SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934
For the fiscal year ended December 31, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- ACT OF 1934
Commission File Number 0-23972
AMERICAN MORTGAGE ACCEPTANCE COMPANY
(Exact name of registrant as specified in its charter)
Delaware 13-6972380
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 317-5700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
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Shares of Beneficial Interest, par value $.10 per share
Name of each exchange on which registered:
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American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
--- ---
The approximate aggregate market value of the voting and non-voting common
equity held by non-affiliates of the Registrant as of December 31, 2004 was
approximately $140,763,000 based on a price of $17.20 per share, the closing
sales price for the Registrant's common shares of beneficial interest on the
American Stock Exchange on that date.
As of March 1, 2005 there were 8,336,803 outstanding common shares of the
Registrant's shares of beneficial interest.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Those portions of the Registrant's Proxy Statement for the Annual
Meeting of Shareholders to be held on June 9, 2005, which are incorporated into
Items 10, 11, 12 and 13.
Index to exhibits may be found on page 67
Page 1 of 74
TABLE OF CONTENTS
AMERICAN MORTGAGE ACCEPTENCE COMPANY
ANNUAL REPORT ON FORM 10-K
PAGE
PART I
Item 1. Business 4
Risk Factors 6
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Shareholders 15
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder 16
Matters
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and 18
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risks 30
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with Accountants on Accounting and 62
Financial Disclosure
Item 9A. Disclosures Controls and Procedures 62
PART III
Item 10. Directors and Executive Officers of the Company 63
Item 11. Executive Compensation 63
Item 12. Security Ownership of Certain Beneficial Owners and Management 63
Item 13. Certain Relationships and Related Transactions 63
Item 14. Principal Accounting Fees and Services 63
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 63
SIGNATURES 66
2
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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 us and our management and involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements 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:
o Risks of investing in uninsured and non-investment grade mortgage
assets and subordinated CMBS;
o Competition in acquiring desirable investments;
o Interest rate fluctuations and changes in prepayment rates which may
affect the value of our assets;
o Risks associated with investments in real estate generally and the
properties which secure many of our investments;
o General economic conditions, particularly as they affect the value of
our assets and the credit status of our borrowers;
o Dependence on our external Advisor for all services vital to our
operations;
o Conflicts which may arise among us and other entities affiliated with
our Advisor which have similar investment policies to ours; and
o Risks associated with the repurchase agreements we utilize to finance
our investments and the availability of financing generally
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this annual report.
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PART I
Item 1. Business.
General
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American Mortgage Acceptance Company was formed on June 11, 1991 as a
Massachusetts business trust. We elected to be treated as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"). Throughout this report, the terms "we", "us", "the Company" and
similar terms are meant to represent American Mortgage Acceptance Company and
its consolidated subsidiaries.
Additional information about us is also available at www.americanmortgageco.com.
We make available, free of charge on or through our website, our annual report
on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K,
and amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after such material
is electronically filed with, or furnished to the Securities and Exchange
Commission ("SEC"). Materials we file with the SEC may be read and copied at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549.
This information may also be obtained by calling the SEC at 1-800-SEC-0330. The
SEC also maintains an Internet website that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the SEC at www.sec.gov. We will provide a copy of any of the
foregoing documents to shareholders upon request.
Business Strategy
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Since our 1999 listing on the American Stock Exchange, our goal has been to
attempt to maximize the return on our asset base by investing in higher yielding
assets while managing risk by maintaining a portion of our investments in
government agency guaranteed or insured assets.
Our business plan focuses on originating and acquiring mortgages secured by
commercial properties with a focus on the multifamily sector. The mortgages may
take the form of government insured first mortgages, insured mortgage
pass-through certificates or insured mortgage backed securities, and uninsured
mezzanine loans, construction loans, and bridge loans. Additionally, we have
indirectly invested in subordinate commercial mortgage-backed securities and may
invest in other real estate assets, including non-multifamily mortgages. In
association with our investing activities, we may also issue guarantees of
construction and permanent financing and make standby loan commitments.
Investing
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We leverage the expertise of Related AMI Associates, Inc. (our "Advisor") and
its affiliates in originating the loans and other assets in which we invest. In
addition, our Advisor provides the expertise to perform both the initial
underwriting of the properties which serve as direct or indirect collateral for
our loans, as well as in the ongoing monitoring of those properties through
construction, lease-up and stabilization.
We invest in the following types of assets:
GOVERNMENT INSURED AND GUARANTEED INVESTMENTS
Our declaration of trust requires that 40% of our new investments be of the type
we originally invested in prior to our reorganization in 1999. Generally, we
seek to maintain a minimum of 40% of our investments in government insured or
guaranteed investments, primarily through the acquisition of Government National
Mortgage Association ("GNMA" or "Ginnie Mae") and Federal National Mortgage
Association ("Fannie Mae") ("FNMA") mortgage-backed securities and pass-through
certificates. We believe that government agency insured lending offers safety,
liquidity and moderate yields, while also providing a strong asset base for
collateralized borrowing on favorable terms.
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MEZZANINE LOANS
We originate or acquire mezzanine loans that typically finance newly stabilized
or transitional commercial real estate properties. While we mainly focus on the
multifamily sector, we may originate mezzanine loans for office, retail or
industrial properties as well. The interest rates we offer are either fixed or
floating rate. We seek properties in growing real estate markets with well
capitalized developers or guarantors. We source our mezzanine loans in several
ways, including:
1) issuing mezzanine debt behind an existing first mortgage loan;
2) jointly bidding with a senior lender and closing simultaneously (can
be seamless to the client);
3) acquiring a mezzanine loan from a senior lender; or
4) originating the entire debt structure and selling the first mortgage
to a senior lender.
Mezzanine loans are subordinate to senior mortgages and may include a
participating component, such as a right to a portion of the cash flow and
proceeds generated from the refinancing and sale of the underlying properties.
Typically, they are secured by equity interests in the borrower and have limited
recourse to the borrower.
BRIDGE LOANS
We have two bridge loan programs. In the first, loans are typically funded in
connection with the development of multifamily properties which benefit from the
Low-Income Housing Tax Credit program under Section 42 of the Internal Revenue
Code ("LIHTC program"). Due to the typical equity payment schedule associated
with the LIHTC program, there can be periods in a construction cycle where a
developer needs short-term capital and we offer bridge loans to developers with
typical terms of 12 months, which are collateralized by the equity interests in
the property owner. In the second program, we provide loans for properties
undergoing rehabilitation by new owners when the rehabilitation process will add
significant value to the property and reduce the effective loan-to-value ratio
and risk of loss. Our bridge loans may include a participation component.
COMMERCIAL MORTGAGE-BACKED SECURITIES ("CMBS")
We currently invest indirectly in CMBS through a convertible preferred equity
investment in ARCap Investors, LLC ("ARCap"). ARCap specializes in, and is a
recognized industry leader in investing in, non-investment grade and unrated
subordinated CMBS. The CMBS which comprise ARCap's portfolio are collateralized
by a diverse range of underlying properties including multifamily, retail,
office and hotel.
FIRST MORTGAGE REVENUE BONDS
We currently invest in taxable revenue bonds that are secured by first mortgages
on affordable multifamily housing properties throughout the country. The revenue
bonds generally rank on par with tax-exempt first mortgage revenue bonds that
are owned by CharterMac, an affiliate of our Advisor. The proceeds from these
revenue bonds are generally used for the new construction or substantial
rehabilitation of affordable multifamily properties.
OTHER INVESTMENTS
From time to time, we may invest in assets outside of our normal investment
strategy if we believe that making such an investment is advantageous in
maximizing the return on our asset base.
Financing
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We finance our investing activity primarily through borrowing from various
facilities at short-term rates. We have three repurchase facilities, which we
use to finance our investments, a warehouse facility that we use to finance
mezzanine loans, and a line of credit with a related party that we use to
purchase all types of investments.
For further information about these facilities, see MANAGEMENT'S DISCUSSION AND
ANALYSIS - LIQUIDITY AND CAPITAL RESOURCES and Notes 8, 9 and 10 to the
consolidated financial statements.
5
In addition, we may also issue common shares to fund investing activity. We have
the capacity to raise approximately $170.0 million of additional funds by
issuing either common or preferred shares pursuant to a shelf registration
statement filed with the SEC in 2002.
From time to time, we may also issue other types of securities to raise
additional capital.
Competition
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We compete with various financial institutions in each of our lines of business.
We compete with investment banks, other REITs, mezzanine funds and pension fund
advisors for loan products.
Management and Governance
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We have engaged our Advisor, an affiliate of CharterMac, to manage our
day-to-day affairs. Our Advisor has subcontracted with Related Capital Company,
LLC ("Related"), a subsidiary of CharterMac, to provide the services
contemplated. Through our Advisor, Related offers us a core group of experienced
staff and executive management personnel who provide us with services on both a
full- and part-time basis. These services include, among other things,
acquisition, underwriting, asset monitoring, portfolio management, finance,
accounting, tax, capital markets, investor relations and public relations
services.
We have no employees. Our Advisor receives compensation in connection with such
activities as set forth in Item 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA;
Item 11, EXECUTIVE COMPENSATION; and Item 13, CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS. In addition, we reimburse our Advisor and certain of its
affiliates for expenses they incur in connection with their performance of
services for us in accordance with our declaration of trust.
We are governed by a board of trustees comprised of three independent trustees
and two non-independent trustees who are affiliated with our Advisor.
Risk Factors
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An investment in our common shares involves a number of risks. Before making an
investment decision, you should carefully consider all of the risks described in
this document. If any of the risks discussed actually occur, our business,
financial condition and results of operations, and the value of your investment,
could be materially adversely affected.
For convenience, we have grouped these risk factors as follows:
1. Risks related to our investments
2. Risks related to our Advisor
3. Risks related to our debt obligations
4. Risks related to our classification as a REIT and not as an investment
company
5. Risks related to our common shares and our shareholders
1. RISKS RELATED TO OUR INVESTMENTS
MORTGAGE INVESTMENTS THAT ARE NOT UNITED STATES GOVERNMENT INSURED AND
NON-INVESTMENT GRADE MORTGAGE ASSETS INVOLVE RISK OF LOSS
GENERAL. We intend to continue to originate and acquire uninsured and
non-investment grade mortgage loans and mortgage assets as part of our
investment strategy. Such loans and assets may include mezzanine loans, bridge
loans and CMBS. While holding such interests, we will be subject to risks of
borrower defaults, bankruptcies, fraud and losses and special hazard losses that
are not covered by standard hazard insurance. In the event of any default under
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mortgage loans held by us, we will bear the risk of loss of principal and
non-payment of interest and fees to the extent of any deficiency between the
value of the mortgage collateral and the principal amount of the mortgage loan.
LIMITED RECOURSE LOANS MAY LIMIT OUR RECOVERY TO THE VALUE OF THE MORTGAGED
PROPERTY. Our loans are generally non-recourse, although some may have limited
recourse provisions for a short period. In addition, limited recourse against
the borrower may be further limited by applicable provisions of the laws of the
jurisdictions in which the mortgaged properties are located or by the selection
of remedies and the impact of those laws on that selection. With respect to our
non-recourse mortgage loans, in the event of a borrower default, the value of
the specific mortgaged property and other assets, if any, pledged to secure the
relevant mortgage loan, may be less than the amount owed under the mortgage
loan. As to those mortgage loans that provide for recourse against the borrower
and its assets generally, there can be no assurance that such recourse will
provide a recovery in respect of a defaulted mortgage loan greater than the
liquidation value of the mortgaged property securing that mortgage loan.
COMPETITION IN ACQUIRING DESIRABLE INVESTMENTS MAY LIMIT THEIR AVAILABILITY
WHICH COULD, IN TURN, NEGATIVELY AFFECT OUR ABILITY TO GENERATE NET INCOME
We compete for loan investments with numerous public and private real estate
investment vehicles, such as mortgage banks, pension funds, REITs, institutional
investors and individuals. Mortgages, mezzanine loans, subordinated interests in
CMBS and other investments are often obtained through a competitive bidding
process. In addition, competitors may seek to establish relationships with the
financial institutions and other firms from which we intend to purchase such
assets. Many of our competitors are larger than us, may have access to greater
capital resources and other resources, and may have other advantages over us and
our Advisor in conducting certain business and providing certain services.
Competition may result in higher prices for mortgage assets, lower yields and a
narrower spread of yields over our borrowing costs. There can be no assurance
that we will achieve investment results that will allow any specified level of
cash distribution.
INTEREST RATE FLUCTUATIONS WILL AFFECT THE VALUE OF OUR ASSETS AND OUR ABILITY
TO GENERATE NET INCOME
Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
considerations and other factors beyond our control. Interest rate fluctuations
can adversely affect our net income in many ways and present a variety of risks,
including the risk of a mismatch between asset yields and borrowing rates.
Interest rate mismatch could occur between asset yields and borrowing rates
resulting in decreased yield. Our operating results will depend in large part on
differences between the income from our assets (net of credit losses) and our
borrowing costs. We fund the origination and acquisition of a significant
portion of our assets with borrowings which have interest rates that reset
relatively rapidly, such as monthly or quarterly. We anticipate that, in most
cases, the income from our fixed-rate assets will respond more slowly to
interest rate fluctuations than the cost of our borrowings, creating a mismatch
between asset yields and borrowing rates. Consequently, changes in interest
rates, particularly short-term interest rates, may influence our net income.
Also, as some of our investments may have variable interest rates, interest rate
fluctuations could adversely affect our net income, although the variability of
the income would serve to partially offset the variability of expense on our
borrowings.
See also Item 7A, QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
PREPAYMENT RATES MAY NEGATIVELY AFFECT THE VALUE OF OUR INVESTMENTS.
The value of our investments may be affected by prepayment rates. Prepayment
rates are influenced by changes in current interest rates and a variety of
economic, geographic and other factors beyond our control, and consequently,
such prepayment rates cannot be predicted with certainty. To the extent we
originate mortgage loans, we expect 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 we acquire, but do not originate. In periods of declining
7
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 us 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 we would not have the prepayment proceeds available to invest in
assets with higher yields. Under certain interest rate and prepayment scenarios
we may fail to recoup fully our cost of acquisition of certain investments.
WE MAY NOT ACCURATELY ASSESS INVESTMENT YIELDS, WHICH MAY NEGATIVELY AFFECT OUR
EARNINGS
Before making any investment, our Advisor will consider the expected yield of
the investment and the factors that may influence the yield actually obtained on
such investment. These considerations will affect our or our Advisor's decision
whether to purchase such an investment and the price offered for such an
investment. No assurances can be given that we or our Advisor can make an
accurate assessment of the yield to be produced by an investment. Many factors
beyond our and our Advisor's control are likely to influence the yield on the
investments, including, but not limited to, competitive conditions in the local
real estate market, local and general economic conditions and the quality of
management of the underlying property. Our Advisor's inability to accurately
assess investment yields may result in our purchasing assets that do not perform
as well as expected, which may negatively affect our earnings.
THERE ARE RISKS ASSOCIATED WITH INVESTMENTS IN REAL ESTATE, WHICH MAY NEGATIVELY
AFFECT OUR EARNINGS
We derive most of our income by investing, directly and indirectly, in debt
secured by residential or commercial properties. Such investments subject us to
various types and degrees of risk that could adversely affect the value of our
assets and our ability to generate revenue and net income.
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:
o national, regional and local economic conditions (which may be
adversely affected by industry slowdowns and other factors);
o local real estate conditions (such as an oversupply of housing,
retail, industrial, office or other commercial space);
o changes or continued weakness in specific industry segments;
o construction quality, age and design;
o demographic factors;
o retroactive changes to building or similar codes; and
o increases in operating expenses (such as energy costs).
