroit, MI 342 -- 342 29
Desert View (H)
Coolidge, AZ 960 -- 960 42
--------------------------------------------------------------------
Subtotal First Mortgage Loans 2,781 -- 2,781 707
--------------------------------------------------------------------
MEZZANINE LOANS (I):
Stabilized Properties
- ---------------------
Stony Brook II
East Haven, CT -- -- -- 527
Plaza at San Jacinto (J)
Houston, TX -- -- -- 39
--------------------------------------------------------------------
Subtotal Stabilized Mezzanine Loans -- -- -- 566
--------------------------------------------------------------------
Properties in Lease-Up
- ----------------------
The Hollows (K)
Greenville, NC 1,549 (138) 1,411 130
Elmhurst Village (L) (M)
Oveido, FL 2,874 (398) 2,476 240
The Reserve at Autumn Creek (L) (M) (N)
Friendswood, TX 1,987 (56) 1,931 35
Club at Brazos (O) (K)
Rosenberg, TX 1,962 (76) 1,886 150
Northbrooke (L) (M)
Harris County, TX 1,500 (134) 1,366 132
--------------------------------------------------------------------
Subtotal Properties in Lease-Up 9,872 (802) 9,070 687
--------------------------------------------------------------------
Properties in Construction/Rehabilitation
- -----------------------------------------
Del Mar Villas
Dallas, TX 765 -- 765 35
Mountain Valley
Dallas, TX 776 -- 776 35
Villas at Highpoint
Lewisville, TX 2,482 (185) 2,297 151
--------------------------------------------------------------------
Subtotal Properties in Construction/Rehabilitation 4,023 (185) 3,838 221
--------------------------------------------------------------------
Subtotal Mezzanine Loans 13,895 (987) 12,908 1,474
--------------------------------------------------------------------
Total Mortgage Loans $16,676 $ (987) $15,689 $ 2,181
====================================================================
9
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
(A) Loans are subject to mandatory prepayment at the option of the Company ten
years after construction completion, with one year's notice. Loans with a
call date of "TBD" are still under construction.
(B) Interest on the mezzanine loans is based on a fixed percentage of the
unpaid principal balance of the related first mortgage loans. The amount
shown is the approximate effective rate earned on the balance of the
mezzanine loan. The mezzanine loans also provide for payments of additional
interest based on a percentage of cash flow remaining after debt service
and participation in sale or refinancing proceeds and certain provisions
that cap the Company's total yield, including additional interest and
participations, over the term of the loan.
(C) Lifetime interest cap represents the maximum annual return, including
interest, fees and participations, that can be earned by the Company over
the life of the mezzanine loan, computed as a percentage of the balance of
the first mortgage loan plus the mezzanine loan.
(D) As of September 30, 2003, all interest payments on the mortgage loans are
current, with the exception of Reserve at Autumn Creek - See (N).
(E) Carrying amounts of the loans are net of unamortized origination costs and
fees and loan discounts.
(F) The Stonybrook II first mortgage loan and mezzanine loan were repaid in
January 2003.
(G) Interest only payments are due monthly, with loan balance due at maturity.
(H) Loan purchased in April 2003 in connection with a guarantee by the Company.
(I) The principal balance of the mezzanine loans is secured by the partnership
interests of the entity that owns the underlying property and a third
mortgage deed of trust. Interest payments on the mezzanine loans are
secured by a second mortgage deed of trust and are guaranteed for the first
36 months after construction completion by an entity related to the general
partner of the entity that owns the underlying property.
(J) The Plaza at San Jacinto mezzanine loan has been reclassified to real
estate owned -- see Note 5.
(K) The Company does not have an interest in the first lien position relating
to this mezzanine loan.
(L) The Company has an interest in the first lien position relating to this
mezzanine loan.
(M) The first mortgage loans related to those properties were converted from
participations in FHA loans to ownership of the GNMA certificates and are
held by the Company.
(N) Certain required debt service payments have been missed, causing this
mezzanine loan to be in default. As of May 2003, the Company stopped
accruing income on the mezzanine loan. During October 2003, the Company
exercised its rights under the subordinated promissory note and other
documents to take possession of the real estate collateral of the Autumn
Creek property, subject to the first mortgage loan, not owned by the
Company. The Company has obtained an independent appraisal for the property
underlying the mezzanine loan. The appraisal determined that the value of
the property exceeded the value of the first mortgage outstanding on the
property and the Company's mezzanine loan outstanding. As such, the Company
believes that no reserve for impairment is necessary at this time. The
Company has incurred approximately $56,000 of costs in the process of
protecting its investment, which are included in amortization and other
expenses.
(O) The funding of this mezzanine loan is based on property level operational
achievements.
(P) Interest cap on these loans is the maximum rate permitted by law.
10
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
NOTE 3 - Investments in Debt Securities - Available for Sale
Information relating to debt securities owned by the Company as of September 30,
2003 is as follows:
(Dollars in thousands)
Purchased/ Amortized
Certificate Final Stated Cost at
Name Number Payment Date Interest Rate September 30, 2003
- ---------- ----------- ------------ ------------- ------------------
GNMA Certificates
- -----------------
Western Manor (1) 355540 7/27/94 7.125% $ 2,461
3/15/29
Copper Commons (2) 382486 7/28/94 8.500% --
8/15/29
SunCoast Capital Group, Ltd. (1) G002412 6/23/97 7.000% 285
4/20/27
Elmhurst Village (1) 549391 6/28/01 7.745% 21,615
1/15/42
Reserve at Autumn Creek (3) 448748 6/28/01 7.745% 15,978
1/15/42
Casitas at Montecito (4) 519289 3/11/02 7.300% --
10/15/42
Village at Marshfield (1) 519281 3/11/02 7.475% 21,402
1/15/42
Cantera Crossing (1) 532662 3/28/02 6.500% 6,019
6/1/29
Filmore Park (1) 536739 3/28/02 6.700% 1,434
10/15/42
Northbrooke (1) 548972 5/24/02 7.080% 14,032
8/1/43
Ellington Plaza (1) 585494 7/26/02 6.835% 22,295
6/1/44
Burlington 595515 11/1/02 5.900% 6,838
4/15/31
FNMA DUS Certificates
- ---------------------
Cambridge 385971 4/11/03 5.560% 3,676
3/1/33
Bayforest 381974 4/21/03 7.430% 4,321
10/1/28
Coventry Place 384920 5/9/03 6.480% 793
3/1/32
Rancho de Cieto 385229 5/13/03 6.330% 2,619
9/1/17
Elmwood Gardens 386113 5/15/03 5.350% 5,562
5/1/33
Interest Income
Earned Applicable
Unrealized to the Nine
Gain (Loss) at Balance at Months Ended
Name September 30, 2003 September 30, 2003 September 30, 2003
- ---------- ------------------ ------------------ ------------------
GNMA Certificates
- -----------------
Western Manor (1) $ -- $ 2,461 $ 145
Copper Commons (2) -- -- 17
SunCoast Capital Group, Ltd. (1) 18 303 21
Elmhurst Village (1) 4,053 25,668 1,257
Reserve at Autumn Creek (3) 2,996 18,974 929
Casitas at Montecito (4) -- -- 70
Village at Marshfield (1) 1,906 23,308 1,080
Cantera Crossing (1) 746 6,765 292
Filmore Park (1) 163 1,597 62
Northbrooke (1) 2,013 16,045 661
Ellington Plaza (1) 2,926 25,221 763
Burlington 356 7,194 298
FNMA DUS Certificates
- ---------------------
Cambridge (169) 3,507 92
Bayforest (153) 4,168 114
Coventry Place (48) 745 17
Rancho de Cieto (133) 2,486 48
Elmwood Gardens (302) 5,260 110
11
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
(continued)
Purchased/ Amortized
Certificate Final Stated Cost at
Name Number Payment Date Interest Rate September 30, 2003
- ---------- ----------- ------------ ------------- ------------------
30 West 380751 5/27/03 6.080% 1,370
10/1/16
Jackson Park 386139 5/30/03 5.150% 2,786
6/1/18
Courtwood 386274 6/26/03 4.690% 1,771
6/1/33
Sultana 386259 6/30/03 4.650% 4,118
6/1/23
Buena 386273 6/30/03 4.825% 3,064
6/1/33
Allegro 386324 6/30/03 5.380% 2,582
7/1/33
Village West 386243 6/30/03 4.910% 789
6/1/21
Westwood/Monterey 386421 9/15/03 5.090% 2,728
8/1/33
Euclid 386446 9/15/03 5.310% 2,380
8/1/33
Edgewood 386458 9/15/03 5.370% 2,365
9/1/33
---------------------
Total $ 153,283
=====================
Interest Income
Earned Applicable
Unrealized to the Nine
Gain (Loss) at Balance at Months Ended
Name September 30, 2003 September 30, 2003 September 30, 2003
- ---------- ------------------ ------------------ ------------------
30 West (85) 1,285 22
Jackson Park (118) 2,668 48
Courtwood (205) 1,566 22
Sultana (455) 3,663 48
Buena (396) 2,668 36
Allegro (144) 2,438 35
Village West (81) 708 10
Westwood/Monterey (22) 2,706 7
Euclid (20) 2,360 6
Edgewood (30) 2,335 6
------------------------------------------------------------
Total $ 12,816 $ 166,099 $ 6,216
============================================================
(1) These GNMA and FNMA DUS certificates are partially or wholly-pledged
as collateral for borrowings under the repurchase facility.