Other risks include, but are not limited to, the following:
o If a mortgage loan is called due to construction not being completed
as required in the mortgage loan documents, we may determine to expend
additional capital in order to preserve our investment;
o occupancy and rent levels may be affected by construction of
additional housing units and national, regional and local politics,
including current or future rent stabilization and rent control laws
and agreements;
o federal LIHTCs and city, state and federal housing subsidy or similar
programs which apply to some of the properties impose rent limitations
that could adversely affect the ability to increase rents to generate
the funds necessary to maintain the properties in proper condition,
which is particularly important during periods of rapid inflation or
declining market value of such properties;
o if a loan defaults, the value of the property securing the loan (plus,
for properties that generate LIHTCs, the value of the credits) may be
less than the unamortized principal amount of the loan;
o an owner or operator of real property may become liable for the costs
of removal of certain hazardous substances released on its property
without regard to whether the owner or operator knew of, or was
responsible for, the release of such hazardous substances. The
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presence of hazardous substances may adversely affect an owner's
ability to operate the property; and
o Certain underlying properties may be required to comply with the
Americans with Disabilities Act, and must comply with fire and safety
regulations, building codes, and other land use regulations.
Compliance with such requirements may require property operators to
make substantial capital expenditures.
These conditions and events may increase the possibility that a property
operator may be unable to meet its obligations to us or otherwise expose us to
losses, thereby affecting our net income. We manage these risks through diligent
and comprehensive underwriting, asset management and ongoing monitoring of loan
and property performance. We may also obtain construction completion guarantees,
personal recourse agreements and/or operating deficit guarantees. In other
cases, we may decide to forego certain types of available security if we
determine that the security is not necessary or is too expensive to obtain in
relation to the risks covered.
We also own several properties as a result of defaults by borrowers. Excluding
properties for which we have sales contracts and for which we have recovered a
large portion of the investment we made upon foreclosure, as of December 31,
2004, the aggregate carrying value of these properties was approximately $25.4
million. While we are acting to improve the performance of these properties and
are actively seeking buyers for them, there is no assurance that we will realize
the full carrying amounts when the properties are sold.
CHANGES IN MORTGAGE LOAN PROGRAMS COULD ADVERSELY AFFECT US
We could be hindered in making investments by adverse changes in the FHA
insurance, Ginnie Mae or Fannie Mae guarantee programs or rules or regulations
relating to them. Generally, once a mortgage has been endorsed for insurance or
guaranteed, subsequent amendments to the rules or regulations would not apply
retroactively to affect preexisting investments, but could affect prospective
investments. Changes to the guarantee programs could adversely affect our
ability to originate or acquire attractive investments.
THERE ARE RISKS ASSOCIATED WITH OUR INVESTMENT IN ARCAP, WHICH MAY NEGATIVELY
AFFECT OUR EARNINGS
We have invested indirectly in subordinated CMBS through our ownership of a
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. In addition, our ability to
transfer our membership interest in ARCap is limited by the terms of ARCap's
operating agreement.
PARTICIPATING INTERESTS IN MORTGAGES MAY NOT BE REALIZED
In connection with the acquisition and origination of mortgages, we have
obtained and may continue to obtain participating interests that may entitle us
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. As the operation of real estate is subject to numerous
variables and risks, there can be no assurance that such interests will result
in additional payments to us.
GEOGRAPHIC CONCENTRATION AND THE CREDIT QUALITY OF BORROWERS MAY RESULT IN
LOSSES
We have not established any limit upon the geographic concentration of
properties securing our investments or the credit quality of borrowers of
uninsured investments. As a result, properties securing our investments may be
overly concentrated in certain geographic areas and the underlying borrowers of
our uninsured investments may have low credit quality. We may experience losses
due to geographic concentration or low credit quality. As of December 31, 2004,
76.7% of our investments in mortgage loans, notes receivable, revenue bonds and
real estate owned were secured by properties in Texas. These types of
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investments comprised approximately 37.6% of our portfolio of investments as of
December 31, 2004. We had no borrowers exceeding 10% of our portfolio of
investments in mortgage loans, notes receivable and revenue bonds other than
Richard Shaw, The Related Companies, L.P. and Richard Nathan who are the
creditors of 12.1%, 13.9% and 14.8%, respectively, in these categories. The
Related Companies, L.P. is an affiliate of our Advisor.
2. RISKS RELATED TO OUR ADVISOR
WE ARE DEPENDENT ON OUR ADVISOR AND IF OUR ADVISOR TERMINATES THE ADVISORY
AGREEMENT, WE MAY NOT BE ABLE TO FIND AN ADEQUATE REPLACEMENT ADVISOR
We have no employees, although for administrative purposes we have appointed
officers. We have entered into an advisory agreement with our Advisor under
which it provides us with all of the services vital to our operations. We are
dependent on our Advisor for the management and administration of our business
and investments. The results of our operations will be dependent upon the
availability of, and our Advisor's ability to identify and capitalize on,
investment opportunities. The agreement may be terminated
(i) without cause by our Advisor or
(ii) with or without cause by a majority of our independent trustees,
each without penalty and each upon 60 days prior written notice to the
non-terminating party. If our Advisor terminates our agreement, we may not be
able to find an adequate replacement advisor.
CONFLICTS OF INTEREST COULD ARISE AMONG US AND OR RELATED PARTIES WITH RESPECT
TO INVESTMENT OPPORTUNITIES
Our Advisor has subcontracted its obligation to provide services under the
advisory agreement to Related, and there are risks involved with this
arrangement. Under our advisory agreement, the Advisor and Related are permitted
to act as advisor to other entities having investment policies similar to ours,
including other REITs. Generally, in conflict situations with non-affiliated
entities, our Advisor must present an investment opportunity to us if the
opportunity is within our investment objectives and policies, the opportunity is
of a character that could be taken by us, and we have the financial resources to
take advantage of the opportunity.
Additionally, CharterMac, the parent of the Advisor and Related, has in the
past, and may in the future, invest in taxable mortgage investments or other
investments that are similar to those in which we invest.
To the extent that these existing entities, as well as affiliated entities which
may be formed by affiliates of our Advisor in the future, have funds available
for investment at the same time as we do and a potentially suitable investment
is offered to us or the affiliated entities, our Advisor will review the
affiliated entities' and our investment portfolios and will determine whether or
not the investment should be made by one of the affiliated entities or by us
based upon factors such as the amount of funds available for investment, yield
and portfolio diversification. If the making of a mortgage loan or other
mortgage investment appears equally appropriate for us and these affiliated
entities, the mortgage loan or other mortgage investment will either be made by
a joint venture between two or more of such entities (which may include us), or
will be allocated to one of such entities on a basis of rotation with the
initial order of priority determined by the dates of formation of the entities.
In addition, The Related Companies, LP ("TRCLP"), the principal owner of which
is Stephen M. Ross, the Non-Executive Chairman and an indirect owner of a 14.3%
economic interest in CharterMac, may engage in businesses which compete with our
Company. In connection with CharterMac's acquisition of Related in December
2003, CharterMac and TRCLP entered into an agreement which prohibited TRCLP and
its affiliates from competing with any business currently engaged in by Related
other than in specified areas, including originating mezzanine loans to
multifamily housing properties similar to those which secure our loans. There
can be no assurance that we and TRCLP and its affiliates would not directly
compete for similar products and opportunities in these areas in the future.
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CONFLICTS OF INTEREST COULD ARISE IN TRANSACTIONS WHERE WE LEND TO OR BORROW
FROM AFFILIATES OF OUR ADVISOR
Every transaction entered into between us and an affiliate of our Advisor raises
a potential conflict of interest. In addition to the initial determination to
invest in mortgage investments secured by properties owned by an affiliate of
our Advisor, such conflicts of interest with respect to these mortgage
investments include, among others, decisions regarding:
o whether to waive defaults of such affiliate;
o whether to foreclose on a loan; and
o whether to permit additional financing on the properties securing our
investments other than financing provided by us.
We have invested in, and may in the future invest in, mortgage investments
secured by properties in which either direct or indirect affiliates of our
Advisor own equity interests in the borrower. Our declaration of trust requires
that any transaction between our Advisor or any of its affiliates and us be
approved by a majority of our trustees, including a majority of the independent
trustees, not otherwise interested in the transaction, as being fair and
reasonable and on terms not less favorable to us than those available from
unaffiliated third parties. As of December 31, 2004, we had six bridge loans
with a total carrying value of approximately $12.8 million, two first mortgages
with a total carrying value of approximately $2.3 million, and seven multifamily
housing first mortgage bonds with a total carrying value of approximately $6.7
million to borrowers that are affiliates of our Advisor, which represents 6.2%
of our total assets.
In June 2004, we entered into a revolving credit facility with CharterMac, which
provides up to $20.0 million in borrowings and bears interest at LIBOR plus 300
basis points. This facility is for a term of one year with a one-year optional
extension and contains customary restrictions/covenants that are similar to our
warehouse debt facility.
3. RISKS RELATED TO OUR DEBT OBLIGATIONS
SHORT-TERM REPURCHASE AGREEMENTS INVOLVE RISK OF LOSS
We finance, and expect to continue to finance, a portion of our investments
through collateralized borrowing in the form of repurchase agreements, which
involve us selling assets concurrently with our agreement to repurchase them at
a later date and at a fixed price. During the repurchase agreement period, we
continue to receive principal and interest payments on the assets. The use of
borrowing, or "leverage," to finance our assets involves a number of risks,
including the following:
IF WE ARE UNABLE TO RENEW OUR BORROWINGS AT FAVORABLE RATES, WE MAY BE FORCED TO
SELL ASSETS, AND OUR PROFITABILITY MAY BE ADVERSELY AFFECTED. We rely on
short-term repurchase agreements to finance a portion of our assets. Our ability
to achieve our investment objectives depends on our ability to borrow money in
sufficient amounts and on favorable terms and our ability to renew or replace
these short-term borrowings on a continuous basis as they mature. If we are not
able to renew or replace maturing borrowings, we would be forced to sell some of
our assets under possibly adverse market conditions, which may adversely affect
our profitability. As of December 31, 2004, we had borrowings of approximately
$157.6 million outstanding under the repurchase facilities, all of which
typically have 30-day settlement terms.
A DECLINE IN THE MARKET VALUE OF OUR ASSETS MAY RESULT IN MARGIN CALLS THAT MAY
FORCE US TO SELL ASSETS UNDER ADVERSE MARKET CONDITIONS. Repurchase agreements
involve the risk that the market value of the securities sold by us may decline
and that we 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, we would experience
additional losses. If we are forced to liquidate our assets to repay borrowings,
there can be no assurance that we will be able to maintain compliance with the
REIT asset and source of income requirements.
OUR USE OF REPURCHASE AGREEMENTS TO BORROW MONEY MAY GIVE OUR LENDERS GREATER
RIGHTS IN THE EVENT OF BANKRUPTCY. Of our total borrowings of approximately
$166.1 million as of December 31, 2004, approximately $157.6 million were made
using repurchase agreements which require us to pledge certain of our assets to
the lender to secure our obligations thereunder. Borrowings made under
repurchase agreements may qualify for special treatment under the U.S.
11
Bankruptcy Code, which may make it difficult for us to recover our pledged
assets if a lender files for bankruptcy. In addition, if we were to file for
bankruptcy, lenders under our repurchase agreements may be able to avoid the
automatic stay provisions of the U.S. Bankruptcy Code and take possession of,
and liquidate, the assets we pledged under these agreements without delay.
HEDGING TRANSACTIONS CAN LIMIT GAINS AND INCREASE EXPOSURE TO LOSSES
Hedging involves risk and hedging activities may not have the desired beneficial
impact on our results of operations or financial condition. Moreover, no hedging
activity can completely insulate us from the risks associated with changes in
interest rates and prepayment rates.
We intend generally to hedge as much of the interest rate risk as our Advisor
determines is in our best interests given the cost of such hedging transactions.
REIT provisions of the Code may limit our ability to hedge our assets and
related borrowings. Any limitation on our use of hedging techniques may result
in greater interest rate risk.
4. RISKS RELATED TO OUR CLASSIFICATION AS A REIT AND NOT AS AN INVESTMENT
COMPANY
OUR REIT STATUS SUBJECTS US AND OUR SHAREHOLDERS TO RISKS
Our REIT status subjects us and our shareholders to a number of risks including
the following:
FAILURE TO QUALIFY AS A REIT WOULD HAVE ADVERSE TAX CONSEQUENCES FOR US. In
order to maintain our REIT status we must meet a number of requirements. These
requirements are highly technical and complex and often require an analysis of
various factual matters and circumstances that may not be totally within our
control. Even a technical or inadvertent mistake could jeopardize our REIT
status. Furthermore, Congress and the IRS may make changes to the tax laws and
regulations, and the courts may issue new rulings, that make it more difficult
or impossible for us to remain qualified as a REIT. If we fail to qualify as a
REIT, we would be subject to federal income tax at regular corporate rates.
Therefore, we would have less money available for investments and for
distributions to our shareholders. This may also have an adverse effect on the
market value of our common shares. In general, we would not be able to elect
REIT status for four years after a year in which we lose our REIT status.
AS A REIT, OUR INCOME CAN ONLY COME FROM LIMITED TYPES OF SOURCES. To qualify as
a REIT, at least 75% of our gross income must come from qualified real estate
sources and 95% of our gross income must come from other sources that are
itemized in the REIT tax laws. Therefore, we may have to forego opportunities to
invest in potentially profitable businesses or assets because they would produce
income that could jeopardize our status as a REIT.
WE HAVE CERTAIN DISTRIBUTION REQUIREMENTS. As a REIT, we must distribute to
shareholders at least 90% of our REIT taxable income (excluding capital gains).
The required distribution limits the amount we have available for other business
purposes, including amounts to fund our growth. Also, it is possible that
because of the differences between the time we actually receive revenue (such as
original issue discount interest income attributable to our investment in ARCap)
or pay expenses and the period we report those items for distribution purposes,
we may have to borrow funds on a short-term basis to meet the 90% distribution
requirement.
WE ARE ALSO SUBJECT TO OTHER TAX LIABILITIES. As a REIT, we may be subject to
certain federal, state and local taxes on our income and property. Any of these
taxes would reduce our operating cash flow.
LIQUIDATION OF COLLATERAL MAY JEOPARDIZE OUR REIT STATUS. To continue to qualify
as a REIT, we must comply with requirements regarding our assets and our sources
of income. If we are compelled to liquidate our mortgage investments to satisfy
our obligations to our lenders, we may be unable to comply with these
requirements, ultimately jeopardizing our status as a REIT.
12
LOSS OF INVESTMENT COMPANY ACT EXEMPTION WOULD ADVERSELY AFFECT US
We intend to conduct our business so as not to become regulated as an investment
company under the Investment Company Act of 1940. If we fail to qualify for this
exemption, we would be regulated as an investment company and our business would
be materially adversely affected. Investment company regulations would prevent
us from conducting our business as described in this document by, among other
restrictions, reducing our ability to borrow. The Investment Company Act exempts
entities that are primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real estate. Under the
current interpretation of SEC staff, in order to qualify for this exemption, we
must maintain at least 55% of our assets directly in these qualifying real
estate interests. Mortgage-backed securities that do not represent all the
certificates issued with respect to an underlying pool of mortgages may be
treated as securities separate from the underlying mortgage loans and, thus, may
not qualify for purposes of the 55% requirement. Therefore, our ownership of
these mortgage-backed securities is limited by the provisions of the Investment
Company Act. In meeting the 55% requirement, we treat as qualifying interests,
mortgage-backed securities issued with respect to an underlying pool as to which
we hold all issued certificates. If the SEC or its staff adopts a contrary
interpretation, we could be required to sell a substantial amount of our
mortgage-backed securities under potentially adverse market conditions. Further,
in order to insure that we at all times qualify for the exemption from the
Investment Company Act, we may be precluded from acquiring mortgage-backed
securities whose yield is somewhat higher than the yield on those that could be
purchased in a manner consistent with the exemption. The net effect of these
factors may be to lower our net income.
5. RISKS RELATED TO OUR COMMON SHARES AND OUR SHAREHOLDERS
RESTRICTIONS ON SHARE ACCUMULATION IN REITS COULD DISCOURAGE A CHANGE OF CONTROL
OF OUR COMPANY
In order for us to qualify as a REIT, not more than 50% of the number or value
of our outstanding shares may be owned, directly or indirectly, by five or fewer
individuals during the last half of a taxable year or during a proportionate
part of a shorter taxable year.
In order to prevent five or fewer individuals from acquiring more than 50% of
our outstanding shares and a resulting failure to qualify as a REIT, our
declaration of trust provides that, subject to certain exceptions, no person may
own, or be deemed to own by virtue of the attribution provisions of the Code,
more than 9.8% of the outstanding shares. The shares most recently acquired by a
person that are in excess of the 9.8% limit will not have any voting rights and
will be deemed to have been offered for sale to us for a period subsequent to
the acquisition. Any person who acquires shares in excess of the 9.8% limit is
obliged to immediately give written notice to us and provide us with any
information we may request in order to determine the effect of the acquisition
on our status as a REIT.
While these restrictions are designed to prevent any five individuals from
owning more than 50% of our shares, they also discourage a change in control of
our company. These restrictions may also deter tender offers that may be
attractive to shareholders or limit the opportunity for shareholders to receive
a premium for their shares if an investor makes purchases of shares to acquire a
block of shares.
SUPERMAJORITY VOTING REQUIREMENTS FOR ACQUISITIONS AND MERGERS COULD DISCOURAGE
A CHANGE OF CONTROL OF OUR COMPANY
Our declaration of trust requires that 80% of our shareholders and all of our
independent trustees approve exchange offers, mergers, consolidations or similar
transactions involving us in which our shareholders receive securities in a
surviving entity having materially different investment objectives and policies,
or that is anticipated to provide significantly greater compensation to
management, except for transactions affected because of changes in applicable
law, or to preserve tax advantages for a majority in interest of our
shareholders. These restrictions may also deter tender offers that may be
attractive to shareholders or limit the opportunity for shareholders to receive
a premium for their shares if an investor makes purchases of shares to acquire a
block of shares.
13
ISSUANCES OF LARGE AMOUNTS OF OUR COMMON SHARES COULD CAUSE OUR SHARE PRICE TO
DECLINE
Our declaration of trust permits our trustees to issue an unlimited number of
shares (subject to SEC registration requirements and the consent of shareholders
if required pursuant to the rules of the American Stock Exchange). In connection
with the issuance of any common shares in the future, our Advisor is entitled to
receive as compensation common shares equal to 1% of the issuance. The issuance
of common shares could cause dilution of our existing common shares and a
decrease in the market price.
OUR SHAREHOLDERS MAY HAVE PERSONAL LIABILITY FOR OUR ACTS AND OBLIGATIONS
It is possible that certain states may not recognize the limited liability of
shareholders, although our declaration of trust provides that our shareholders
shall not be subject to any personal liability for our acts or obligations. Our
declaration of trust also provides that every written agreement entered into by
us shall contain a provision that our obligations are not enforceable against
our shareholders personally. No personal liability should attach to our
shareholders under any agreement containing such provision; however, not every
written agreement entered into by us contains such a provision. In certain
states, our shareholders may be held personally liable for contract claims where
the underlying agreement does not specifically exclude shareholder liability.
Our shareholders may also be held personally liable for other claims against us,
such as tort claims, claims for taxes and certain statutory liability. Upon
payment of any such liability, however, the shareholder will, in the absence of
willful misconduct on the shareholder's part, be entitled to reimbursement from
our general assets, to the extent such assets are sufficient to satisfy the
claim.
14
Item 2. Properties.
As a result of foreclosure, we own three properties subject to sales
contracts, one property held for sale and one property held and used.
See Note 7 for further discussion of these properties.
Item 3. Legal Proceedings.
On October 27, 2003, prior to taking possession of the real estate
collateral supporting a loan investment, we were named in a lawsuit,
Concord Gulfgate, Ltd. vs. Robert Parker, Sunrise Housing Ltd., and
American Mortgage Acceptance Company, Cause No. 2003-59290 in the State
District Court of Harris County, Texas. The suit claims, among other
causes of action against the respective defendants, that we conducted
wrongful foreclosure in that the loan guarantor did not derive any
benefit from our loan and that the limited partners of the loan
guarantor did not authorize the loan transaction. The suit seeks, among
other relief, actual, consequential, exemplary, and punitive damages, a
declaration that the loan made by us is unenforceable, and that we were
involved in a conspiracy to defraud the loan guarantor. The suit is
currently in the discovery phase. A trial date has not been set.
We filed a countersuit on November 25, 2003 against the limited
partners of the loan guarantor seeking to recover unpaid taxes and
misappropriated property receipts. We are currently unable to determine
the possible outcome of the litigation.
Item 4. Submission of Matters to a Vote of Shareholders.
None.
15
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters.
As of March 1, 2005, there were 245 registered shareholders owning 8,336,803
shares. Our common shares have been listed on the American Stock Exchange since
July 1, 1999, under the symbol "AMC". Prior to July 1, 1999, there was no
established public trading market for our shares.
The high and low common share prices for each quarterly period in the past two
fiscal years in which the shares were traded is as follows:
2004 2003
--------------------- ---------------------
Quarter Ended Low High Low High
- ------------------- --------- --------- --------- ---------
March 31 $ 16.15 $ 18.31 $ 13.60 $ 16.06
June 30 $ 12.86 $ 17.86 $ 14.93 $ 17.99
September 30 $ 13.65 $ 17.02 $ 13.50 $ 17.94
December 31 $ 15.70 $ 18.05 $ 15.40 $ 16.97
The last reported sale price of our common shares on the American Stock Exchange
on March 1, 2005 was $16.62.
The following table provides information related to our Incentive Share Option
Plan as of December 31, 2004:
Equity Compensation Plan Information
(a) (b) (c)
Number of securities
Number of remaining available for
securities to be future issuance under
issued upon exercise Weighted-average equity compensation
of outstanding exercise price of plans (excluding
options, warrants outstanding options, securities reflected
and rights warrants and rights in column (a)
---------------------- --------------------- -----------------------
Equity compensation plans 100,000 $15.03 733,680
approved by security holders
Equity compensation plans not
approved by security holders -- -- --
---------------------- --------------------- -----------------------
Totals 100,000 $15.03 733,680
---------------------- --------------------- -----------------------
16
Distributions
- -------------
Cash distributions per share for the years ended December 31, 2003 and 2004 are
as set forth in the following table:
Total Amount
Cash Distribution Distributed
for Quarter Ended Date Paid Per Share (in thousands)
- ----------------- ----------- ------------- --------------
March 31, 2003 5/15/03 $ 0.40 $ 2,546
June 30, 2003 8/14/03 0.40 3,335
September 30, 2003 11/14/03 0.40 3,335
December 31, 2003 2/12/04 0.40 3,335
------ -------
Total for 2003 $1.60 $12,551
====== =======
March 31, 2004 5/13/04 $ 0.40 $ 3,335
June 30, 2004 8/12/04 0.40 3,334
September 30, 2004 11/11/04 0.40 3,334
December 31, 2004 2/14/05 0.40 3,334
------ -------
Total for 2004 $ 1.60 $13,337
====== =======
There are no material legal restrictions upon our present or future ability to
make distributions in accordance with the provisions of our declaration of
trust. Future distributions paid by us will be at the discretion of our trustees
and will depend on our actual cash flow, our financial condition, capital
requirements, REIT requirements and such other factors as the trustees deem
relevant.
There were no share repurchases during the fourth quarter of 2004. Other
information required by this item, as well as additional information regarding
our share repurchase program and share compensation paid to our independent
trustees, is included in note 13 to our consolidated financial statements.
Item 6. Selected Financial Data.
The information set forth below presents our selected financial data. Additional
financial information is set forth in the audited financial statements and
footnotes thereto contained in Item 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.
(In thousands except per share amounts)
Year ended December 31,
----------------------------------------------------
OPERATIONS 2004 2003 2002 2001 2000
- ---------- --------- -------- -------- -------- -------
Total revenues $ 15,909 $ 15,051 $ 10,458 $ 5,698 $ 7,910
========= ======== ======== ======== =======
Net income $ 11,273 $ 11,884 $ 9,660 $ 5,187 $ 3,318
========= ======== ======== ======== =======
Net income per share,
basic and diluted $ 1.35 $ 1.52 $ 1.61 $ 1.35 $ .86
========= ======== ======== ======== =======
Distributions per share $ 1.60 $ 1.60 $ 1.51 $ 1.45 $ 1.45
========= ======== ======== ======== =======
December 31,
----------------------------------------------------
FINANCIAL POSITION 2004 2003 2002 2001 2000
- ------------------ --------- -------- -------- -------- -------
Total assets $ 349,033 $327,107 $195,063 $101,982 $70,438
========= ======== ======== ======== =======
Repurchase facilities payable $ 157,633 $149,529 $ 87,880 $ 43,610 $12,656
========= ======== ======== ======== =======
Warehouse facility payable $ 3,827 $ 34,935 $ 8,788 $ -- $ --
========= ======== ======== ======== =======
Line of credit due to related party $ 4,600 $ -- $ -- $ -- $ --
========= ======== ======== ======== =======
Mortgages payable on real estate owned $ 56,993 $ 15,993 $ -- $ -- $ --
========= ======== ======== ======== =======
17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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 us and our management and involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements 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:
o Risks of investing in uninsured and non-investment grade mortgage
assets and subordinated CMBS;
o Competition in acquiring desirable investments;
o Interest rate fluctuations and changes in prepayment rates which may
affect the value of our assets;
o Risks associated with investments in real estate generally and the
properties which secure many of our investments;
o General economic conditions, particularly as they affect the value of
our assets and the credit status of our borrowers;
o Dependence on our external Advisor for all services vital to our
operations;
o Conflicts which may arise among us and other entities affiliated with
our Advisor which have similar investment policies to ours; and
o Risks associated with the repurchase agreements we utilize to finance
our investments and the availability of financing generally
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this annual report.
Factors Affecting Comparability
- -------------------------------
In 2003, several of our loans defaulted and we subsequently foreclosed upon and
now own the properties. In certain instances this required us to invest
additional capital to acquire senior mortgage positions and subsequently
foreclose on those positions to acquire the real estate securing the loans.
Additionally, the sale of some of the properties did not qualify as a sale for
accounting purposes and the first mortgage debt secured by the purchaser is
reflected in our financial statements.
As a result of the foreclosures, we now have a significant amount of real estate
owned and mortgage loans payable on our balance sheet. This results in a
reduction of certain interest income, the recognition of rental income and
income from real estate owned, and the depreciation of certain of the foreclosed
properties, none of which was recorded prior to the second half of 2003 (See
REAL ESTATE OWNED below).
18
Investment Activity
- -------------------
During the years ended December 31, 2004 and 2003, we made the following
investments:
(In thousands)
December 31, 2004 December 31, 2003
-------------------------- --------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
---------- ------------- ---------- -------------
FNMA certificates $ 34,823 5.60% $ 39,960 5.48%
Mezzanine loans 8,500 11.64% 3,293 16.50%
Bridge loans/notes receivable 4,517 12.96% 15,007 11.82%
Variable rate bridge loans -- -- 16,039 LIBOR + 4.09%
Taxable revenue bonds -- -- 7,672 8.69%
Mortgage loans -- -- 1,011 11.00%
---------- ----------
Total $ 47,840 $ 82,982
========== ==========
During 2004, the composition of our investment portfolio shifted to include a
larger proportion of debt securities and a smaller proportion of other debt
instruments. This change resulted from the relative availability of investment
opportunities, the ability to obtain leverage on those assets to allow further
investment and the timing of cash flows related to the liquidation of other
assets in our portfolio.
Our declaration of trust requires that 40% of our new investments be of the type
we originally invested in prior to our reorganization in 1999. Generally, we
seek to maintain at least 40% of our investments in government-insured or
guaranteed investments. At December 31, 2004, we owned approximately $194.6
million in GNMA and FNMA certificates, representing approximately 55.8% of our
assets.
Results of Operations
COMPARISON OF YEARS ENDED DECEMBER 31, 2004 AND 2003
The following is a summary of our operations for the year ended December 31,
2004 compared to 2003:
(In thousands)
Year Ended December 31,
----------------------------------
2004 2003 Change
------- ------- ------
Total revenues $15,909 $15,051 5.7%
Total expenses 10,830 5,653 91.6
Total other income 6,194 2,486 149.2
------- ------- -------
Net income $11,273 $11,884 (5.1%)
======= ======= =======
For the year ended December 31, 2004, as compared to the year ended December 31,
2003, revenues and other income have increased mainly due to an increase in
acquisitions and additional fundings of GNMA and FNMA certificates and revenues
generated by foreclosed properties. Expenses have also increased for these
periods due to an increase in expenses related to the foreclosed properties,
higher interest costs, general and administrative expenses and depreciation
recorded for real estate owned.
19
REVENUES
Changes in the components of our revenue in 2004 as compared to 2003 were as
follows:
% Change from
Prior Year
------------------
Interest income
Debt securities 11.1%
Mortgage loans (30.4)
Notes receivable (19.6)
Revenue bonds 319.2
Temporary investments (23.6)
Rental income 100.0
Other revenues 5.4
------------------
Total revenues 5.7%
==================
At December 31, 2004 and 2003 we had the following investments:
December 31, 2004 December 31, 2003
-------------------------- --------------------------
Weighted Weighted
Carrying Average Carrying Average
Amount Interest Rate Amount Interest Rate
---------- ------------- ---------- -------------
Debt securities 194,587 6.47% 167,260 6.80%
Mortgage loans 21,376 11.68% 13,864 11.80%
Notes receivable 23,111 9.43% 35,946 7.96%
Revenue bonds 6,672 8.69% 7,586 8.69%
Interest income from debt securities increased, primarily due to the continued
advances on the Ellington Plaza GNMA certificate and the purchase of eight FNMA
certificates during 2004, partially offset by the repayment of the Autumn Creek
GNMA certificate.
Interest income from mortgage loans decreased, primarily due to the receipt of
additional interest due upon repayment of the Stonybrook II first mortgage and
mezzanine loan in 2003, with no comparable items in 2004, and the reduction of
interest received from certain foreclosed properties due to the reclassification
of these assets to real estate owned.
Interest income from notes receivable decreased, primarily due to the default of
required debt service payments from foreclosed properties (See REAL ESTATE OWNED
below).
Interest income from revenue bonds relates to taxable revenue bonds purchased in
October 2003 and the increase in 2004 reflects a full year of ownership as
compared to two months in 2003.
Rental income was recorded for the year ended December 31, 2004 due to the
reclassification of the Plaza at San Jacinto property as Real Estate Owned -
Held and Used (see REAL ESTATE OWNED below).
20
EXPENSES
Changes in components of our expenses in 2004 as compared to 2003 were as
follows:
% Change from
Prior Year
-------------------
Interest 57.7%
General and administrative 89.7
Fees to Advisor 7.9
Property operations 100.0
Depreciation 100.0
Amortization and other 9.3
-------------------
Total expenses 91.6%
===================
At December 31, 2004, excluding mortgages on real estate owned, we had total
debt of approximately $166.1 million with a weighted average interest rate of
2.76% per year, including the effect of a swap agreement put into place in April
2003. At December 31, 2003, we had a comparable balance of approximately $184.5
million with a weighted average interest rate of 1.80% per year.
Interest expense increased, primarily due to the borrowings stemming from the
increased investment base. This increase can also be attributed to the interest
rate swap agreement, which was outstanding for all of 2004 and a steady increase
in LIBOR during 2004. During 2004, LIBOR increased 1.30%.
General and administrative expenses increased, primarily due to the increase in
legal fees related to foreclosed properties, the increase in accounting fees
related to Sarbanes-Oxley consulting services, and the increase of certain other
administrative costs.
Property operations were recorded for the year ended December 31, 2004 due to
the reclassification of the Plaza at San Jacinto as Real Estate Owned - Held and
Used (see REAL ESTATE OWNED below).
Depreciation expense was recorded for the year ended December 31, 2004 relating
to the reclassification of foreclosed properties from Real Estate Owned-Held for
Sale to Real Estate Owned-Held and Used. Depreciation was captured for the 2004
periods, as well as retroactively to the initial foreclosure dates of the
properties (see REAL ESTATE OWNED below).
OTHER INCOME
Other income increased, due to the increase in net operating income recognized
from the operations of foreclosed properties (see REAL ESTATE OWNED below).
REAL ESTATE OWNED
During 2003, five loans defaulted and we foreclosed upon and took ownership of
the underlying properties. We reclassified our investments in these foreclosed
properties as Real Estate Owned-Held for Sale on our balance sheet and
recognized income from the operations of these properties. As a result of these
unusual circumstances, there was a substantial decrease in interest income from
these loans, as noted above.