(2) This GNMA certificate was repaid in April 2003 at par.
(3) The Company effectively owns 100% of the beneficial interest of Autumn
Creek due to the fact that the Company owns this GNMA certificate as
well as the mezzanine loan (see Note 2). The principal and interest on
this GNMA is 100% recoverable through insurance from HUD and GNMA.
(4) This GNMA certificate was repaid in March 2003 at par. As a result of
the repayment, the Company realized a loss of approximately $391,000
due to the unamortized balance of the premium that was recorded when
the GNMA certificate had been purchased.
12
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
The amortized cost, unrealized gain and fair value for the investment in debt
securities at September 30, 2003 and December 31, 2002 were as follows:
(Dollars in thousands)
September 30, December 31,
2003 2002
------------- ------------
Amortized cost $153,283 $105,331
Net unrealized gain 12,816 8,703
-------- --------
Fair Value $166,099 $114,034
======== ========
As of September 30, 2003, there were gross unrealized gains and losses of
$15,177,148 and $2,361,306, respectively. As of December 31, 2002, there were
gross unrealized gains and losses of $8,730,076 and $27,147, respectively.
13
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
NOTE 4 - Notes Receivable
The Company's notes receivable are collateralized by equity interests in the
owner of the underlying property and consist of the following as of September
30, 2003:
(Dollars in thousands)
Remaining
Outstanding Committed
Principal Unamortized Carrying Balance to Interest
Property Location Balance Costs and Fees Amount Fund (1) Rate Maturity
- ------------------------------------------------------------------------------------------------------------------------------------
Parwood (2) Long Beach, CA $ 2,683 $ 7 $ 2,676 $ 567 11.00% January 2004
Concord at Gulfgate (3) Houston, TX 3,500 21 3,479 -- 12.00% May 2004
Noble Towers (2)(4) Oakland, CA 3,581 35 3,546 3,719 9.75% July 2005
Clarks Crossing (2) Laredo, TX 1,150 -- 1,150 -- 12.00% December 2003
Desert View (2) Coolidge, AZ 20 -- 20 -- 11.00% May 2004
Valley View (2) North Little Rock, AR 400 -- 400 -- 12.00% December 2003
Del Mar Villas (5) Dallas, TX 5,554 17 5,537 -- LIBOR + 4.625%(7) April 2004
Mountain Valley (5) Dallas, TX 6,023 40 5,983 284(6) LIBOR + 4.750%(7) November 2004
Baywoods (5) Antioch, CA 10,990 49 10,941 -- LIBOR + 4.000%(7) March 2005
Oaks of Baytown (5) Baytown, TX 2,216 18 2,198 1,610 LIBOR + 4.500%(7) August 2005
Quay Point (5) Houston, TX 1,223 6 1,217 -- LIBOR + 3.600%(7) August 2005
--------------------------------------------------
Total $ 37,340 $ 193 $37,147 $ 6,180
==================================================
(1) Funded on an as needed basis.
(2) These loans are to limited partnerships who are affiliated with the Advisor
(see Note 8).
(3) This note is in default (see below).
(4) Affiliate of the Advisor has provided a full guarantee on the payment of
principal and interest due on this note.
(5) Pledged as collateral in connection with warehouse facility with Fleet
National Bank (see Note 7).
(6) To be funded for rehabilitation.
(7) LIBOR at September 30, 2003 was 1.12%.
14
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
The property underlying the note receivable secured by the Concord at Gulfgate
partnership interests missed required debt service payments beginning with the
May 2003 payment, causing the note to be in default. The Company has stopped
accruing income on the note receivable and is taking the steps necessary to
protect its investment. The Company obtained an independent appraisal which
indicates that the value of the property exceeds the value of the first mortgage
outstanding on the property not owned by the Company, and the Company's note
receivable outstanding. The appraisal assumed that the property will be sold to
a qualifying 501(c)(3) entity which would qualify for full real estate tax
abatement in Texas, which is consistent with the original underwriting completed
by the Company at the time the loan was originated. The appraisal also assessed
the value of the property if the real estate tax abatement is not received. If
this occurs, the value of the property could be substantially less than the
Company's current assessment. The Company believes that it is probable that the
property will qualify for the tax abatement and, accordingly, has not recorded
an allowance for losses on the impaired loan.
NOTE 5 - Real Estate Owned
On March 7, 2003, the Company exercised its rights under the subordinated
promissory note and other documents to take possession of the real estate
collateral of the Plaza at San Jacinto, a 132-unit multifamily property located
in La Porte, Texas. The Company had provided a $1.2 million mezzanine loan to
the owner of the Plaza at San Jacinto on May 24, 2001; this loan was in default.
The Company paid an additional approximate amount of $6.7 million to purchase
the first mortgage loan on the property. On May 6, 2003, the Company acquired
the real estate at a foreclosure auction, which has enabled the Company to
secure and protect the real estate and cash collateral. Based on a recent
independent appraisal, the Company believes that the value of the collateral,
less estimated disposal costs, exceeds the amount paid for the first mortgage
loan and the carrying amount of the mezzanine loan. However, there can be no
assurance that the Company will be able to sell this property for an amount
greater than or equal to its appraised value. The Company has reclassified its
investment in the Plaza at San Jacinto mezzanine loan, as well as the balance of
the first mortgage, purchased during the first quarter, to real estate owned on
the consolidated balance sheet and ceased accrual of interest. Income from
operations of the property, in the approximate amount of $127,000, is recorded
as other income on the consolidated statement of income. The property is held
for sale and is not being depreciated. The Company also incurred approximately
$87,000 of costs to effect this troubled debt restructuring for the nine months
ended September 30, 2003, which are included in amortization and other expenses.
During October 2003, the Company has been actively negotiating the sale of this
property with a potential buyer. No contract has been entered into to date and
no assurance can be given by the Company that a contract will be entered into
with this particular buyer.