During the time we owned the real estate, certain circumstances have occurred
that warranted the reclassification of most of these assets. The following is
the December 31, 2004 classification of our real estate owned portfolio:
o REAL ESTATE OWNED - HELD AND USED
During 2004, we reclassified one of the unsold properties as Real
Estate Owned - Held and Used because we have not sold it within the
one-year time frame required by generally accepted accounting
21
principles ("GAAP"). As a result, we recorded depreciation on the
property in 2004, as well as retroactively for the full year that the
property was classified as Held for Sale. We also recognize the
property's rental income and operational expenses in separate line
items on the income statement. During February 2005, this property was
sold (see Note 17 to our consolidated financial statements).
During 2004, we reclassified our Real Estate Owned - Subject to Sales
Contract properties to Real Estate Owned - Held and Used (see below).
o REAL ESTATE OWNED - SUBJECT TO SALES CONTRACTS
In the fourth quarter of 2003, we sold three of the properties and
provided 100% financing to the buyer, via a bridge loan. Per the terms
of that loan, we received 100% of the properties' cash flow until
permanent financing was put in place in December 2004 (see below). Due
to our providing 100% financing to the buyer, these transactions did
not constitute a sale in accordance with GAAP and, therefore, we
continued to classify the properties as Real Estate Owned - Subject to
Sales Contracts on the balance sheet.
During December 2004, UBS Real Estate Investments, Inc. provided
permanent first mortgage financing in the amount of $41.0 million for
these properties. We restructured the remaining balance due from the
borrower of approximately $13.4 in the form of a mezzanine loan.
This sale still does not constitute a sale in accordance with GAAP. We
have reclassified these properties on our balance sheet as Real Estate
Owned - Held and Used; and have recorded depreciation on the
properties in 2004, as well as retroactively for the period since
foreclosure. We have recognized income associated with the properties
as income from real estate owned on the income statement up to the
date of refinancing. We will recognize income associated with $13.4
million mezzanine loan as rental income on future income statements.
o REAL ESTATE OWNED - HELD FOR SALE
One remaining property in our real estate owned portfolio, Autumn
Creek, will continue to remain as Real Estate Owned - Held for Sale as
we continue to market the real estate. We have changed the marketing
strategy of this asset in order to reflect marketplace behavior.
There have been circumstances that arose during 2004 that have warranted us to
seek foreclosure of another property to protect our investment. The Northbrooke
mezzanine loan defaulted by ceasing to make required debt service payments and
we are currently in the process of determining the necessary steps for
foreclosure. We expect to fully recover our investment.
We have focused on increasing the occupancy level and operating income of all of
the properties owned to projected stabilization levels. The weighted average
occupancy rate on the stabilized properties at the time of foreclosure was 81.4%
and the weighted average occupancy rate on these same properties at December 31,
2004 was 95.9%. As a result, we have experienced increasing yields on several of
these foreclosed assets. While property level operations continue to improve, we
are actively seeking to sell or refinance the properties with third parties so
that we can redeploy the capital invested into higher yielding investments.
OTHER ITEMS
The loss on the repayment of debt securities in 2003 related to the write-off of
a purchase premium upon repayment of a GNMA certificate.
COMPARISON OF YEARS ENDED DECEMBER 31, 2003 AND 2002
The following is a summary of our operations for the year ended December 31,
2003 compared to 2002:
22
(In thousands)
Year Ended December 31,
-------------------------------------
2003 2002 Change
---------- --------- ----------
Total revenues $15,051 $10,458 43.9%
Total expenses 5,653 3,812 48.3
Total other income 2,486 3,014 (17.5)
---------- --------- ----------
Net income $11,884 $9,660 23.0%
========== ========= ==========
For the year ended December 31, 2003, as compared to the year ended December 31,
2002, revenues and other income increased mainly due to increases in investment
activity during 2003, as well as the reclassification of certain foreclosed
assets into real estate owned. Expenses also increased for these periods due to
increased borrowing activity to fund investments, as well as higher general and
administrative expenses related to the foreclosure of real estate properties.
REVENUES
Changes in components of our revenues in 2003 as compared to 2002 were as
follows:
Year Ended
December 31 %
Change from
Prior Year
------------------
Interest income
Debt securities 51.9%
Mortgage loans 26.7
Notes receivable 39.5
Revenue bonds 100.0
Temporary investments 10.0
Other revenues (0.6)
------------------
Total revenues 43.9%
==================
Interest income from debt securities increased, primarily due to the purchase of
three additional GNMA certificates in the latter part of 2002, and the purchase
of fifteen FNMA certificates during 2003.
Interest income from mortgage loans increased, 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 in 2003.
Interest income from notes receivable increased, due to the initial funding of
ten 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 (See REAL ESTATE OWNED above).
Interest income from revenue bonds, arose from our first purchase of taxable
revenue bonds in October 2003.
Rental income increased, primarily due to the net operating income from the
operations of foreclosed properties, while we recorded no such income in 2002.
23
EXPENSES
Changes in components of our expenses in 2003 as compared to 2002 were as
follows:
Year Ended
December 31 %
Change from
Prior Year
------------------
Interest 107.5%
General and administrative 33.9
Fees to Advisor 19.2
Amortization and other (0.8)
------------------
Total expenses 48.3%
==================
Interest expense increased, due to the increased borrowings on our warehouse
facility and additional borrowings under the repurchase facility, which were
used to fund investments, 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 our cash flows and earnings. The weighted average interest rate
on borrowings was 1.80% in 2003, compared to 2.10% in 2002. The rate decrease
was primarily due to a steady decrease in LIBOR during 2002 and 2003.
General and administrative increased primarily due to increased legal fees on
foreclosed properties and an increase in excise taxes due to the annual
distribution obligation falling below the minimum threshold.
Fees to Advisor increased, primarily due to an increase in asset management fees
due to a higher asset base and an increase in overhead reimbursements. These
increases were partially offset by decreased incentive management fees as none
were earned by the Advisor in 2003.
OTHER ITEMS
A loss on the repayment of debt securities in the amount of approximately
$391,000, relating to the write-off of a purchase premium upon repayment of one
GNMA certificate and a gain of approximately $18,000 for the sale of a vacant
lot at Concord at Gessner, were recorded for the year ended December 31, 2003.
During 2002, the Company had a gain of approximately $614,000, resulting from
the sale of one GNMA certificate.
Funds from Operations
- ---------------------
Funds from operations ("FFO"), represents net income or loss (computed in
accordance with GAAP), excluding gains (or losses) from sales of property,
excluding depreciation and amortization related to real property and including
funds from operations for unconsolidated joint ventures calculated on the same
basis. FFO is calculated in accordance with the National Association of Real
Estate Investment Trusts ("NAREIT") definition. FFO does not represent cash
generated from operating activities in accordance with GAAP and is not
necessarily indicative of cash available to fund cash needs. FFO should not be
considered as an alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flows as a measure of
liquidity. Our management considers FFO a supplemental measure of operating
performance, and, along with cash flows from operating activities, financing
activities, and investing activities, it provides investors with an indication
of our ability to incur and service debt, make capital expenditures, and to fund
other cash needs.
For the years ended December 31, 2003 and 2002, FFO was equal to net income, as
we did not record depreciation expense on any of our assets.
24
The following table reconciles net income to FFO for the year ended December 31,
2004:
(In thousands)
Year Ended
December 31, 2004
-----------------
Net income $ 11,273
Add back: depreciation of real property 2,143
---------
FFO $ 13,416
=========
Cash flows from:
Operating activities $ 13,986
=========
Investing activities $ (22,546)
=========
Financing activities $ 9,206
=========
Weighted average shares outstanding:
Basic 8,336
=========
Diluted 8,343
=========
Since not all companies calculate FFO in a similar fashion, our calculation
presented above may not be comparable to similarly titled measures reported by
other companies.
Liquidity and Capital Resources
- -------------------------------
SOURCES OF FUNDS
We expect that cash generated from our investments, as well as our borrowing
capacity, will meet our needs for short-term liquidity and will be sufficient to
pay all expenses and distributions to our shareholders in amounts sufficient to
retain our REIT status in the foreseeable future. In order to qualify as a REIT
under the Internal Revenue Code, as amended, we must, among other things,
distribute at least 90% of our taxable income. We believe that we are in
compliance with the REIT-related provisions of the Code.
We finance our investing activity primarily through borrowing from various
facilities at short-term rates. At December 31, 2004, we had approximately $38.3
million available to borrow, contractually, under our debt facilities without
exceeding limits imposed by debt covenants and our declaration of trust.
In August 2005, our warehouse facility will mature. We are seeking to replace
this facility with a similar one with similar terms and are currently in
negotiations with financial institutions to develop such a facility.
From time to time, we may also issue common shares or other equity to fund
investing activity. In April 2003, we completed a public offering of 1,955,000
common shares for net proceeds of approximately $27.5 million, which were used
to fund investments.
We have capacity to raise approximately $170.0 million of additional funds by
issuing either common or preferred shares pursuant to a shelf registration
statement filed with the SEC in 2002. If market conditions warrant, we may seek
to raise additional funds for investment through further offerings, although the
timing and amount of such offerings cannot be determined at this time.
SUMMARY OF CASH FLOWS
During the year ended December 31, 2004, as compared to the year ended December
31, 2003, the net change in cash and cash equivalents increased by approximately
$9.0 million. Operating cash flows improved by $2.2 million primarily due to
25
higher cash earnings and favorable variances in timing of receivables collected.
A decrease in net cash used in investing activities (approximately $101.1
million) and a corresponding decrease in net cash provided by financing
activities (approximately $94.3 million) were due to a higher level of investing
activity in debt securities, mortgage loans, and mezzanine and bridge loans
during the 2003 period. The lower level of investing in 2004 corresponded to the
decrease in net borrowings.
During the year ended December 31, 2003, as compared to the year ended December
31, 2002, the net change in cash and cash equivalents decreased approximately
$17.8 million. Operating cash flows improved by approximately $2.8 million
primarily due to higher earnings. An increase in net cash used in investing
activities (approximately $49.3 million) and an increase in net cash provided by
financing activities (approximately $28.7 million) were due to an increase in
proceeds received from repurchase and warehouse facilities used for purchases of
mortgage loans and debt securities.
OTHER
We are 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.
Distributions
- -------------
Of the total distributions of approximately $13.3 million and approximately
$12.6 million for the years ended December 31, 2004 and 2003, respectively,
approximately $2.1 million ($.25 per share or 15.48%) represented a return of
capital for the year ended December 31, 2004 and approximately $667,000 ($.08
per share or 5.31%) represented a return of capital for the year ended December
31, 2003, determined in accordance with GAAP. As of December 31, 2004, the
aggregate amount of the distributions made since our initial public offering
representing a return of capital, in accordance with GAAP, totaled approximately
$17.2 million. The portion of the distributions which constituted a return of
capital was more significant in our initial years in order to permit us to
maintain level distributions to shareholders while we were in the process of
investing the proceeds from our initial public offering.
Application of Critical Accounting Policies
- -------------------------------------------
Our consolidated financial statements are based on the selection and application
of GAAP, which requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. These estimates
and assumptions sometimes involve future events which cannot be determined with
absolute certainty. Therefore, our determination of estimates requires that we
exercise our judgment. While we have used our best estimates based on the facts
and circumstances available to us at the time, different results may actually
occur and any such differences could be material to our financial statements.
We believe the following policies may involve a higher degree of judgment and
complexity and represent the critical accounting policies used in the
preparation of our financial statement:
o valuation of investments in debt securities;
o assessment of impairment of mortgage loans and notes;
o classification of mezzanine loan investments; and
o classification and valuation of real estate owned.
VALUATION OF INVESTMENTS IN DEBT SECURITIES
SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES,
provides guidance on determining the valuation of investments owned. The initial
classification of our investments in the "available for sale" category rather
than as "held to maturity" is due to our intent to sell these securities if the
terms of a particular offer are deemed favorable to us. We have sold these
securities in the past and from time to time, we may look to sell these
securities in the future if it is opportunistic for us to do so. Because of this
classification, we must carry our investments at estimated fair value. GNMA and
FNMA DUS Certificates are relatively liquid investments. We use third-party
quoted market prices as our primary source of valuation information.
26
ASSESSMENT OF IMPAIRMENT OF MORTGAGE LOANS AND NOTES
SFAS No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, establishes
standards regarding impairment issues related to our mortgage loans and notes
receivable. Our portfolio of mortgage loans and notes is periodically evaluated
for impairment to establish appropriate loan loss reserves, if necessary. Our
Advisor has a credit review committee which meets monthly and reviews the status
of each loan and note and maintains a "watch list" of loans (including loans for
which we have issued guarantees) for which the underlying property may be
experiencing construction cost overruns, delays in construction completion,
occupancy shortfalls, lower than expected debt service coverage ratios, or other
matters which might cause the borrower to be unable to make scheduled interest
and principal payments. If a loan is experiencing difficulties, members of this
credit committee work with the borrower to try to resolve the issues, which
could include extending the loan term, making additional advances, or reducing
required payments. If, in the judgment of our management, it is determined that
it is probable that we will not receive all contractually required payments when
they are due, the loan or note would be deemed impaired, and a loan loss reserve
established. As of December 31, 2004, our management had determined that no loan
required a loss reserve.
CLASSIFICATION OF MEZZANINE LOAN INVESTMENTS
Our mezzanine loan investments bear interest at fixed or variable rates, and
some also include provisions that allow us to participate in a percentage of the
underlying property's cash flows from operations and proceeds from a sale or
refinancing. At the inception of each such investment, our management must
determine whether such investment should be accounted for as a loan, joint
venture or as real estate, using the guidance contained in the Third Notice to
Practitioners issued by the AICPA. Although the accounting methodology does not
affect our cash flows from these investments, this determination affects the
balance sheet classification of the investments as well as the classification,
timing and amounts of reported earnings.
Accounting for the investment as real estate is required if we expect that the
amount of profit, regardless of its nature, is over 50 percent of the property's
total expected residual profit. If a mezzanine investment were accounted for as
an investment in real estate, our balance sheet would show the underlying
property and its related senior debt (if such debt were not also held by us),
and the income statement would include the property's rental revenues, operating
expenses and depreciation.
If we expect to receive less than 50 percent of the property's residual profit,
then loan or joint venture accounting is applied. Loan accounting is
appropriate:
o if the borrower has a substantial equity investment in the property;
o if we have recourse to substantial assets of the borrower;
o if the property is generating sufficient cash flow to service normal
loan amortization; or
o if certain other conditions are met.
Under loan accounting, we recognize interest income as earned and additional
interest from participations as received. Joint venture accounting would require
that we only record our share of the net income from the underlying property.
Our management must exercise judgment in making the required accounting
determinations. For each mezzanine arrangement, we project total cash flows over
the loan's term and our share in those cash flows, and consider the borrower's
equity, the contractual cap, if any, on total yield to us over the term of the
loan, market yields on comparable loans, borrower guarantees, and other factors
in making an assessment of the proper accounting. To date, we have determined
that all mezzanine investments should be accounted for as loans.
CLASSIFICATION AND VALUATION OF REAL ESTATE OWNED
The accounting for the foreclosure, ownership and subsequent sale of real estate
is governed by:
o SFAS No. 15, ACCOUNTING BY DEBTORS AND CREDITORS FOR TROUBLED DEBT
RESTRUCTURINGS;
27
o SFAS No. 144, ACCOUNTING FOR THE SALE OR DISPOSAL OF LONG-LIVED
ASSETS; and
o SFAS No. 66, ACCOUNTING FOR SALES OF REAL ESTATE.
During 2003, we exercised our rights under subordinated promissory notes and
other documents to take possession of certain real estate collateral. We have
also purchased the first mortgage loans on all of the respective properties,
except for Autumn Creek, and acquired the real estate at foreclosure auctions.
Three of the properties were subsequently sold, although the transaction did not
meet the sale criteria of SFAS No. 66, despite the fact that the purchaser later
secured permanent first-mortgage financing.
When a loan is in the process of foreclosure, it is our policy to initially
reclassify the balance of the loan into Real Estate Owned-Held for Sale 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. We obtain
independent appraisals of all foreclosed real estate to assist management in
evaluating property values. To date, no losses have been recorded upon
foreclosure.