The property underlying the note receivable secured by the Concord at Little
York partnership interests missed required debt service payments beginning with
the May 2003 payment, causing the note to be in default. The Company stopped
accruing interest on the note receivable. During July 2003, the Company
exercised its rights under the subordinated promissory note and other documents
to take possession of the real estate collateral of the Concord at Little York
property. The Company had provided a $3.5 million mezzanine loan to the owner of
the property in February 2002. The Company paid an additional approximate amount
of $11.7 million to purchase the first mortgage loan on the property. On August
4, 2003, the Company acquired the real estate of the property at a foreclosure
auction, which has enabled the Company to secure and protect the real estate and
cash collateral. Based on a recent independent appraisal, the Company believes
that the value of the collateral less estimated disposal costs, exceeds the
amount paid for the first mortgage loan and the carrying amount of the mezzanine
loan. The appraisal assumed that the property will be sold to a qualifying
501(c)(3) entity which would qualify for a full real estate abatement in Texas,
which is consistent with the original underwriting completed by the Company at
the time the loan was originated. Subsequent to September 30, 2003, the Company
sold the property to a qualified 501(c)(3) entity (see Note 13) and accordingly,
has not recorded an allowance for losses on the impaired loan. The Company has
15
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
reclassified its investment in Concord at Little York loan, as well as the
balance of the first mortgage acquired, to real estate owned on the consolidated
balance sheet. Losses from operations of the property in the approximate amount
of $12,600 are recorded in other income on the consolidated statement of income.
The property underlying the note receivable secured by the Concord at Gessner
partnership interests missed required debt service payments beginning with the
May 2003 payment, causing the note to be in default. The Company stopped
accruing interest on the note receivable. During July 2003, the Company
exercised its rights under the subordinated promissory note and other documents
to take possession of the real estate collateral of the Concord at Gessner
property. The Company had provided a $1.5 million mezzanine loan to the owner of
the property in March 2003. The Company paid an additional approximate amount of
$14.2 million to purchase the first mortgage loan on the property. On August 4,
2003, the Company acquired the real estate of the property at a foreclosure
auction, which has enabled the Company to secure and protect the real estate and
cash collateral. Based on a recent independent appraisal, the Company believes
that the value of the collateral less estimated disposal costs, exceeds the
amount paid for the first mortgage loan and the carrying amount of the mezzanine
loan. The appraisal assumed that the property, upon completion of construction,
will be sold to a qualifying 501(c)(3) entity which would qualify for a full
real estate abatement in Texas, which is consistent with the original
underwriting completed by the Company at the time the loan was originated.
Subsequent to September 30, 2003, the Company sold the property to a qualified
501(c)(3) entity (see Note 13) and accordingly, has not recorded an allowance
for losses on the impaired loan. The Company has reclassified its investment in
Concord at Gessner mezzanine loan, as well as the balance of the first mortgage
acquired, to real estate owned on the consolidated balance sheet. Losses from
operations of the property in the approximate amount of $2,000 are recorded in
other income on the consolidated statement of income. The Company is funding
additional costs to complete the construction of the property. These costs,
estimated to be approximately $1.6 million, of which $415,000 has been funded
through September 30, 2003, are being capitalized to real estate owned.
NOTE 6 - Repurchase Facility
The Company has a repurchase facility with Nomura Securities International Inc.
(the "Nomura Securities Repurchase Facility"), which enables the Company to
borrow up to 97% of the fair market value of GNMA and FNMA DUS Certificates
owned by the Company. Interest on borrowings are at 30-day LIBOR plus 0.02%. As
of September 30, 2003 and December 31, 2002, the amounts outstanding under this
facility were $140.7 and $87.9 million, respectively, and weighted average
interest rates were 1.64% and 1.47%, respectively. Deferred costs relating to
the Nomura Securities Repurchase Facility have been fully amortized. All amounts
outstanding at September 30, 2003, had 30-day settlement terms.
NOTE 7- Warehouse Facility
In October 2002, the Company entered into a mortgage warehouse line of credit
with Fleet National Bank (the "Fleet Warehouse Facility") in the amount of up to
$40 million. Under the terms of the Fleet Warehouse Facility, Fleet will advance
up to 83% of the total loan package, to be used to fund notes receivable, which
the Company will make to its customers for the acquisition/refinancing and minor
renovation of existing, lender-approved multifamily properties. This facility,
which matures April 2006, bears interest at a rate of 30, 60, 90 or 180-day
LIBOR + 200 basis points, at the discretion of the Company, payable monthly on
the total amounts advanced. Principal is due upon the earlier of refinance or
sale of the underlying project or upon maturity. The Company pays a fee of 12.5
basis points, paid quarterly, on any unused portion of the facility. As of
September 30, 2003 and December 31, 2002, the Company had approximately $20.5
and $8.8 million, respectively, in borrowings outstanding under this program.
16
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
NOTE 8 - Related Party Transactions
The costs incurred to related parties for the three and nine months ended
September 30, 2003 and 2002 were as follows, all of which are paid or payable to
the Advisor:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2003 2002 2003 2002
---------------------- ---------------------
Expense reimbursement $ 275 $ 110 $ 598 $ 428
Asset management fees 266 208 769 618
Incentive fee* (73) -- -- --
--------- --------- --------- ---------
$ 468 $ 318 $ 1,367 $ 1,046
========= ========= ========= =========
* During September 2003, the Company and its Advisor have agreed to amend its
management agreement regarding the payment of an incentive management fee to
the Advisor. Under the terms of the amended agreement, there is no change to
the calculation of the incentive management fee. However, the incentive
management fee is only earned by the Advisor if the Company attains $1.60 in
GAAP earnings per share for the calendar year. Based on the amendment to the
agreement and the Company's current projection for 2003 earnings per share,
the Company believes it will not incur an incentive management fee in 2003.
The Company had accrued an incentive management fee of $73,000 during the
first and second quarters of 2003, which is being reversed in the third
quarter.
Some of the Company's notes receivable (see Note 4), the guarantee on Creekside
Apartments and standby bridge loan commitments described in Note 11 are to
limited partnerships in which the general partner is an unaffiliated third party
and the limited partner is itself a limited partnership in which an affiliate of
Related is the general partner.
The Noble Towers notes receivable is guaranteed by an affiliate of the Advisor
(see Note 4).
In December 2002, Charter Municipal Mortgage Acceptance Company ("CharterMac"),
an affiliate of the Advisor, announced a proposed acquisition of Related, which
would include the Advisor. The Company believes that this acquisition will not
affect the Company's day-to-day operations. If the proposed transaction is
consummated, ownership of the Advisor will be transferred to CharterMac, but
management of the Advisor will remain unchanged as the principals of Related who
currently manage the Advisor will become executive officers of CharterMac and
will remain executive officers of the Advisor. Due to the provision in the
Company's trust agreement which requires the Company to have a majority of
"independent" trustees, it is expected that two of the Company's independent
trustees who serve on the boards of both CharterMac and the Company will no
longer qualify as "independent" trustees if they remain on the board of
CharterMac following consummation of the proposed transaction. In such event, it
is expected that such trustees will be required to be replaced, within 60 days
following consummation of the proposed transaction, with two new independent
trustees. CharterMac has filed a definitive proxy with the SEC and is holding a
shareholders meeting on November 17, 2003 to vote on the proposed acquisition.
NOTE 9 - Capital Stock and Share Option Plan
On April 23, 2003, the Company completed a public offering of 1,955,000 common
shares at a price of $15.00 per share, resulting in proceeds, net of
underwriters' discount and expenses, of approximately $27.5 million. In
connection with this offering and pursuant to the Trust Agreement, the Company
issued 19,550 shares to the Advisor.