It is our intent to sell foreclosed properties within a short time period. Due
to the Held for Sale classification, we do not initially depreciate the
properties. If we do not sell a property or do not meet sale criteria within the
permissible timeframe for Held for Sale classification, we reclassify the
property into Real Estate Owned-Held and Used or Subject to Sales Contract
categories and account for it as an operating asset. Depreciation is recorded
for the asset including a retroactive adjustment for the full period that the
property was classified as Real Estate Owned-Held for Sale. Income from property
operations is recorded provided realization and collectibility of the amounts
are considered likely. Likewise, interest income on notes receivable for
properties sold that do not meet the criteria for sale recognition is recorded
to the extent that collectibility is considered likely.
This accounting for real estate owned requires substantial judgment as to the
fair value of the assets, the likelihood of collecting income and our ability to
sell the properties. As of December 31, 2004, we believe that the amounts
reported are fairly stated and realizable.
Commitments, Contingencies and Off Balance Sheet Arrangements
- -------------------------------------------------------------
We have no unconsolidated subsidiaries, special purpose off-balance sheet
financing entities, or other off-balance sheet arrangements.
The following table reflects our maximum exposure and carrying amount as of
December 31, 2004, for guarantees we have entered into:
(In thousands) Maximum Carrying
Exposure Amount
- --------------------------------- ------------- ------------
Stabilization loan guarantees (1) $12,270 $ --
FNMA loan program (2) 3,221 --
------- -----------
$15,491 $ --
======= ===========
(1) These guarantees provide credit enhancement to developers during
construction and lease-up of new properties for a fee. We issued these
guarantees as a means to address an undeserved market for credit and to
establish and maintain relationships with developers. We believe there is
little risk associated with the guarantees and expect no liquidity
requirements in the near term.
(2) These indemnification agreements relate to a program we initiated and have
since discontinued. We believe the risk of any cost associated with the
indemnity agreement is minimal.
The maximum exposure amount is not indicative of any expected losses under the
guarantees. For full description of these guarantees, see Note 16 to the
consolidated financial statements.
28
Contractual Obligations
- -----------------------
In conducting business, we enter into various contractual obligations. Detail of
these obligations, including expected settlement periods, is contained below.
Payments Due by Period
(In thousands)
Less than More than
Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years
---------- ----------- ----------- ------------ ------------
Debt:
Lines of credit:
Repurchase facilities $157,633 $157,633 $ -- $ -- $ --
Warehouse facility 3,827 3,827 -- -- --
Revolving facility 4,600 4,600 -- -- --
Mortgage loan on real estate
owned (1) 15,993 15,993 -- -- --
Mortgage loan on real estate
owned (2) 41,000 469 1,671 1,984 36,876
Funding Commitments:
Funding commitment for
mezzanine/preferred stock (3) 74,500 74,500 -- -- --
Standby and forward bridge loan
commitments 2,104 2,104 -- -- --
Standby and forward mezzanine
loan commitments 379 -- 379 -- --
Forward GNMA commitments 2,279 2,279 -- -- --
---------- ----------- ----------- ------------ ------------
Total $302,315 $261,405 $ 2,050 $ 1,984 $ 36,876
========== =========== =========== ============ ============
(1) Represents a non-recourse mortgage loan on Real Estate Owned-Held for Sale
(Autumn Creek). We purchased the mortgage at an auction in February 2005.
(See Notes 7 and 17).
(2) Represents a first mortgage on properties we report as Real Estate Owned -
Held and Used (Concord Properties) as a sale of the properties did not meet
the criteria for sale recognition in accordance with GAAP. The debt is
non-recourse with respect to AMAC, the debt service is paid from the cash
flows of the properties and we will not be required to satisfy the
obligation. (See Note 7).
(3) Funding of this commitment has a remote likelihood of occurrence.
Recently Issued Accounting Standards
- ------------------------------------
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123(R), SHARE-BASED PAYMENT. As we already follow the fair value provisions set
forth in SFAS No. 123, this statement is expected to have an immaterial impact
on our financial statements.
There are no other new pending accounting pronouncements which we are required
to adopt that would have a significant impact on our consolidated financial
statements.
Inflation
- ---------
Inflation did not have a material effect on our results for the periods
presented.
29
Item 7A. 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 our investments are exposed to 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 our control.
INTEREST RATE RISK
Interest rate fluctuations can adversely affect our income in many ways and
present a variety of risks, including the risk of mismatch between asset yields
and borrowing rates.
Our operating results depend in large part on differences between the income
from our assets (net of credit losses) and our borrowing costs. Most of our
assets generate fixed returns and have terms in excess of five years. We fund
the origination and acquisition of a significant portion of these assets with
borrowings which have variable 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 our net
income. Our borrowings under repurchase and warehouse agreements bear interest
at rates that fluctuate with LIBOR.
Various financial vehicles exist which would allow our management to mitigate
the impact of interest rate fluctuations on our cash flows and earnings. During
March 2003, upon our management's analysis of the interest rate environment and
the costs and risks of such strategies, we entered into an interest rate swap in
order to hedge against increases in the floating interest rate on our repurchase
facilities. The swap is a five-year agreement with Bank of America whereby we
pay Bank of America a fixed 3.48% on a notional amount of $30.0 million. In
return, Fleet pays us a floating rate equivalent to the 30-day LIBOR rate on the
same notional amount. A possible risk of such swap agreements is the possible
inability of Bank of America to meet the terms of the contracts with us;
however, there is no current indication of such an inability.
Based on the $136.1 million unhedged portion of $166.1 million of borrowings
outstanding at December 31, 2004, a 1% change in LIBOR would impact our annual
net income and cash flows by approximately $1.4 million. However, since the
interest income from some of our loans is also based on LIBOR, a 1% increase in
LIBOR would increase our annual net income and cash flows from such loans by
approximately $157,000. Because the value of our debt securities fluctuate with
changes in interest rates, rate fluctuations will also affect the market value
of our net assets.
30
Item 8. Financial Statements and Supplementary Data.
Page
---------
(a) 1. Financial Statements
Report of Independent Registered Public Accounting Firm 32
Consent of Independent Registered Public Accounting Firm 33
Management's Report on the Effectiveness of Internal
Control over Financial Reporting 34
Report of Independent Registered Public Accounting Firm 35
Consolidated Balance Sheets as of December 31, 2004 and 2003 37
Consolidated Statements of Income for the years ended
December 31, 2004, 2003 and 2002 38
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2004, 2003 and 2002 39
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 40
Notes to Consolidated Financial Statements 42
(a) 2. Financial Statement Schedules
-----------------------------
All schedules have been omitted because they are not required or
because the required information is contained in the financial
statements or notes thereto.
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees
And Shareholders of
American Mortgage Acceptance Company
New York, New York
We have audited the accompanying consolidated balance sheets of American
Mortgage Acceptance Company and subsidiaries (the "Company") as of December 31,
2004 and 2003, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of American Mortgage Acceptance
Company and subsidiaries as of December 31, 2004 and 2003, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 16, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
DELOITTE & TOUCHE LLP
New York, New York
March 16, 2005
32
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No.
33-87440 of American Mortgage Acceptance Company on Form S-3 and in Registration
Statement No. 33-118572 of American Mortgage Acceptance Company on Form S-8 of
our report dated March 16, 2005 relating to the consolidated financial
statements of American Mortgage Acceptance Company and management's report on
the effectiveness of internal control over financial reporting appearing in this
Annual Report on Form 10-K of American Mortgage Acceptance Company for the year
ended December 31, 2004.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 16, 2005
33
MANAGEMENT'S REPORT ON THE EFFECTIVENESS OF
INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of American Mortgage Acceptance Company is responsible for
establishing and maintaining adequate internal control over financial reporting.
Our internal control system was designed to provide reasonable assurance to our
management and Board of Trustees regarding the preparation and fair presentation
of published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
American Mortgage Acceptance Company management assessed the effectiveness of
the Company's internal control over financial reporting as of December 31, 2004.
In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in
INTERNAL CONTROL - INTEGRATED FRAMEWORK. Based upon our assessment we believe
that, as of December 31, 2004, our internal control over financial reporting is
effective in accordance with those criteria.
Deloitte & Touche, LLP, our independent auditors, have issued an audit report on
our assessment of the Company's internal control over financial reporting, which
appears on page 35.
/s/ Stuart J. Boesky /s/ Alan P. Hirmes
- -------------------- ------------------
Stuart J. Boesky Alan P. Hirmes
Chief Executive Officer Chief Financial Officer
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees
And Shareholders of
American Mortgage Acceptance Company
New York, New York
We have audited management's assessment, included in the accompanying
"Management's Report on Internal Controls over Financial Reporting", that
American Mortgage Acceptance Company together with its consolidated subsidiaries
(the "Company") maintained effective internal control over financial reporting
as of December 31, 2004, based on the criteria established in "INTERNAL
CONTROL--INTEGRATED FRAMEWORK" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of trustees, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
35
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the criteria established in "INTERNAL
CONTROL--INTEGRATED FRAMEWORK" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in
"INTERNAL CONTROL--INTEGRATED FRAMEWORK" issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
December 31, 2004 and the related consolidated statements of income,
shareholders' equity and cash flows for the year ended December 31, 2004 of the
Company and our report dated March 16, 2005 expressed an unqualified opinion on
those financial statements.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 16, 2005
36
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
ASSETS
December 31,
----------------------
2004 2003
--------- ---------
Investments in debt securities $ 194,587 $ 167,260
Investments in mortgage loans, net 21,376 13,864
Notes receivable, net 23,111 35,946
Investments in revenue bonds 6,672 7,586
Investment in ARCap 20,240 20,240
Real Estate Owned - Held and Used, net 60,211 --
Real Estate Owned - Subject to Sales Contracts, net -- 51,616
Real Estate Owned - Held for Sale 17,924 25,802
Cash and cash equivalents 2,674 2,028
Other assets 2,238 2,765
--------- ---------
Total assets $ 349,033 $ 327,107
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Repurchase facilities payable $ 157,633 $ 149,529
Warehouse facility payable 3,827 34,935
Line of credit - due to related party 4,600 --
Mortgages payable on real estate owned 56,993 15,993
Accounts payable and accrued expenses 1,344 1,830
Due to Advisor and affiliates 770 590
Distributions payable 3,334 3,335
--------- ---------
Total liabilities 228,501 206,212
--------- ---------
Commitments and contingencies
Shareholders' equity:
Shares of beneficial interest; $.10 par value; 25,000
shares authorized; 8,716
issued and 8,337 outstanding in 2004 and 8,713 issued and 8,338
outstanding in 2003 871 871
Treasury shares of beneficial interest at par; 379
shares in 2004 and 375 shares in 2003 (38) (38)
Additional paid-in capital 126,800 126,779
Share based compensation (16) (29)
Distributions in excess of net income (17,202) (15,138)
Accumulated other comprehensive income 10,117 8,450
--------- ---------
Total shareholders' equity 120,532 120,895
--------- ---------
Total liabilities and shareholders' equity $ 349,033 $ 327,107
========= =========
See accompanying notes to consolidated financial statements.
37
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
Years Ended December 31,
-----------------------------------
2004 2003 2002
-------- -------- --------
Revenues:
Interest income:
Debt securities $ 9,734 $ 8,765 $ 5,769
Mortgage loans 1,808 2,597 2,050
Notes receivable 2,546 3,166 2,270
Revenue bonds 633 151 --
Temporary investments 42 55 50
Rental income 812 -- --
Other revenues 334 317 319
-------- -------- --------
Total revenues 15,909 15,051 10,458
-------- -------- --------
Expenses:
Interest 4,017 2,548 1,228
General and administrative 1,740 917 685
Fees to Advisor 1,956 1,812 1,520
Property operations 563 -- --
Depreciation 2,143 -- --
Amortization and other 411 376 379
-------- -------- --------
Total expenses 10,830 5,653 3,812
-------- -------- --------
Other income:
Equity in earnings of ARCap 2,400 2,400 2,400
Income from real estate owned 3,794 459 --
Net (loss) gain on sale or repayment of
debt securities and land parcel -- (373) 614
-------- -------- --------
Total other income 6,194 2,486 3,014
-------- -------- --------
Net income $ 11,273 $ 11,884 $ 9,660
======== ======== ========
Net income per share
(basic and diluted) $ 1.35 $ 1.52 $ 1.61
======== ======== ========
Dividends per share $ 1.60 $ 1.60 $ 1.51
======== ======== ========
Weighted average shares outstanding
Basic 8,336 7,803 6,018
======== ======== ========
Diluted 8,343 7,815 6,018
======== ======== ========
See accompanying notes to consolidated financial statements.
38
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands)
Treasury Shares of
Shares of Beneficial Interest Beneficial Interest
----------------------------- ----------------------------
Shares Amount Shares Amount
------------ ------------- ------------ ------------
Balance at January 1, 2002 4,214 $ 421 (375) $ (38)
Comprehensive income:
Net income
Other comprehensive income:
Unrealized holding gain on investments
Less: reclassification adjustment for gain included
in net income
Total other comprehensive income
Comprehensive income
Issued common shares 2,525 253
Distributions
-------------------------------------------------------------
Balance at December 31, 2002 6,739 674 (375) (38)
Comprehensive income:
Net income
Other comprehensive income:
Net unrealized loss on interest rate derivatives
Unrealized holding loss on investments
Plus: reclassification adjustment for loss included in
net income
Total other comprehensive loss
Comprehensive income
Issuance of share options
Amortization of share option costs
Common shares issued 1,974 197
Distributions
-------------------------------------------------------------
Balance at December 31, 2003 8,713 871 (375) (38)
Comprehensive income:
Net income
Other comprehensive income:
Net unrealized gain on interest rate derivatives
Unrealized holding gain on investments
Total other comprehensive income
Comprehensive income
Issuance of share options
Amortization of share option costs
Common shares issued to trustees 3
Purchase of treasury shares (4)
Distributions
-------------------------------------------------------------
Balance at December 31, 2004 8,716 $ 871 (379) $ (38)
=============================================================
Additional Distributions
Paid-in Shared Based in Excess
Capital Compensation of Net Income
-------------- --------------- -----------------
Balance at January 1, 2002 $ 68,841 $(14,505)
Comprehensive income:
Net income 9,660
Other comprehensive income:
Unrealized holding gain on investments
Less: reclassification adjustment for gain included
in net income
Total other comprehensive income
Comprehensive income
Issued common shares 30,629
Distributions (9,626)
-----------------------------------------------------------
Balance at December 31, 2002 99,470 (14,471)
Comprehensive income:
Net income 11,884
Other comprehensive income:
Net unrealized loss on interest rate derivatives
Unrealized holding loss on investments
Plus: reclassification adjustment for loss included in
net income
Total other comprehensive loss
Comprehensive income
Issuance of share options 51 $ (51)
Amortization of share option costs 22
Common shares issued 27,258
Distributions (12,551)
-----------------------------------------------------------
Balance at December 31, 2003 126,779 (29) (15,138)
Comprehensive income:
Net income 11,273
Other comprehensive income:
Net unrealized gain on interest rate derivatives
Unrealized holding gain on investments
Total other comprehensive income
Comprehensive income
Issuance of share options 34 (34)
Amortization of share option costs 47
Common shares issued to trustees 40
Purchase of treasury shares (53)
Distributions (13,337)
-----------------------------------------------------------
Balance at December 31, 2004 $126,800 $ (16) $(17,202)
===========================================================
Accumulated Other
Comprehensive Comprehensive
Income Income Total
--------------- ----------------- -----------
Balance at January 1, 2002 $ 560 $ 55,279
Comprehensive income:
Net income $ 9,660 9,660
Other comprehensive income:
Unrealized holding gain on investments 8,757
Less: reclassification adjustment for gain included
in net income (614)
--------
Total other comprehensive income 8,143 8,143 8,143
Comprehensive income $ 17,803
========
Issued common shares 30,882
Distributions (9,626)
---------------------------------
Balance at December 31, 2002 8,703 94,338
Comprehensive income:
Net income $ 11,884 11,884
Other comprehensive income:
Net unrealized loss on interest rate derivatives (278)
Unrealized holding loss on investments (348)
Plus: reclassification adjustment for loss included in
net income 373
--------
Total other comprehensive loss (253) (253) (253)
--------
Comprehensive income $ 11,631
========
Issuance of share options
Amortization of share option costs 22
Common shares issued 27,455
Distributions (12,551)
----------------------------------------------------
Balance at December 31, 2003 8,450 120,895
Comprehensive income:
Net income $ 11,273 11,273
Other comprehensive income:
Net unrealized gain on interest rate derivatives 407
Unrealized holding gain on investments 1,260
--------
Total other comprehensive income 1,667 1,667 1,667
--------
Comprehensive income $ 12,940
========
Issuance of share options
Amortization of share option costs 47
Common shares issued to trustees 40
Purchase of treasury shares (53)
Distributions (13,337)
----------------------------------------------------
Balance at December 31, 2004 $ 10,117 $120,532
=================================
See accompanying notes to consolidated financial statements.