The Company applies the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" for its share options issued to non-employees. Accordingly,
17
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
compensation cost is accrued based on the estimated fair value of the options
issued, and amortized over the vesting period. Because vesting of the options is
contingent upon the recipient continuing to provide services to the Company
until the vesting date, the Company estimates the fair value of the non-employee
options at each period-end up to the vesting date, and adjusts expensed amounts
accordingly. The fair value of each option grant is estimated using the
Black-Scholes option-pricing model.
In April 2003, in accordance with the Incentive Share Option Plan, the Company's
Compensation Committee granted 190,000 options to employees of Related at an
exercise price of $15.03, which was the market price of the Company's common
shares at the grant date. These options vest equally, in thirds, in April 2004,
2005 and 2006 and expire in 10 years. These options were dilutive for the three
and nine months ended September 30, 2003, and were taken into account in the
calculation of diluted earnings per share. At September 30, 2003, these options
had a fair value of $66,500 based on the Black-Scholes pricing model, using the
following assumptions: dividend yield of 9.67%, estimated volatility of 16%,
risk free interest rate of 3.76% and expected lives of 9.50 years. The Company
recorded compensation cost of $19,150, reflected in general and administrative
expenses for the nine months ended September 30, 2003, relating to these
options.
In August 2003, the Company's Board of Trustees approved a share repurchase plan
for the Company. The plan enables the Company to repurchase, from time to time,
up to 1,000,000 common shares. The repurchases will be made in the open market,
and the timing will be dependent on the availability of shares and other market
conditions. No repurchases have been made at September 30, 2003.
NOTE 10 - Earnings Per Share
Basic net income per share in the amount of $.33 and $.41 and $1.12 and $1.22
for the three and nine months ended September 30, 2003 and 2002, respectively,
equals net income for the periods ($2,776,231 and $2,587,524 and $8,541,505 and
$7,184,958, respectively), divided by the basic weighted average number of
shares outstanding, which were 8,338,180 and 6,363,630 and 7,622,590 and
5,901,176, respectively.
Diluted net income per share is calculated using the weighted average number of
shares outstanding during the period plus the additional dilutive effect of
common share equivalents. The dilutive effect of outstanding share options is
calculated using the treasury stock method.
Diluted net income per share in the amount of $.33 and $.41 and $1.12 and $1.22
for the three and nine months ended September 30, 2003 and 2002, respectively,
equals net income for the periods ($2,776,231 and $2,587,524 and $8,541,505 and
$7,184,958, respectively) divided by the diluted weighted average number of
shares outstanding, which were 8,346,866 and 6,363,630 and 7,633,997 and
5,901,176, respectively.
NOTE 11 - Commitments and Contingencies
The Company completed a loan program with Fannie Mae, which agreed to fully fund
the origination of $250 million of Delegated Underwriter and Servicer loans
("DUS") for apartment properties that qualify for low income housing tax credits
("LIHTC") under Section 42 of the Internal Revenue Code. Under this loan
program, the Company would originate and contract for individual loans of up to
$6 million each. The Company would guarantee a first loss position of the
aggregate principal amount of these loans and also guarantee construction loans
for which it had issued a forward commitment to originate under this program.
Subsequent to creating this program, the level of loan origination competition
increased, reducing the program's projected financing value and profitability.
As a result, the Company decided in the first quarter of 2002 to discontinue
this program. Accordingly, the Company wrote off approximately $358,000 of
18
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
unamortized deferred costs relating to this program, which is included in Fannie
Mae loan program expenses on the consolidated statement of income.
In September 2003, the Company entered into a letter of agreement with PW
Funding Inc. ("PWF"), a subsidiary of CharterMac, each of which are affiliates
of the Advisor, under which the Company transferred and assigned all of its
rights and obligations to the two loans it originated under this program to PWF.
In turn, the Company indemnified PWF against any losses to Fannie Mae on the
loans. CharterMac has agreed to guarantee PWF's performance with regard to this
program, which in turn, allowed for the release of approximately $8.3 million in
collateral pledged by the Company to secure its obligations under the loan
program. This agreement closed in October 2003.
19
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
Standby and Forward Loan and GNMA Commitments
- ---------------------------------------------
The Company has issued the following standby and forward bridge and permanent
loan commitments for the purpose of constructing/rehabilitating certain
multifamily apartment complexes in various locations.
(Dollars in thousands)
Standby and
Forward Bridge loan Commitments
- ---------------------------------------
Maximum Amount of Commitments
---------------------------------------------------
Issue Date Project Location No. of Apt. Units Less than 1 Year 1 - 3 Years
- ----------------------------------------------------------------------------------------------------------------------------
Jan-02 Parwood Long Beach, CA 528 $ 567 (1) $ --
Nov-02 Mountain Valley Dallas, TX 312 284 (2) --
Feb-03 Noble Towers Oakland, CA 195 -- 3,719 (3)
------------------------------------------------------------------------
Total Standby and Forward Bridge Loan Commitments 1,035 $ 851 $ 3,719
========================================================================
Standby and Forward Permanent Loan Com-
mitments
----------------------------------------
Maximum Amount of Commitments
---------------------------------------------------
Issue Date Project Location No. of Apt. Units Less than 1 Year 1 - 3 Years
- ----------------------------------------------------------------------------------------------------------------------------
May-02 Highland Park Topeka, KS 200 $ 4,250 (4)(5)(6) --
------------------------------------------------------------------------
Total Standby and Forward Permanent Loan Commitments 200 $ 4,250 --
========================================================================
Standby and Forward Mezzanine Loan Com-
mitments
----------------------------------------
Maximum Amount of Commitments
---------------------------------------------------
Issue Date Project Location No. of Apt. Units Less than 1 Year 1 - 3 Years
- ----------------------------------------------------------------------------------------------------------------------------
April-03 Villas at Highpoint Lewisville, TX 304 $ 117 (2) $ --
April-03 Villas at Highpoint Lewisville, TX -- -- 693 (7)
------------------------------------------------------------------------
Total Standby and Forward Mezzanine Loan Commitments 304 $ 117 $ 693
========================================================================
20
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
Forward GNMA Commitments
--------------------------------
Maximum Amount of Commitments
-----------------------------------------------------------
Date Purchased Project Location Less than 1 Year 1 - 3 Years
- ------------------------------------------------------------------------------------------------------------------------------------
Mar-02 Cantera Crossing Dallas, TX $ 173 (2) $ --
Mar-02 Fillmore Park New Orleans, LA 6 (2) --
May-02 Ellington Plaza Washington, DC 15,380 (2) --
-----------------------------------------------------------
Total Forward GNMA Commitments $15,559 --
-----------------------------------------------------------
Total Standby and Forward Loan and GNMA Commitments $20,777 $ 4,412
===========================================================
(1) Funding has already begun. Remaining amount of commitment is not expected
to be funded.
(2) Funding has already begun. Amount represents remaining commitment expected
to be funded.
(3) Fundings will be on an as needed basis to complete rehabilitation of the
property.
(4) Funding not anticipated to occur.
(5) The Company received a loan commitment fee of 2.0% for issuing the
commitment.
(6) The Company will receive a 1% loan origination fee if funding occurs.
(7) Funding expected to occur after construction completion.
21
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
Construction Loan Guarantees
- ----------------------------
During 2002, the Company guaranteed the following loans in relation to the
construction of affordable multifamily apartment complexes in various locations.
The construction loan guarantees will provide credit support for the properties
after construction completion, up until the date in which permanent financing
takes place.
During October 2002, the Company entered into an agreement with Wachovia Bank,
National Association ("Wachovia") to provide stabilization guarantees for new
construction of multifamily properties under the LIHTC program. Wachovia already
provides construction and stabilization guarantees to Fannie Mae, for loans
Wachovia originates under the Fannie Mae LIHTC forward commitment loan program,
but only for loans within regions of the country Wachovia has designated to be
within its territory. For loans outside Wachovia's territory, the Company has
agreed to issue a stabilization guarantee, for the benefit of Wachovia. The
Company is guarantying that properties which have completed construction will
stabilize and the associated construction loans will convert to permanent Fannie
Mae loans. The Company receives origination and guarantee fees from the
developers for providing the guarantees. If the properties do not stabilize with
enough net operating income for Fannie Mae to fully fund its commitment for a
permanent loan, AMAC may be required to purchase the construction loan from
Wachovia or to fund the difference between the construction loan amount and the
reduced Fannie Mae permanent loan amount.
(Dollars in thousands)
Maximum Amount of
Guarantee
Loan Administra- Construction
Less than 1 tion fee(1) Guarantee
Date Closed PROJECT Location No. of Units Year 1-3 Years (annual percentage) Fee (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Jul-02 Clark's Crossing Laredo, TX 160 $ 4,790 $ -- 0.500% 0.625%
Sept-02 Creekside Apts. Colorado Springs, CO 144 7,500 -- 0.375% --
Oct-02 Village at Meadowbend (3) Temple, TX 138 -- 3,675 0.500% 0.750%
Nov-02 Mapleview Apartments (3) Saginaw, MI 104 -- 3,240 0.625% 0.247%
---------------------------------------------------------------------
Total Construction Loan Guarantees 546 $12,290 $ 6,915
=====================================================================
(1) Loan Administration Fee is paid on a monthly basis during the guarantee
period.
(2) Construction Guarantee Fee is an up-front fee - paid at closing and
amortized over the guarantee period.
(3) Guarantee was made under Wachovia Bank, National Association Guarantee
Agreement.
For each of these guarantees, and for the guarantees issued under the Fannie Mae
program discussed in the first paragraph of this Note 11, the Company monitors
the status of the underlying properties and evaluates its exposure under the
guarantees. To date, the Company has concluded that no accrual for probable
losses is required under SFAS 5.
22
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
NOTE 12 - Financial Risk Management and Derivatives
On March 25, 2003, the Company entered into a five-year interest rate swap in
order to reduce the Company's exposure to any possible increases in the floating
interest rate on its Nomura Securities Repurchase Facility (Note 6). Under the
interest rate swap agreement, the Company is required to pay Fleet National Bank
(the "Counterparty") a fixed rate of 3.48% on a notional amount of $30 million.
In return, the Counterparty will pay the Company a floating rate equivalent to
30-day LIBOR. The average 30-day LIBOR rate for the three and nine months ended
September 30, 2003, was 1.11% and 1.23%, respectively.
A possible risk of such swap agreements is the possible inability of the
Counterparty to meet the terms of the contracts with the Company; however, there
is no current indication of such an inability.
The Company accounts for this swap under Statement of Financial Accounting
Standards No. 133, as amended and interpreted. Accordingly, the Company has
documented its established policy for risk management and its objectives and
strategies for the use of derivative instruments to potentially mitigate such
risks. At inception, the Company designated the interest rate swap as a cash
flow hedge on the variable interest payments on its floating rate financing.
Accordingly, the interest rate swap is recorded at its fair market value each
accounting period, with changes in the market value being recorded in other
comprehensive income to the extent that the hedge is effective in achieving
offsetting cash flows. The Company assesses, both at the inception of the hedge
and on an ongoing basis, whether the swap agreement is highly effective in
offsetting changes in the cash flows of the hedged financing. Any
ineffectiveness in the hedging relationship would be recorded in earnings. The
Company's assessment is that this swap has been and will continue to be highly
effective.
At September 30, 2003, this interest rate swap was recorded as a liability with
a fair market value of approximately $697,884 included in interest rate
derivatives on the consolidated balance sheet.
NOTE 13 - Subsequent Events
During October 2003, the Company dissolved AMAC/FM Corporation due to the
assignment of all rights and obligations under the Fannie Mae loan program to PW
Funding (see Note 11). The dissolution of this subsidiary did not impact the
Company's consolidated financial statements.
On October 10, 2003, the Company purchased nine taxable revenue bonds at a
discount (99% of par) from CharterMac in the amount of $7.6 million. The nine
taxable revenue bonds, each of which is secured by a first mortgage position,
held by CharterMac, on a multifamily property, carry a weighted average interest
rate of 8.69%. The price paid was determined by an independent third party
valuation of the taxable revenue bonds. This transaction was approved by the
Company's Board of Trustees.
On October 15, 2003, the Company's Board of Trustees approved and the Company
funded a bridge loan of approximately $1.3 million to Related Capital Guaranteed
Corporate Partners II, L.P., an affiliate of the Advisor. The Company received a
fee of $10,000, which is equivalent to a yield of approximately 18%. The loan
was repaid on October 31, 2003.
During October 2003, the Company exercised its rights under the subordinated
promissory note and other documents to take possession of the real estate
collateral of the Autumn Creek property, subject to the first mortgage loan,
which is not owned by the Company.
On October 27, 2003, the Company sold the Concord at Gessner and Concord at
Little York properties to a qualified 501(c)(3) entity, which qualifies for a
real estate tax abatement. In order to expedite the closings and ensure the
23
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
501(c)(3) entity would receive the real estate tax abatement prior to January 1,
2004, the Company is providing 100% financing to the 501(c)(3) entity via bridge
loans on each property, which mature in April 2005, to the 501(c)(3) entity. The
501(c)(3) entity will pay the Company 100% of each properties' cash flow until
the properties are fully leased, stabilized, and permanent financing is in
place. There will be no accrued interest. If there is a gap between the
permanent mortgage amount and the bridge loan, The Company will provide
mezzanine financing at an interest rate at the greater of 8% or an amount to
equal to 75% of cash flows, net of first mortgage debt service payments.
Shortfalls below the 8% expected interest rate will be accrued and payable to
the Company. Any payments in excess of the 8% expected interest rate will reduce
any accrued interest balances, or, if none exist, principal on the mezzanine
loan.
During November 2003, the Company exercised its rights under the subordinated
promissory note and other documents to take possession of the real estate
collateral supporting the Concord at Gulfgate loan, subject to a defaulted first
mortgage loan, which is not owned by the Company. The Company is in active
negotiations with first mortgagee to work out the default issues. During the
foreclosure process, the Company has been named in a lawsuit filed by the
limited partners of the partnership that owned the property. The Company is
currently attempting to resolve this issue. The Company is currently unable to
determine the possible outcome of the litigation.
On November 3, 2003, the Company partially funded a $1.5 million bridge loan to
GKV Preservation Partnership, L.P., an affiliate of the Advisor. The Company's
initial funding was approximately $369,000. The loan, which matures in May 2004,
bears interest at a rate of 11.5%. The Company received a bridge loan
origination fee of $37,500.
During November 2003, a distribution of $3,335,272, ($0.40 per share) which was
declared in September 2003, will be paid to shareholders for the quarter ended
September 30, 2003.
24
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
- ---------------------
Interest income from debt securities increased approximately $816,000 and
$2,214,000 for the three and nine months ended September 30, 2003 as compared to
2002 primarily due to the purchase of an additional three GNMA certificates in
the latter part of 2002 and the purchase of fifteen FNMA DUS certificates during
2003 at an average interest rate yield of 5.49%.