39
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-----------------------------------
2004 2003 2002
--------- --------- ---------
Cash flows from operating activities:
Net income $ 11,273 $ 11,884 $ 9,660
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense 2,143 -- --
Net loss (gain) on sale of assets or repay-
ment of debt securities and land parcel -- 373 (614)
Equity in earnings of ARCap, in excess of
distributions received -- -- 6
Amortization - deferred financing costs 266 170 6
Amortization - deferred compensation costs 47 22 --
Amortization - loan premium and
origination costs and fees (205) (518) (89)
Accretion of discounts and premiums on
debt securities 112 157 23
Other non-cash expense 40 -- --
Changes in operating assets and liabilities:
Accrued interest receivable 273 (936) (599)
Other assets 64 8 743
Due to Advisor and affiliates 179 (100) 359
Accounts payable and accrued expenses 225 91 (586)
Accrued interest payable (431) 639 39
--------- --------- ---------
Net cash provided by operating activities 13,986 11,790 8,948
--------- --------- ---------
Cash flows from investing activities:
Net proceeds from sale of land -- 37 --
Funding and purchase of mortgage loans (8,802) (50,680) (4,665)
Repayment of mortgage loans 1,306 9,463 --
Funding and purchase of notes receivable (8,308) (23,906) (22,307)
Repayment of notes receivable 21,286 5,746 7,683
Mortgage loan origination fees (net of
acquisition expenses) 46 187 169
Principal repayments of debt securities 17,787 8,539 526
Investment in debt securities (43,943) (62,290) (55,768)
Additions to real estate owned (2,809) (3,166) --
Purchase of revenue bonds -- (7,586) --
Principal repayment of revenue bonds 891 -- --
--------- --------- ---------
Net cash used in investing activities (22,546) (123,656) (74,362)
--------- --------- ---------
(continued)
40
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(continued)
Years Ended December 31,
-----------------------------------
2004 2003 2002
--------- --------- ---------
Cash flows from financing activities:
Proceeds from refinancing of Real Estate Owned 41,000 -- --
Proceeds from repurchase facilities 27,613 115,818 100,750
Repayments of repurchase facilities (19,509) (54,169) (56,480)
Proceeds from warehouse facility 1,245 26,147 8,788
Repayments of warehouse facility (32,353) -- --
Proceeds from line of credit - due to
related party 15,361 -- --
Repayments of line of credit - due to
related party (10,761) -- --
Deferred financing costs -- -- (669)
Distributions paid to shareholders (13,337) (11,761) (8,471)
Treasury stock purchases (53) -- --
Issuance of common shares -- 27,455 30,882
--------- --------- ---------
Net cash provided by financing activities 9,206 103,490 74,800
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 646 (8,376) 9,386
Cash and cash equivalents at the beginning
of the year 2,028 10,404 1,018
--------- --------- ---------
Cash and cash equivalents at the end of
the year $ 2,674 $ 2,028 $ 10,404
========= ========= =========
Supplemental information:
Interest paid $ 3,822 $ 2,546 $ 1,163
========= ========= =========
Non-cash investing and financing activities:
Conversion of mortgage loans, notes
receivable, and assumption of debt on real
estate owned $ -- $ 72,748 $ --
========= ========= =========
See accompanying notes to consolidated financial statements.
41
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies
a) Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of American Mortgage
Acceptance Company and its wholly-owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation. Unless otherwise
indicated, we herein refer to American Mortgage Acceptance Company and its
subsidiaries as "AMAC," "we", "us", "our", and "our Company". We are externally
managed by Related AMI Associates, Inc., which acts as our Advisor. We operate
in one business segment.
Effective October 2003, we dissolved one subsidiary due to the assignment of
certain obligations under the Fannie Mae loan program to CharterMac Mortgage
Capital Corp. ("CMC") (see Note 16). We had formed the subsidiary to manage this
program.
Our consolidated financial statements are prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). The preparation of financial statements in
conformity with GAAP requires us 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.
Certain amounts from prior years have been reclassified to conform to the 2004
presentation.
b) Revenue Recognition
We derive our revenues from a variety of sources as follows:
o INTEREST INCOME ON DEBT SECURITIES - We recognize interest on GNMA and
FNMA certificates on the accrual basis as it becomes due. Interest
income also includes the amortization or accretion of premiums and
discounts arising at the purchase date, using the effective yield
method.
o INTEREST INCOME FROM MORTGAGE LOANS AND NOTES RECEIVABLE - We
recognize interest on mortgage loans and notes receivable on the
accrual basis as it becomes due. We amortize deferred loan origination
costs and fees over the life of the applicable loan as an adjustment
to interest income, using the interest method. Certain mortgage loans
contain provisions that allow us to participate in a percentage of the
underlying property's excess cash flows from operations and excess
proceeds from a sale or refinancing. This income is recognized on the
accrual basis as it becomes due.
o INTEREST INCOME ON REVENUE BONDS - Interest income from revenue bonds
is recognized on the accrual basis as it becomes due.
o INTEREST INCOME ON TEMPORARY INVESTMENTS - Interest income from
temporary investments, such as cash in banks and short-term
instruments, is recognized on the accrual basis as it becomes due.
o RENTAL INCOME - Rental income is recognized on properties classified
as held and used. Income or loss from the operations of real estate
owned is accrued monthly.
o INCOME FROM REAL ESTATE OWNED - Income or loss from the operations of
real estate owned is accrued monthly and included, net, in income from
real estate owned, for properties that are not recorded as held and
used (See Note 7).
42
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o OTHER REVENUES
o STANDBY LOAN COMMITMENT FEES - We receive fees for issuing standby
loan commitments. If we do not expect to fund the commitment, we
recognize the fee ratably over the commitment period. If we determine
that it is possible or probable that a commitment will be exercised,
we defer the fee and, if the commitment is exercised, amortize it over
the life of the loan as an adjustment to interest income; if the
commitment expires unexercised, we recognize it upon expiration.
o STABILIZATION GUARANTEE AND LOAN ADMINISTRATION FEES - We receive fees
from borrowers for guaranteeing construction loans made by third-party
lenders for the period between construction completion and funding of
the permanent loan. We receive these fees in advance and amortize them
over the guarantee periods. We also receive loan administration fees
on these guaranteed loans, on a monthly basis during the guarantee
period. We recognize these fees when due.
o FNMA LOAN GUARANTEE FEES - We receive monthly loss sharing/guarantee
fees related to the FNMA loan program (see Note 16) and recognize them
when due.
c) Investments in Debt and Debt Securities
We account for our investments in debt securities pursuant to SFAS No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES ("SFAS No.
115"). For investments classified as available for sale, we record changes in
fair value in other comprehensive income unless we consider an investment
impaired, or a decline in fair value to be other than temporary (see IMPAIRMENT
below).
1. Debt Securities
We classify our investments in GNMA and FNMA certificates as available
for sale debt securities and use third-party quoted market prices as
our primary source of valuation.
2. Mortgage Loans and Notes Receivable
We classify these investments as held to maturity and, accordingly,
carry them at cost, including unamortized loan origination costs and
fees.
3. Revenue Bonds
We classify our investments in revenue bonds as available for sale
debt securities. Because revenue bonds have a limited market, we
estimate fair value for each bond as the present value of its expected
cash flows using a discount rate for comparable investments.
4. Impairment
For investments in mortgage loans and notes receivable, we follow the
provisions of Statement of Financial Accounting Standards No. 114,
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN ("SFAS No. 114").
Under SFAS No. 114, a loan is impaired when, based on current
information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the
loan agreement. SFAS No. 114 requires lenders to measure impaired
loans based on:
(i) the present value of expected future cash flows discounted at the
loans' effective interest rate;
(ii) the loan's observable market price; or
(iii)the fair value of the collateral if the loan is
collateral-dependent.
43
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our portfolio of mortgage loans and notes is periodically evaluated
for possible impairment to establish appropriate loan loss reserves,
if necessary. If, in our judgment, we determine that it is probable
that we will not receive all contractually required payments when they
are due, we deem the loan or note impaired and establish a loan loss
reserve.
For any investments classified as available for sale, a decline in
market value below cost that we deem other than temporary is charged
to earnings. If, in the judgment of our Advisor, it is determined
probable that we will not receive all contractual payments required
when due, the bond is deemed impaired and is written down to its then
estimated fair value, with the amount of the write-down accounted for
as a realized loss.
5. Gain or Loss on Sale
Realized gains and losses on securities are included in earnings and
are recorded on the trade date and calculated as the difference
between the amount of cash received and the carrying cost of the
specific investment, including any unamortized discounts, premiums,
origination costs and fees.
d) Investment in ARCap
We account for our preferred equity investment in ARCap Investors, LLC ("ARCap")
using the equity method pursuant to Accounting Principles Board Opinion No. 18,
THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK ("APB No. 18")
as interpreted by AICPA Statement of Position 78-9, ACCOUNTING FOR INVESTMENTS
IN REAL ESTATE VENTURES, EITF Issue D-46, ACCOUNTING FOR LIMITED PARTNERSHIP
INVESTMENTS and EITF 03-16, ACCOUNTING FOR INVESTMENTS IN LIMITED LIABILITY
COMPANIES.
Our equity in the earnings of ARCap is accrued at the preferred dividend rate of
12%, which equals the income allocated to us under ARCap's operating agreement,
unless ARCap does not have earnings and cash flows adequate to meet this
dividend requirement.
e) Real Estate Owned
Real estate owned consists of properties of which we took possession by
exercising our rights under subordinated promissory notes and other documents.
In some cases, we also purchased the first mortgage loans on the properties
before foreclosing on the real estate collateral. We recorded these properties
at the lower of fair value of the real estate, less estimated disposal costs, or
the carrying amount of the foreclosed loan. The determination of fair value of
the real estate is based on independent appraisals. These properties fall into
three classifications:
o Held for Sale - properties for which we are actively seeking a buyer
o Held and Used - properties for which we are actively seeking a buyer,
but have held for longer than one year.
o Subject to Sales Contracts - properties for which the buyer has not
contributed sufficient equity to qualify for sale treatment pursuant
to Statement of Financial Accounting Standards No. 66, ACCOUNTING FOR
SALES OF REAL ESTATE ("SFAS No. 66").
When the foreclosure process is complete and we own the property, it is
classified as Held for Sale and the net income or loss from operations of the
property is included in other income. As it is our intent to sell those
properties in the near term, we do not initially depreciate the assets. We apply
the same accounting for properties classified as Subject to Sales Contracts. For
properties later classified as Held and Used and for properties Subject To Sales
Contracts, if full sale recognition is not achieved within one year, we record
depreciation on the asset, including an initial retroactive adjustment for the
entire period we owned the property. On the properties classified as Held and
Used, we record operating revenues and expenses separately.
44
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our portfolio of real estate owned is periodically evaluated for possible
impairment. If, in our judgment, we determine that the property's fair value is
below its carrying value, we will deem the property impaired and it will be
written down to its then estimated fair value, with the amount of the write-down
accounted for as a realized loss.
f) Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and temporary investments in
short-term instruments with original maturity dates equal to or less than three
months.
g) Loan Origination Costs and Fees
Acquisition fees and other direct expenses incurred for activities performed to
originate mortgage loans are capitalized and are included in Investment in
Mortgage Loans, net of any fees received from borrowers for loan originations.
They are amortized on a straight-line basis over the period of the loans.
h) Repurchase Facilities
We finance our investments in debt securities using repurchase facilities, under
which we sell the certificates to three counterparties under an agreement
requiring us to repurchase them for a fixed price on a fixed date, generally 30
days from the sale date. We account for these transactions as collateralized
borrowings; accordingly, the securities remain on our balance sheet with the
proceeds from the sales recorded as debt. The difference between the sale
proceeds and the fixed repurchase price is recorded as interest expense ratably
over the period between the sale and repurchase dates.
i) Stock Options
We account for stock options we issue under the fair value based method pursuant
to Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("SFAS No. 123"). We estimate the fair value of each
option grant using the Black-Scholes option-pricing model.
j) Interest Rate Derivative
We account for our interest rate swap agreement under SFAS No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133"). At
inception, we designated this swap as a cash flow hedge on the variable interest
payments of our floating rate financing. Accordingly, we record the swap at fair
market value, and record changes in market value in other comprehensive income
to the extent the hedge is effective. This hedge has been effective through
December 31, 2004. We record the net amounts receivable or payable under the
swap agreement as a component of interest expense.
k) Fair Value of Financial Instruments
As described above, our debt securities, revenue bonds, and interest rate
derivatives are carried at estimated fair values. We have determined that the
fair value of our remaining financial instruments, including mortgage loans and
cash and cash equivalents, notes receivable, and secured borrowings approximate
their carrying values at December 31, 2004 and 2003. The fair value of
investments in mortgage loans, revenue bonds, notes receivable, and debt
securities are based on actual market price quotes or by determining the present
value of the projected future cash flows using appropriate discount rates,
credit losses and prepayment assumptions. Other financial instruments carry
interest rates which are deemed to approximate market rates.
45
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
l) Income Taxes
We have qualified as a REIT under the Internal Revenue Code (the "Code"). A REIT
is generally not subject to federal income tax on that portion of its REIT
taxable income ("Taxable Income") which is distributed to its shareholders
provided that at least 90% of Taxable Income is distributed and provided that
such income meets certain other conditions. Accordingly, no provision for
federal income taxes is required. We may be subject to state taxes in certain
jurisdictions.
m) New Accounting Pronouncements
The following pronouncements issued in 2002 and 2003 relate to disclosure only
or had no material impact on our financial statements:
o SFAS No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44 AND 64,
AMENDMENT OF FASB STATEMENT NO. 13 AND TECHNICAL CORRECTIONS, issued
in April 2002.
o SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES, issued in July 2002.
o SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND
DISCLOSURE, issued in December 2002.
o SFAS No. 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, issued in April 2003.
o SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY, issued in May 2003.
o FASB Interpretation No. 45, GUARANTORS' ACCOUNTING AND DISCLOSURE ARE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF
INDEBTEDNESS TO OTHERS, issued in November 2002.
o FASB Interpretation No. 46(R), CONSOLIDATION OF VARIABLE INTEREST
ENTITIES, issued in December 2003.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123(R), SHARE-BASED PAYMENT, which replaces SFAS No. 123 and which we are
required to adopt by the third quarter of 2005. As we have been accounting for
share-based payments following the fair value provisions of SFAS No. 123, we
expect our adoption of this standard will not be significant.