Interest income from mortgage loans decreased approximately $118,000 for the
three months ended September 30, 2003 as compared to 2002 primarily due to the
repayment of the Stonybrook II first mortgage and mezzanine loans in January
2003 and the default of required debt service payments from The Reserve at
Autumn Creek. Interest income from mortgage loans increased approximately
$635,000 for the nine months ended September 30, 2003 as compared to 2002
primarily due to the additional interest and prepayment penalties received, as
well as the recognition of deferred loan origination fees, from the repayment of
the Stonybrook II first mortgage and mezzanine loans.
Interest income from notes receivable increased approximately $173,000 and
$855,000 for the three and nine months ended September 30, 2003 as compared to
2002 due to the initial funding of six notes receivable during 2003, partially
offset by the default of required debt service payments from the Concord at
Gessner, Concord at Little York, and Concord at Gulfgate notes.
Interest expense increased approximately $403,000 and $873,000 for the three and
nine months ended September 30, 2003 as compared to 2002 due to the increased
borrowings on the new warehouse facility and additional borrowings under the
repurchase facility, as well as the addition of an interest rate swap agreement,
put into place in March 2003 to mitigate the impact of interest rate
fluctuations on the Company's cash flows and earnings.
Fees to Advisor increased approximately $150,000 and $321,000 for the three and
nine months ended September 30, 2003 as compared to 2002 primarily due to an
increase in asset management fees payable to the Advisor due to an increase in
the assets and an increase in the overhead reimbursement paid by the Company to
the Advisor.
Amortization and other expenses increased approximately $121,000 and $321,000
for the three and nine months ended September 30, 2003 as compared to 2002 due
to costs incurred in the Plaza at San Jacinto debt restructuring, costs incurred
to protect The Reserve at Autumn Creek investment, and the amortization of
deferred costs on the Fleet Warehouse Facility.
During the nine months ended September 30, 2002, the Company recognized
approximately $358,000 in FNMA loan program expenses associated with the
write-off of the unamortized deferred costs related to the Fannie Mae loan
program.
A loss on the repayment of debt securities in the amount of approximately
$391,000 was recorded for the nine months ended September 30, 2003, relating to
the write-off of a purchase premium due to the repayment of one GNMA
certificate. During 2002, the Company had a gain of approximately $614,000,
resulting from the sale of one GNMA certificate.
Liquidity and Capital Resources
- -------------------------------
As of September 30, 2003, the Company's mortgage investments consisted of three
mortgage loans and eight mezzanine loans originated by or on behalf of the
Company, twenty-five GNMA and FNMA DUS mortgage-backed securities and
pass-through certificates, eleven bridge loans and a preferred equity investment
in ARCap Investors, L.L.C. ("ARCap").
During 2003, the Company has had five notes receivable on which required debt
service payments were not received, causing the notes to be in monetary default.
In four of these instances, the Company has foreclosed on the property securing
the note receivable and taken possession of the property and in one instance the
Company is monitoring the situation and evaluating its alternatives for
protecting its investment. The Company goes through an extensive underwriting
25
process prior to making its investments, and the Company believes that these
recent events of monetary default are part of the risks and nature of making
certain types of mezzanine investments. While the Company is working to preserve
its invested capital, the defaults have had a negative impact on the Company's
cash flows in the short-term, as required interest payments on the notes have
not been received, and the liquidity of the Company's investments have been
reduced. In addition, the Company is committed to fund approximately $1.6
million to complete construction on one of the properties. Through recent
independent appraisals on each of the properties, the Company believes that it
will be able to liquidate each of the properties at amounts greater than that of
their carrying amounts less estimated costs of disposal. Subsequent to September
30, 2003, the Company has disposed of two of these properties (see Note 13). The
Company is actively marketing the other properties on which it has foreclosed
and expects the sales to occur in the near term, although there can be no
assurance that such sales will occur or that the Company will be able to realize
the appraised value upon sale.
During the nine months ended September 30, 2003, cash and cash equivalents
decreased approximately $610,000 primarily due to funding of notes receivable of
approximately $20,230,000, fundings of mortgage loans of approximately
$3,774,000, investments in debt securities of approximately $56,873,000,
purchases of first mortgage loans of approximately $33,517,000, and repayments
of repurchase facility payable of approximately $44,433,000, partially offset by
principal payments of mortgage loans of approximately $9,463,000, proceeds from
warehouse facility payable of approximately $11,741,000, proceeds from the
issuance of common shares of approximately $27,456,000, proceeds from the
repurchase facility payable of approximately $97,260,000, principal repayments
of debt securities of approximately $8,396,000 and a repayment of a note
receivable of approximately $4,057,000.
The Company finances the acquisition of its assets primarily through borrowing
at short-term rates using demand repurchase agreements and the mortgage
warehouse line of credit (see below). Under the Company's declaration of trust,
the Company may incur permanent indebtedness of up to 50% of total market value
calculated at the time the debt is incurred. Permanent indebtedness and working
capital indebtedness may not exceed 100% of the Company's total market value.
On April 23, 2003, the Company completed a public offering of 1,955,000 common
shares, at a price of $15.00 per share, resulting in proceeds, net of
underwriters discount and expenses, of approximately $27.5 million. The net
proceeds from the public offering have been used to fund investment activity.
The Company has the capacity to raise an additional approximate amount of $170
million in either common or preferred shares remaining under a shelf
registration statement filed with the Securities and Exchange Commission during
2002. If market conditions warrant, the Company may seek to raise additional
funds up to this amount for investment through further common and/or preferred
offerings in the future, although the timing and amount of such offerings cannot
be determined at this time.
Effective February 15, 2000, the Company entered into a repurchase facility with
Nomura Securities International Inc. This facility enables the Company to borrow
up to 97% of the fair market value of GNMA and FNMA DUS certificates owned by
the Company, which are pledged as collateral for the borrowings. Interest on
borrowings on GNMA and FNMA DUS certificates are at 30-day LIBOR plus 0.02%. As
of September 30, 2003 and December 31, 2002, the amount outstanding under this
facility was approximately $140.7 and $87.9 million, respectively, and weighted
average interest rates were 1.64% and 1.47%, respectively. All borrowings under
this facility typically have 30-day settlement terms. However, the Company has
the option to shorten or extend the length of the settlement terms at its
discretion. The Company has not experienced any problems when renewing its
borrowing and management believes it will be able to continue to renew its
borrowings when due. If the Company were unable to renew such borrowings with
Nomura, it would have to either find replacement financing or sell assets at
prices which may be below market value.
In October 2002, the Company entered into the Fleet Warehouse Facility with
Fleet National Bank in the amount of $40 million. Advances under the warehouse
facility, up to 83% of the total loan package, will be used to fund notes
26
receivable, which the Company will make to its customers for the
acquisition/refinancing and minor renovation of existing, lender-approved
multifamily properties located in stable sub-markets. The warehouse facility,
which matures April 2006, bears interest at a rate of 30, 60, 90 or 180-day
LIBOR + 200 basis points, at the discretion of the Company, payable monthly on
advances. Principal is due upon the earlier of refinance or sale of the
underlying property or upon maturity. The Company pays a fee of 12.5 basis
points, paid quarterly, on any unused portion of the facility. As of September
30, 2003 and December 31, 2002, the Company had approximately $20.5 million and
$8.8 million, respectively, in loans outstanding under this program.
In order to qualify as a REIT under the Code, as amended, the Company must,
among other things, distribute at least 90% of its taxable income. The Company
believes that it is in compliance with the REIT-related provisions of the Code.