46
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Investments in Debt Securities - Available for
Sale
Information relating to our debt securities owned as of December 31, 2004 is as
follows:
(In thousands)
Date Purchased/ Amoritzed
Certificate Final Stated Cost at
Name Number Payment Date Interest Rate December 31, 2004
- --------------------------------- ----------- --------------- ------------- -----------------
GNMA CERTIFICATES
Western Manor (1)(2) 355540 7/27/94 7.125% $ 2,441
3/15/29
SunCoast Capital Group, Ltd.(1) G002412 6/23/97 7.000% 120
4/20/27
Reserve at Autumn Creek (1)(3) 448748 6/28/01 7.745% --
1/15/42
Elmhurst Village (1) 549391 6/28/01 7.745% 21,504
1/15/42
Village at Marshfield (1) 519281 3/11/02 7.475% 21,242
1/15/42
Cantera Crossing (1) 532663 3/28/02 6.500% 6,350
6/1/29
Filmore Park (1) 536740 3/28/02 6.700% 1,425
10/15/42
Northbrooke (1) 548972 5/24/02 7.080% 13,955
8/1/43
Ellington Plaza (1) 585494 7/26/02 6.835% 35,463
6/1/44
Burlington (1) 595515 11/1/02 5.900% 6,713
4/15/31
FNMA DUS CERTIFICATES
Cambridge (1) 385971 4/11/03 5.560% 3,616
3/1/33
Bayforest (1) 381974 4/21/03 7.430% 4,240
10/1/28
Coventry Place (1) 384920 5/9/03 6.480% 781
3/1/32
Rancho de Cieto (1) 385229 5/13/03 6.330% 2,566
9/1/17
Elmwood Gardens (1) 386113 5/15/03 5.350% 5,474
5/1/33
30 West (1) 380751 5/27/03 6.080% 1,333
10/1/16
Jackson Park (1) 386139 5/30/03 5.150% 2,741
6/1/18
Unrealized
Gain (Loss) at Balance at Interest Income
Name December 31, 2004 December 31, 2004 in 2004
- --------------------------------- ----------------- ----------------- ---------------
GNMA CERTIFICATES
Western Manor (1)(2) $ (33) $ 2,408 $ 190
SunCoast Capital Group, Ltd.(1) 7 127 12
Reserve at Autumn Creek (1)(3) -- -- 67
Elmhurst Village (1) 3,137 24,641 1,669
Village at Marshfield (1) 1,020 22,262 1,433
Cantera Crossing (1) 698 7,048 423
Filmore Park (1) 138 1,563 94
Northbrooke (1) 1,592 15,547 975
Ellington Plaza (1) 4,151 39,614 2,208
Burlington (1) 311 7,024 391
FNMA DUS CERTIFICATES
Cambridge (1) (42) 3,574 194
Bayforest (1) 4 4,244 254
Coventry Place (1) (10) 771 43
Rancho de Cieto (1) (68) 2,498 125
Elmwood Gardens (1) (71) 5,403 287
30 West (1) (51) 1,282 62
Jackson Park (1) (6) 2,735 139
47
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Continued
Date Purchased/ Amoritzed
Certificate Final Stated Cost at
Name Number Payment Date Interest Rate December 31, 2004
- --------------------------------- ----------- --------------- ------------- -----------------
Courtwood (1) 386274 6/26/03 4.690% 1,740
6/1/33
Sultana (1) 386259 6/30/03 4.650% 4,046
6/1/23
Buena (1) 386273 6/30/03 4.825% 3,007
6/1/33
Allegro (1) 386324 6/30/03 5.380% 2,543
7/1/33
Village West (1) 386243 6/30/03 4.910% --
6/1/21
Westwood/Monterey (1) 386421 9/15/03 5.090% 2,687
8/1/33
Euclid (1) 386446 9/15/03 5.310% 2,346
8/1/33
Edgewood (1) 386458 9/15/03 5.370% 2,329
9/1/33
Bayou Pointe 387066 9/21/04 5.650% 1,708
8/1/22
Pomono (1) 386995 9/21/04 6.220% 5,902
7/1/34
Maple Street 387093 10/4/04 5.750% 1,497
10/1/22
Seabreeze Co-op (1) 387139 11/12/04 5.360% 1,957
11/1/34
Orchard Street (1) 387158 11/22/04 5.480% 3,136
11/1/22
Indiana Seniors 387171 12/15/04 5.380% 7,850
12/1/29
Beach Grove 387114 12/21/04 5.620% 1,280
9/1/34
York 386631 12/29/04 5.490% 12,584
8/1/33
--------------
Total $184,576
==============
2003 Total $158,533
==============
Unrealized
Gain (Loss) at Balance at Interest Income
Name December 31, 2004 December 31, 2004 in 2004
- --------------------------------- ----------------- ----------------- ---------------
Courtwood (1) (134) 1,606 80
Sultana (1) (267) 3,779 188
Buena (1) (210) 2,797 140
Allegro (1) (81) 2,462 136
Village West (1) -- -- 22
Westwood/Monterey (1) 105 2,792 152
Euclid (1) 107 2,453 134
Edgewood (1) 94 2,423 133
Bayou Pointe (4) 1,704 25
Pomono (1) (79) 5,823 83
Maple Street (2) 1,495 19
Seabreeze Co-op (1) 6 1,963 14
Orchard Street (1) (7) 3,129 18
Indiana Seniors (103) 7,747 18
Beach Grove (19) 1,261 2
York (172) 12,412 4
-------------------------------------------------
Total $10,011 $194,587 $ 9,734
=================================================
2003 Total $ 8,727 $167,260 $ 8,765
=================================================
(1) These GNMA and FNMA DUS certificates are partially or wholly-pledged
as collateral for borrowings under the repurchase facilities (see Note
8).
(2) During January 2005, this GNMA certificate was paid off at par.
(3) During 2004, we received proceeds of approximately $16.0 million from
HUD in relation to the paydown of this certificate.
48
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost, unrealized gain and fair value for the investment in debt
securities at December 31, 2004 and 2003 were as follows:
(In thousands)
December 31,
------------------------------
2004 2003
--------- ----------
Amortized cost $ 184,576 $ 158,533
Unrealized gains 11,370 10,040
Unrealized losses (1,359) (1,313)
--------- ---------
Net unrealized gain 10,011 8,727
--------- ---------
Fair value $ 194,587 $ 167,260
========= =========
The fair value and gross unrealized losses of our debt securities aggregated by
length of time that individual debt securities have been in a continuous
unrealized loss position, at December 31, 2004, and 2003 is summarized in the
table below:
(Dollars in thousands)
December 31, 2004 December 31, 2003
-------------------------------------- --------------------------------------
Less than 12 Months Less than 12 Months
12 Months or More Total 12 Months or More Total
--------- --------- ------- --------- --------- -------
Number of securities 11 7 18 13 -- 13
Fair value $46,055 $16,832 $62,887 $34,480 $ -- $34,480
Gross unrealized loss $ 515 $ 844 $ 1,359 $ 1,313 $ -- $ 1,313
These unrealized losses are as a result of increases in interest rates
subsequent to the acquisition of the securities. All of the debt securities are
performing according to their terms. Furthermore, the Company has the intent and
ability to hold these securities to maturity, or at least until interest rates
change such that the fair value is no longer less than book value. Accordingly,
the Company has concluded that these impairments are temporary.
At December 31, 2004, 26 of these debt securities, with a fair value of
approximately $169.9 million are partially or wholly pledged as collateral under
the Company's repurchase facilities (see Note 8).
49
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Investments in Mortgage Loans
Information relating to our investments in mortgage loans as December 31, 2004
is as follows:
(Dollars in thousands)
FINAL
MATURITY LIFETIME
PROPERTY DESCRIPTION DATE CALL DATE (B) INTEREST RATE INTEREST CAP (D)
- -------- ----------- -------- ------------- ------------- ----------------
FIRST MORTGAGE LOANS:
Sunset Gardens
Eagle Pass, TX Multifami1y 10/04(A) N/A 11.50% N/A
Alexandrine (H)
Detroit, MI Multifamily N/A N/A 11.00% N/A
Desert View (I)
Coolidge, AZ Multifamily 5/06 N/A 10.00% N/A
Subtotal First Mortgage Loans
MEZZANINE LOANS (J):
The Hollows (K)
Greenville, NC Multifamily 1/42 1/12 10.00% (C) 16%
Northbrooke (L)(M)(N)
Harris County, TX Multifamily 8/43 7/13 11.50% (C) 14%
Elmhurst Village (L)(M)
Oveido, FL Multifamily 1/42 3/19 10.00% (C) 16%
Club at Brazos (K)(O)
Rosenberg, TX Multifamily 5/43 4/13 10.00% (C) 14%
Del Mar Villas
Dallas, TX Multifamily 10/05 N/A LIBOR + 4.625% (P)
Mountain Valley
Dallas, TX Multifamily N/A N/A LIBOR + 4.750% (P)
Villas at Highpoint
Lewisville, TX Multifamily 4/33 TBD 14.57% N/A
Villas at Highpoint
Lewisville, TX Multifamily 4/33 TBD 23.76% N/A
The Pines
Las Vegas, NV Multifamily 9/07 N/A LIBOR + 8.75% N/A
Sawmill Plaza
Columbus, OH Shopping Center 10/14 N/A 13.50% N/A
Champaign Offices
Champaign, IL Office Center 10/11 N/A 10.67% N/A
Subtotal Mezzanine Loans
Total Mortgage Loans
SHARE OF EXCESS SALE OR
EXCESS OPERATING REFINANCING PERIODIC
PROPERTY CASH FLOWS PROCEEDS PAYMENT TERMS PRIOR LIENS
- -------- ---------------- -------------- ------------- -----------
FIRST MORTGAGE LOANS:
Sunset Gardens
Eagle Pass, TX N/A N/A (G) --
Alexandrine (H)
Detroit, MI N/A N/A (G) --
Desert View (I)
Coolidge, AZ N/A N/A (G) --
Subtotal First Mortgage Loans
MEZZANINE LOANS (J):
The Hollows (K)
Greenville, NC 50% 25% (G) $ 8,839
Northbrooke (L)(M)(N)
Harris County, TX 50% 50% (G) 13,807
Elmhurst Village (L)(M)
Oveido, FL 50% 25% (G) 21,496
Club at Brazos (K)(O)
Rosenberg, TX 50% 25% (G) 14,275
Del Mar Villas
Dallas, TX N/A N/A (G) 5,559
Mountain Valley
Dallas, TX N/A N/A (G) N/A
Villas at Highpoint
Lewisville, TX N/A N/A (G) 18,800
Villas at Highpoint
Lewisville, TX N/A N/A (G) 18,800
The Pines
Las Vegas, NV N/A N/A (G) 10,000
Sawmill Plaza
Columbus, OH N/A N/A (G) 16,000
Champaign Offices
Champaign, IL N/A N/A (G) 26,000
Subtotal Mezzanine Loans
Total Mortgage Loans
OUTSTANDING CARRYING
FACE AMOUNT OF UNAMORTIZED AMOUNT OF INTEREST INCOME
PROPERTY MORTGAGES (E) COSTS AND FEES MORTGAGES (E) IN 2004
- -------- -------------- -------------- ------------- ---------------
FIRST MORTGAGE LOANS:
Sunset Gardens
Eagle Pass, TX $ 1,479 $ -- $ 1,479 $ 173
Alexandrine (H)
Detroit, MI -- -- -- 12
Desert View (I)
Coolidge, AZ 771 -- 771 86
-----------------------------------------------------------------------
Subtotal First Mortgage Loans 2,250 -- 2,250 271
-----------------------------------------------------------------------
MEZZANINE LOANS (J):
The Hollows (K)
Greenville, NC 1,549 (116) 1,433 174
Northbrooke (L)(M)(N)
Harris County, TX 1,500 (131) 1,369 60
Elmhurst Village (L)(M)
Oveido, FL 2,874 (360) 2,514 320
Club at Brazos (K)(O)
Rosenberg, TX 1,962 (74) 1,888 200
Del Mar Villas
Dallas, TX 765 -- 765 47
Mountain Valley
Dallas, TX -- -- -- 35
Villas at Highpoint
Lewisville, TX 2,599 (140) 2,459 385
Villas at Highpoint
Lewisville, TX 314 (38) 276 40
The Pines
Las Vegas, NV 4,600 (41) 4,559 186
Sawmill Plaza
Columbus, OH 2,000 -- 2,000 80
Champaign Offices
Champaign, IL 1,900 (37) 1,863 10
-----------------------------------------------------------------------
Subtotal Mezzanine Loans 20,063 (937) 19,126 1,537
-----------------------------------------------------------------------
Total Mortgage Loans $ 22,313 $(937) $21,376 $ 1,808
=======================================================================
2003 Total Mortgage Loans $ 14,781 $(917) $13,864 $ 2,597
=======================================================================
50
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) The maturity date on this first mortgage loan is past due. We are currently
in the process of extending the maturity date, providing the loan is
partially paid down with equity being held with Fannie Mae. The loan is
fully collateralized and, as such, there is no impairment of the loan.
(B) Loans are subject to mandatory prepayment at our option ten years after
construction completion, with one year's notice. Loans with a call date of
"TBD" are still under construction.
(C) Interest on the mezzanine loan is based on a fixed percentage of the unpaid
principal balance of the related first mortgage loan. The amount shown is
the approximate effective rate earned on the balance of the mezzanine loan.
The mezzanine loan also provides 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 our total
yield, including additional interest and participations, over the term of
the loan.
(D) Lifetime interest cap represents the maximum annual return, including
interest, fees and participations, that we can earn over the life of the
mezzanine loan, computed as a percentage of the balance of the first
mortgage loan plus the mezzanine loan.
(E) As of December 31, 2004, all interest payments on the mortgage loans are
current, except as noted.
(F) Carrying amounts of the loans are net of unamortized origination costs and
fees and loan discounts.
(G) Interest only payments are due monthly, with loan balance due at maturity.
(H) The first mortgage loan, which matured in December 2003, was paid off in
April 2004.
(I) Loan was purchased in April 2003 in connection with the performance under a
guarantee we made.
(J) The principal balance of the mezzanine loan 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 loan 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.
(K) We do not have an interest in the first lien position relating to this
mezzanine loan.
(L) We have an interest in the first lien position relating to this mezzanine
loan.
(M) The first mortgage loans related to these properties were converted from
participations in FHA loans to ownership of the GNMA certificates and are
held by us - see Note 2.
(N) This mezzanine loan stopped making interest payments in May 2004. We are
currently in the process of determining the necessary steps we need to take
to protect our investment. We have done an internal analysis for the
property underlying the mortgage and the analysis indicates that the value
of the property exceeds the carrying amount of our investment. Accordingly,
we have not recorded an allowance for probable losses on this investment.
(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.
51
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Further information relating to investments in mortgage loans is as follows:
(In thousands)
2004 2003
-------- --------
Balance at beginning of year $ 13,864 $ 22,384
Advances made 8,802 50,680
Conversion to real estate owned -- (49,808)
Loan origination fees (net of acquisition
expenses) (46) (187)
Repayments (1,306) (9,463)
Amortization and accretion -- net 62 258
-------- --------
Balance at end of year $ 21,376 $ 13,864
======== ========
NOTE 4 - Investment in ARCap
We own 800,000 preferred equity units of ARCap with a face amount of $25 per
unit and limited voting rights. The preferred equity units are convertible, at
our option, into ARCap common units. If converted into common units, the
conversion price is equivalent to $25 per unit, subject to certain adjustments.
Also, if not already converted, for a period of 60 days following the fifth
anniversary of the first closing date, which will be August 4, 2005, the
preferred equity units are convertible, at our option, into a three-year note
bearing interest at 12% that would be junior to all of ARCap's then existing
indebtedness. The preferred equity units are also redeemable, at the option of
ARCap, up until the fifth anniversary of the first closing date.
As of December 31, 2004, through our investment in ARCap, we have a substantial
indirect investment in the $879.1 million of commercial mortgage backed
securities ("CMBS") it owns. Multifamily properties underlie approximately one
third of ARCap's CMBS.
Our equity in the earnings of ARCap will generally be equal to the preferred
equity rate of 12%, unless ARCap does not have earnings and cash flows adequate
to meet this distribution requirement. ARCap has met its distribution
requirements to us to date. Yields on CMBS depend, among other things, on the
rate and timing of principal payments, the pass-through rate, interest rate
fluctuations and defaults on the underlying mortgages. Our interest in ARCap is
illiquid and we would need to obtain the consent of the board of managers of
ARCap before we could transfer our interest in ARCap to any party other than a
current member. The carrying amount of the investment in ARCap is not
necessarily representative of the amount we would receive upon a sale of the
interest.
ARCap has shifted its focus to CMBS fund management, whereby it manages CMBS
investment funds raised from third-party investors. ARCap is generally a
minority investor in these funds and ARCap thereby diversifies its revenue base
by increasing its proportion of revenue derived from fees as opposed to interest
income.