The Company expects that cash generated from the Company's investments, as well
as cash generated from additional borrowings from the Nomura Securities
Repurchase Facility and Fleet Warehouse Facility, will meet its needs for
short-term liquidity, and will be sufficient to pay all of the Company's
expenses and to make distributions to its shareholders in amounts sufficient to
retain the Company's REIT status in the foreseeable future.
Under the Company's now discontinued loan program with Fannie Mae, Fannie Mae
agreed to fully fund the origination of $250 million of DUS loans for apartment
properties that qualify for LIHTCs under Section 42 of the Internal Revenue
Code. Under this loan program, the Company would originate and contract for
individual loans of up to $6 million each. The Company would guarantee a first
loss position of the aggregate principal amount of these loans and also
guarantee construction loans for which it had issued a forward commitment to
originate under this program.
Subsequent to creating this program, the level of loan origination competition
increased, reducing the program's projected financing value and profitability.
As a result, the Company decided in the first quarter of 2002 to discontinue
this program. Accordingly, the Company wrote off approximately $358,000 of
unamortized deferred costs relating to this program, which is included in Fannie
Mae loan program expenses on the consolidated statement of income.
In September 2003, the Company entered into a letter of agreement with PW
Funding Inc. ("PWF"), a subsidiary of CharterMac, each of which are affiliates
of the Advisor, under which the Company transferred and assigned all of its
rights and obligations to the two loans it originated under this program to PWF.
In turn, the Company indemnified PWF against any losses to Fannie Mae on the
loans. CharterMac has agreed to guarantee PWF's performance with regard to this
program, which in turn, allowed for the release of approximately $8.3 million in
collateral pledged by the Company to secure its obligations under the loan
program. This agreement was closed in October 2003.
During February 2003, the Company received approximately $10 million in proceeds
relating to the repayment of the Stony Brook II first mortgage and mezzanine
loans, of which, $8.3 million was being held as collateral for the Company's
contingent liabilities under guarantees issued in the Fannie Mae DUS program.
During September 2003, the $8.3 million was released back to the Company upon
the assignment of all rights and obligations under this program to PW Funding.
In November 2003, a distribution of $3,335,272 ($.40 per share), which was
declared in September 2003, will be paid to the shareholders for the quarter
ended September 30, 2003.
For a summary of the Company's commitments and contingencies at September 30,
2003, see Note 11 to the consolidated financial statements.
Management is not aware of any trends or events, commitments or uncertainties,
which have not otherwise been disclosed that will or are likely to impact
liquidity in a material way.
27
Distributions
- -------------
Of the total distributions of $9,215,996 and $7,079,540 for the nine months
ended September 30, 2003 and 2002, respectively, $674,491 ($.09 per share or
7.32 %) represented a return of capital determined in accordance with generally
accepted accounting principles for the nine months ended September 30, 2003.
There was no return of capital for the nine months ended September 30, 2002. As
of September 30, 2003, the aggregate amount of the distributions made since the
commencement of the initial public offering representing a return of capital, in
accordance with generally accepted accounting principles, totaled $15,145,386.
The portion of the distributions which constituted a return of capital was
significant during the initial acquisition stage in order to maintain level
distributions to shareholders.
Critical Accounting Policies
- ----------------------------
The Company's critical accounting policies are described in its Form 10-K for
the year ended December 31, 2002. These critical accounting policies have not
changed during 2003, but the Company has entered into several transactions which
involve new critical accounting policies as described in the following three
paragraphs.
During 2003, the Company entered into a five-year interest rate swap, which is
accounted for under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Standards No. 133". At the inception, the Company designated this
interest rate swap as a cash flow hedge on the variable interest payments in its
floating rate financing. Accordingly, the interest rate swap is recorded at fair
market value each accounting period, with changes in market value being recorded
in other comprehensive income to the extent the hedge is effective in achieving
offsetting cash flows. This hedge has been highly effective, so there has been
no ineffectiveness included in earnings. Net amounts receivable or payable under
the swap agreements are recorded as adjustments to interest expense. The
determination of fair value of the swap is based on third party valuation.
During 2003, the Company exercised its rights under subordinated promissory
notes and other documents to take possession of certain real estate collateral.
The Company has also purchased the first mortgage loans on the properties and
acquired the real estate at foreclosure auctions. When a loan is in the process
of foreclosure, it is the Company's policy to reclassify the balance of the loan
into real estate owned at the lower of fair value of the real estate, less
estimated disposal costs or the carrying amount of the loan, and to cease
accrual of interest. When the foreclosure process is complete and the property
is owned by the Company, income or loss from operations of the property is
picked up on the Company's income statement and any payments made to the Company
reduces the Company's investment in the property. The determination of fair
value of the real estate is based on independent appraisals.
During 2003, in accordance with the Incentive Share Option Plan, the Company's
Compensation Committee granted 190,000 options. The Company applies the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" for its
share options issued to non-employees. Accordingly, compensation cost is accrued
based on the estimated fair value of the options issued, and amortized over the
vesting period. Because vesting of the options is contingent upon the recipient
continuing to provide services to the Company until the vesting date, the
Company estimates the fair value of the non-employee options at each period-end
up to the vesting date, and adjusts expensed amounts accordingly. The fair value
of each option grant is estimated by management using the Black-Scholes
option-pricing model.
Forward-Looking Statements
- --------------------------
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements include statements regarding the intent, belief or
current expectations of the Company and its management and involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following: general economic and business conditions, which will, among other
things, affect the availability and creditworthiness of prospective tenants,
lease rents and the terms and availability of financing; adverse changes in the
28
real estate markets including, among other things, competition with other
companies; risks of real estate development and acquisition; governmental
actions and initiatives; and environment/safety requirements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof.
Inflation
- ---------
Inflation did not have a material effect on the Company's results for the
periods presented.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. The primary
market risk to which the investments of the Company is exposed is interest rate
risk, which is highly sensitive to many factors, including governmental monetary
and tax policies, domestic and international economic and political
considerations and other factors beyond the control of the Company.
INTEREST RATE RISK
Interest rate fluctuations can adversely affect the Company's income and value
of its common shares in many ways and present a variety of risks, including the
risk of mismatch between asset yields and borrowing rates, variances in the
yield curve and changing prepayment rates.
Various financial vehicles exist which would allow Company management to
mitigate the impact of interest rate fluctuations on the Company's cash flows
and earnings. During March 2003, upon management's analysis of the interest rate
environment and the costs and risks of such strategies, the Company entered into
an interest rate swap in order to hedge against increases in the floating
interest rate on its Nomura Securities Repurchase Facility. Under the interest
rate swap agreement, the Company is required to pay Fleet National Bank (the
"Counterparty") a fixed rate on a notional amount of debt. In return, the
Counterparty will pay the Company a floating rate equivalent to the 30-day LIBOR
rate. On March 25, 2003, the Company entered into a five-year interest rate swap
that fixes the 30-day LIBOR rate to 3.48% on a notional amount of $30 million.
This effectively fixes $30 million of the Company's secured borrowings at 3.48%,
protecting the Company in the event the 30-day LIBOR rate rises. A possible risk
of such swap agreements is the possible inability of the Counterparty to meet
the terms of the contracts with the Company; however, there is no current
indication of such an inability.
The Company's operating results will depend in large part on differences between
the income from its assets (net of credit losses) and its borrowing costs. Most
of the Company's assets, consisting primarily of mortgage loans, GNMA and FNMA
DUS certificates, and notes receivable, generate fixed returns and will have
terms in excess of five years. The Company funds the origination and acquisition
of a significant portion of these assets with borrowings which have interest
rates that reset relatively rapidly, such as monthly or quarterly. In most
cases, the income from assets will respond more slowly to interest rate
fluctuations than the cost of borrowings, creating a mismatch between asset
yields and borrowing rates. Consequently, changes in interest rates,
particularly short-term interest rates, may influence the Company's net income.
The Company's debt bears interest at rates that fluctuate with LIBOR. Based on
the $131.2 million unhedged portion of $161.2 million of borrowings outstanding
under these facilities at September 30, 2003, a 1% change in LIBOR would reduce
the Company's annual net income and cash flows by approximately $1.3 million.
However, due to the fact that interest income from loans made under the Fleet
Warehouse Facility are also based on LIBOR, a 1% increase in LIBOR would
increase the Company's annual net income and cash flows from such loans by
approximately $205,000. Increases in these rates will decrease the net income
and market value of the Company's net assets. Interest rate fluctuations that
result in interest expense exceeding interest income would result in operating
losses.
The value of the Company's assets may be affected by prepayment rates on
investments. Prepayment rates are influenced by changes in current interest
rates and a variety of economic, geographic and other factors beyond the
Company's control, and consequently, such prepayment rates cannot be predicted
29
with certainty. When the Company originates mortgage loans, it expects that such
mortgage loans will have a measure of protection from prepayment in the form of
prepayment lock-out periods or prepayment penalties. However, such protection
may not be available with respect to investments which the Company acquires, but
does not originate. In periods of declining mortgage interest rates, prepayments
on mortgages generally increase. If general interest rates decline as well, the
proceeds of such prepayments received during such periods are likely to be
reinvested by the Company in assets yielding less than the yields on the
investments that were prepaid. In addition, the market value of mortgage
investments may, because of the risk of prepayment, benefit less from declining
interest rates than from other fixed-income securities. Conversely, in periods
of rising interest rates, prepayments on mortgages generally decrease, in which
case the Company would not have the prepayment proceeds available to invest in
assets with higher yields. Under certain interest rate and prepayment scenarios
the Company may fail to recoup fully its cost of acquisition of certain
investments.
REAL ESTATE RISK
Multifamily and commercial property values and net operating income derived from
such properties are subject to volatility and may be affected adversely by a
number of factors, including, but not limited to, national, regional and local
economic conditions (which may be adversely affected by industry slowdowns and
other factors); local real estate conditions (such as an oversupply of housing,
retail, industrial, office or other commercial space); changes or continued
weakness in specific industry segments; construction quality, age and design;
demographic factors; retroactive changes to building or similar codes; and
increases in operating expenses (such as energy costs). In the event net
operating income decreases, a borrower may have difficulty paying the Company's
mortgage loan, which could result in losses to the Company. In addition,
decreases in property values reduce the value of the collateral and the
potential proceeds available to a borrower to repay the Company's mortgage
loans, which could also cause the Company to suffer losses.
RISK IN OWNING SUBORDINATED INTERESTS
The Company has invested indirectly in subordinated CMBS through its ownership
of a $20.2 million preferred membership interest in ARCap. Subordinated CMBS of
the type in which ARCap invests include "first loss" and non-investment grade
subordinated interests. A first loss security is the most subordinate class in a
structure and accordingly is the first to bear the loss upon a default on
restructuring or liquidation of the underlying collateral and the last to
receive payment of interest and principal. Such classes are subject to special
risks, including a greater risk of loss of principal and non-payment of interest
than more senior, rated classes. The market values of subordinated interests in
CMBS and other subordinated securities tend to be more sensitive to changes in
economic conditions than more senior, rated classes. As a result of these and
other factors, subordinated interests generally are not actively traded and may
not provide holders with liquidity of investment. With respect to the Company's
investment in ARCap, the ability to transfer the membership interest in ARCap is
further limited by the terms of ARCap's operating agreement.
PARTICIPATING INTEREST
In connection with the acquisition and origination of mortgages, the Company
has, on occasion, obtained and may continue to obtain participating interests
that may entitle it to payments based upon a development's cash flow, profits or
any increase in the value of the development that would be realized upon a
refinancing or sale of the development. Competition for participating interests
is dependent to a large degree upon market conditions. Participating interests
are more difficult to obtain when mortgage financing is available at relatively
low interest rates. In the current interest rate environment, the Company may
have greater difficulty obtaining participating interest. Participating
interests are not government insured or guaranteed and are therefore subject to
the general risks inherent in real estate investments. Therefore, even if the
Company is successful in investing in mortgage investments which provide for
participating interests, there can be no assurance that such interests will
result in additional payments.
30
REPURCHASE FACILITY COLLATERAL RISK
Repurchase agreements involve the risk that the market value of the securities
sold by the Company may decline and that the Company will be required to post
additional collateral, reduce the amount borrowed or suffer forced sales of the
collateral. If forced sales were made at prices lower than the carrying value of
the collateral, the Company would experience additional losses. If the Company
is forced to liquidate these assets to repay borrowings, there can be no
assurance that the Company will be able to maintain compliance with the REIT
asset and source of income requirements.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of the
Company's disclosure controls and procedures (as such term is defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) as of the end of the period covered by this report. Based
on such evaluation, such officers have concluded that, as of the end of such
period, the Company's disclosure controls and procedures are effective.
INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any significant
changes in the Company's internal control over financial reporting during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Upon taking possession of the real estate collateral supporting the
Concord at Gulfgate loan, the Company has been named in a lawsuit
filed by the limited partners of partnership that owned the property.
The Company is currently attempting to resolve this issue. The Company
is currently unable to determine the possible outcome of the
litigation.
Item 2. Changes in Securities - None.
Item 3. Defaults Upon Senior Securities and Use of Proceeds - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
31.1 Chief Executive Officer certification pursuant to Rule 13a-15 or
15d-15
31.2 Chief Financial Officer certification pursuant to Rule 13a-15 or
15d-15
32.1 Chief Executive Officer certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
The following 8-K reports were filed or furnished, as noted in the
applicable Form 8-K, for the quarter ended September 30, 2003:
Current report on Form 8-K, filed on August 7, 2003, relating to the
press release regarding the Company's announcement of its financial
results for its second quarter ended June 30, 2003.
Current report on Form 8-K, filed on August 19, 2003, relating to the
Company making available unaudited supplemental data regarding its
operations for the quarter ended June 30, 2003.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN MORTGAGE ACCEPTANCE COMPANY
(Registrant)
Date: November 13, 2003 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Trustee, Chairman of the Board,
President and Chief Executive Officer
Date: November 13, 2003 By: /s/ Stuart A. Rothstein
-----------------------
Stuart A. Rothstein
Chief Financial Officer
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE
13A-15 OR 15D-15
I, Stuart J. Boesky, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period
ending September 30, 2003 of American Mortgage Acceptance Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the
registrant and we have:
a) designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure the material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this quarterly report based on such
evaluation; and
c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors or persons
performing the equivalent functions:
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 13, 2003 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE
13A-15 OR 15D-15
I, Stuart A. Rothstein, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period
ending September 30, 2003 of American Mortgage Acceptance Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the
registrant and we have:
a) designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure the material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this quarterly report based on such
evaluation; and
c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors or persons
performing the equivalent functions:
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 13, 2003 By: /s/ Stuart A. Rothstein
-----------------------
Stuart A. Rothstein
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18.U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of American Mortgage Acceptance Company
(the "Company") on Form 10-Q for the period ending September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Stuart J. Boesky, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Chief Executive Officer
November 13, 2003
Exhibit 32.2
CERTIFICATION PURSUANT TO
18.U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of American Mortgage Acceptance Company
(the "Company") on Form 10-Q for the period ending September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Stuart A. Rothstein, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
By: /s/ Stuart A. Rothstein
-----------------------
Stuart A. Rothstein
Chief Financial Officer
November 13, 2003