52
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized information for ARCap as of December 31, 2004 and 2003, and the years
then ended is as follows:
2004 2003
------ ------
(in millions)
Investment securities - available for sale $ 771 $ 739
Investment securities - trading 108 282
Other assets 89 29
------ ------
Total assets $ 968 $1,050
====== ======
Repurchase agreements and long-term debt $ 426 $ 625
Other liabilities 339 215
Members' equity 203 210
------ ------
Total liabilities and equity $ 968 $1,050
====== ======
Total revenues $ 205 $ 115
Total expenses 140 99
------ ------
Net income $ 65 $ 16
====== ======
53
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - Bridge Loans/Notes Receivable
Our notes receivable are collateralized by equity interests in the owner of the
underlying property and consist of the following as of December 31, 2004:
(In thousands)
Remaining
Outstanding Committed
Principal Unamortized Carrying Balance to Interest
Property Location Balance Fees Amount Fund Rate Maturity
- ------------------------------------------------------------------------------------------------------------------------------
Noble Towers (1)(2)(3) Oakland, CA $ 7,245 $ (11) $ 7,234 54 9.75% July 2005
December 2004
Clarks Crossing (1) Laredo, TX 926 -- 926 -- 12.00% (6)
Georgia King (1) Newark, NJ 945 -- 945 -- 11.50% January 2005
Reserve at Thornton (1) Thornton, CO 538 (5) 533 412 11.00% August 2006
LIBOR + 4.625%
Del Mar Villas Dallas, TX 5,554 -- 5,554 -- (5) October 2005
LIBOR + 4.500%
Oaks of Baytown (4) Baytown, TX 3,582 (6) 3,576 243 (5) August 2005
LIBOR + 3.600%
Quay Point (4) Houston, TX 1,223 (2) 1,221 -- (5) August 2005
Woods of Mandarin Jacksonville, FL 3,122 -- 3,122 428 13.50% July 2007
============================================
Total $ 23,135 $ (24) $ 23,111 $ 1,137
============================================
2003 Total $ 36,111 $ 165 $ 35,946 $ 6,469
============================================
(1) These loans are to limited partnerships affiliated with our Advisor (see
Note 11).
(2) An affiliate of our Advisor has provided a full guarantee on the payment of
principal and interest due on this note.
(3) During February 2005, this loan was partially repaid in the approximate
amount of $5.9 million.
(4) Pledged as collateral in connection with warehouse facility (see Note 9).
(5) 30-day LIBOR at December 31, 2004 was 2.42%.
(6) Awaiting permanent financing to take place - loan has not paid off.
54
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Taxable Revenue Bonds
During October 2003, we purchased nine taxable revenue bonds at a discount (99%
of par) from CharterMac (our affiliate, see Note 11) for $7.6 million. These
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.
The bonds' fair value at December 31, 2004 and 2003 was $6.7 million and $7.6
million, respectively.
NOTE 7- Real Estate Owned
Our real estate owned consisted of the following (dollars in thousands):
Carrying Value Carrying Value
as of as of
December 31, December 31,
Number of Units Location 2004 2003
---------------------------------------------------------------------
Real Estate Owned - Held and Used
- ---------------------------------
Plaza at San Jacinto (1) 132 La Porte, TX $ 7,929 $ --
Less: accumulated depreciation (425) --
Concord Mezzanine (2) 852 Houston, TX 54,425 --
Less: accumulated depreciation --- (1,718) --
-------- --------
Total Real Estate Owned - Held and Used, net 984 $ 60,211 $ --
=== ======== ========
Real Estate Owned - Subject to Sales Contracts
- ----------------------------------------------
Concord at Little York (2) 276 Houston, TX -- $ 16,274
Concord at Gessner (2) 288 Houston, TX -- 17,194
Concord at Gulfgate (2) 288 Houston, TX -- 18,148
--- -------- --------
Total Real Estate Owned -
Subject to Sales Contracts, net 852 $ -- $ 51,616
=== ======== ========
Real Estate Owned - Held for Sale
- ---------------------------------
Reserve at Autumn Creek (3) 212 Friendswood, TX $ 17,924 $ 17,924
===
Plaza at San Jacinto (1) -- 7,878
-------- --------
Total Real Estate Owned - Held for Sale $ 17,924 $ 25,802
======== ========
(1) In March 2003, we exercised our rights under the subordinated promissory
note and other documents to take possession of the real estate collateral of the
Plaza at San Jacinto and, in May 2003, acquired the real estate at a foreclosure
auction. We classified our investment in this property as Real Estate Owned -
Held for Sale. We have focused on increasing the occupancy and the operating
income generated from the property. We reclassified the property as Real Estate
Owned - Held and Used in March 2004 and began to depreciate the property,
including depreciation for the period the property had been classified as Held
for Sale. During February 2005, this property was sold (see Note 17).
(2) The three properties underlying these notes receivable stopped paying
interest in May 2003. We subsequently exercised our rights under the
subordinated promissory notes and other documents and took possession of all
three properties. We purchased the first mortgages and acquired the real estate
at foreclosure auctions and sold all three properties to a qualified 501(c)(3)
entity during 2003. Because we provided 100% financing to the purchaser, the
transaction did not meet the criteria for sale recognition pursuant to SFAS No.
66.
In connection with the foreclosure of the Concord at Gessner property, we
acquired a land parcel which we subsequently sold to a third party. The sales
price of the land was approximately $224,000, net of closing costs. We provided
55
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
seller financing, in the form of a bridge note, to the buyer, for approximately
$187,000. We allocated approximately $206,000 of cost basis to the land parcel
resulting from the Concord at Gessner foreclosure and recognized a gain on the
sale of approximately $18,000.
In December 2004, UBS Real Estate Investments, Inc. provided first mortgages of
$41.0 million for these properties. We restructured the remaining balance due
from the borrower, approximately $13.4 million, in the form of a mezzanine loan.
The mezzanine loan bears interest at a rate of 8% per annum and matures in
December 2014.
We account for the properties under the deposit method in accordance with SFAS
No. 66. Following the provisions of SFAS No. 66, we have reclassified the
properties as Real Estate Owned - Held and Used until full sale recognition is
achieved. We have recorded the $41.0 million mortgage as a liability and have
recorded depreciation of the properties, including depreciation for the entire
period held, which totaled approximately $1.7 million. Income on the $13.4
million mezzanine loan will be classified as rental income in 2005, when earned.
Income recognized for all three properties in 2004, exclusive of depreciation we
recorded, totaled approximately $3.8 million and is recorded as income from real
estate owned on the consolidated statements of income due to the classification
of such properties as Real Estate Owned - Subject to Sales Contracts when the
income was earned.
(3) Certain required debt service payments were not paid, causing the mezzanine
loan to be in default. In October 2003, we exercised our rights under the
subordinated promissory note and other documents to take possession of the real
estate collateral of the property, subject to the first mortgage loan. See Note
17 regarding the purchase of the first mortgage.
NOTE 8 - Repurchase Facilities
Prior to March 2004, we had a repurchase facility with Nomura Securities
International Inc. ("Nomura"), which enabled us to borrow up to 97% of the fair
market value of GNMA and FNMA DUS Certificates we owned. Interest on borrowings
was at 30-day LIBOR plus 0.02%.
During 2004, Nomura terminated the repurchase facility. We executed new
repurchase agreements with three counterparties, Greenwich Capital, Bear
Stearns, and RBC Capital Markets, which provided us the capacity to repay the
Nomura facility. Terms of the three newly executed agreements offer advance
rates between 94% and 97% and borrowing rates between the LIBOR minus 3 basis
points and LIBOR plus 10 basis points. The borrowings are subject to 30-day
settlement terms. As of December 31, 2004 and 2003, the amounts outstanding
under repurchase facilities were $157.6 and $149.5 million and weighted average
interest rates were 2.64% and 1.56%, respectively.
Certain of our debt securities are pledged as collateral in connection with
these repurchase facilities (see Note 2).
NOTE 9 - Warehouse Facility
In October 2002, we entered into a mortgage warehouse line of credit with Bank
of America (the "Warehouse Facility") in the amount of up to $40.0 million.
Under the terms of the Warehouse Facility, Bank of America will advance up to
83% of loans we issue for the acquisition/refinancing and minor renovation of
existing, lender-approved multifamily properties. This facility, which matures
August 2005, bears interest at a rate of 30, 60, 90 or 180-day LIBOR + 200 basis
points, or prime, at our discretion, payable monthly on the total amounts
advanced. Principal is due upon the earlier of refinance or sale of the
underlying project or upon maturity. We pay a fee of 12.5 basis points, paid
quarterly, on any unused portion of the facility. From time to time, we will use
this facility to finance real estate owned. As of December 31, 2004 and December
31, 2003, we had approximately $3.8 and $34.9 million, respectively, in
borrowings outstanding under this program at an interest rate of 4.42% and
3.12%, respectively.
Included in the $34.9 million of outstanding borrowings under this program at
December 31, 2003, was $14.0 million we borrowed to repay an intercompany loan
from CharterMac (see Note 11); we subsequently repaid the $14.0 million with
proceeds from the Concord refinancing (see Note 7).
56
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - Line of Credit - Related Party
In June 2004, we entered into a revolving credit facility (the "Revolving
Facility") with CharterMac. The Revolving Facility, which is unsecured, will
provide up to $20.0 million in borrowings to be used to purchase new
investments, and bears interest at 30-day LIBOR plus 300 basis points. The
Revolving Facility is for a term of one year with a one-year optional extension
and contains customary restrictions/covenants that are similar to our Warehouse
Facility. In the opinion of our management, the terms of this facility are
consistent with those of transactions with independent third parties. As of
December 31, 2004, we had approximately $4.6 million in borrowings outstanding
on the Revolving Facility at an interest rate of 5.42%
NOTE 11 - Related Party Transactions
Pursuant to the amended Advisory Agreement between us and our Advisor dated
April 6, 1999 (the "Amended Advisory Agreement"), we pay certain fees, in
addition to reimbursements of certain administrative and other costs our Advisor
incurs on our behalf, for its ongoing management and operations of our Company:
Fees/Compensation Annual Amount
----------------- -------------
I. Asset 0.355% for investments in mortgage loans
management fees 0.355% for certain investment grade investments
0.750% for certain non-investment grade investments
1.000% for unrated investments
0.625% for investments held prior to the adoption of
the Amended Advisory Agreement.
II. Annual incentive Subject to (1) a minimum annual distributions
management fees being made to shareholders from cash available for
distribution ("CAD") of $1.45 per share and (2) the
Company achieving at least annual Adjusted Funds from
Operations (defined below) per share of $1.60 (net of
this incentive fee), the Advisor shall be entitled
to receive incentive compensation for each fisca
year in an amount equal to the product of:
(A) 25% of the dollar amount by which
(1) Adjusted Funds From Operations before this
incentive management fee per share
exceed
(2) the greater of:
(a) (i) the weighted average of (x) $20 and
(y) the prices per share of any
secondary offerings by the Company
multiplied by
(ii) the Ten Year U.S. Treasury Rate plus
2% per annum; and;
(b) $1.45
multiplied by
(B) the weighted average number of shares
outstanding during such year.
57
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
"Adjusted Funds From Operations" means net income (computed in accordance with
GAAP) including realized gains (or losses) from debt restructuring and sales of
assets, plus depreciation and amortization on real property, and after
adjustments for unconsolidated partnerships and joint ventures.
"CAD" means cash available for distributions, which shall consist of our net
income (as determined pursuant to GAAP) adjusted for certain non-cash charges
(as determined pursuant to GAAP).
Prior to 2004, the incentive management fee was calculated pursuant to the
Company achieving at least annual GAAP net income of $1.60 per share, net of the
incentive management fee without the additional requirement that net income had
to exceed CAD of $1.45 per share.
In addition, with respect to new mortgage loans we acquire, any origination
points paid by borrowers will first be paid to the Advisor for amounts up to
1.0% of the principal amount of each mortgage loan and we will receive any
excess origination points paid by borrowers, if any, above the 1.0%.
During 2002, our Advisor waived approximately $71,000 in net fees and expense
reimbursements, in light of higher than usual expenses related to the
origination of investments that were never completed.
During 2003, our Advisor waived approximately $67,000 in asset management fees
relating to additional services it performed with regard to real estate we now
own (see Note 7). As our Advisor was paid a fee at the time the loans were
originated, it agreed to waive the additional fees.
The costs recorded for related parties transactions were as follows:
(in thousands) Years Ended December 31,
---------------------------------------
2004 2003 2002
------------- ------------ ----------
Shared service expenses $ 682 $ 725 $ 447
Asset management fees 1,274 1,087 838
Incentive management fee -- -- 235
------ ------ ------
$1,956 $1,812 $1,520
====== ====== ======
Some of our notes receivable (see Note 5), and all of our stabilization loan
guarantees and standby loan commitments (Note 16) are to limited partnerships in
which the general partner is an unaffiliated third party and the limited partner
is affiliated with the Advisor.
The Noble Towers note receivable is guaranteed by an affiliate of the Advisor
(see Note 5).
In September 2003, we transferred certain of our obligations under the Fannie
Mae loan program to CMC, a subsidiary of CharterMac. See Note 16 for more
details on the transaction.
In October 2003, we purchased nine taxable revenue bonds from CharterMac (see
Note 6).
In October 2003, we funded a bridge loan to Related Capital Guaranteed Corporate
Partners II, L.P. Series A, an affiliate of the Advisor, for approximately $1.3
million. We received a fee of $10,000 for funding the loan, which was repaid the
same month.
In December 2003, we borrowed approximately $11.3 million from CharterMac in
order to aid in the purchase of the Concord at Gulfgate first mortgage in the
total amount of $14.1 million (see Note 7). CharterMac charged us interest at an
annual rate of 3.17% on the borrowings, which was based on LIBOR plus 2%, the
same rate we paid on our Warehouse Facility. Shortly thereafter, we received a
$14.0 million loan through the Warehouse Facility, and used the proceeds to
repay the loan to CharterMac.
58
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
See Note 10 for information regarding our Revolving Facility with CharterMac.
NOTE 12 - Earnings Per Share
(In thousands, except per share amounts)
Year Ended December 31, 2004 Income Shares Per Share
------------- ------------- -------------
Basic EPS $ 11,273 8,336 $ 1.35
Effect of dilutive securities -- 7 --
------------- ------------- -------------
Diluted EPS $ 11,273 8,343 $ 1.35
============= ============= =============
Year Ended December 31, 2003
Basic EPS $ 11,884 7,803 $ 1.52
Effect of dilutive securities -- 12 --
------------- ------------- -------------
Diluted EPS $ 11,884 7,815 $ 1.52
============= ============= =============
Year Ended December 31, 2002
Basic EPS $ 9,660 6,018 $ 1.61
Effect of dilutive securities -- -- --
------------- ------------- -------------
Diluted EPS $ 9,660 6,018 $ 1.61
============= ============= =============
NOTE 13 - Shareholders' Equity
Capital Shares
- --------------
On February 25, 2002, we completed a public offering of approximately 2.5
million common shares at a price of $13.00 per share. The common shares were
offered through Friedman, Billings, Ramsey and RBC Capital Markets. The net
proceeds from this offering, approximately $30.9 million, net of underwriter's
discount and expenses, were used to fund investments.
On April 23, 2003, we completed a public offering of approximately 2.0 million
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 common
shares were offered through JMP Securities and RBC Capital Markets. The net
proceeds from this offering were used to fund investments.
During 2004, we issued approximately 2,600 common shares to our trustees as
compensation. No such shares were issued in 2003.
Share Repurchase Program
- ------------------------
In August 2003, our Board of Trustees approved a share repurchase plan. The plan
enables us 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. This program has no
expiration date. During 2004, we repurchased 4,000 shares at a cost of
approximately $53,000.
59
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated Other Comprehensive Income
- --------------------------------------
Changes in accumulated other comprehensive income
Net unrealized
Net unrealized (loss) gain on
gain on interest rate
(in thousands) investments derivatives Total
----------------- ------------------ -----------------
Balance at January 1, 2002 $ 560 $ -- $ 560
Period change 8,143 -- 8,143
----------------- ------------------ -----------------
Balance at December 31, 2002 8,703 -- 8,703
Period change 25 (278) (253)
----------------- ------------------ -----------------
Balance at December 31, 2003 8,728 (278) 8,450
Period change 1,260 407 1,667
----------------- ------------------ -----------------
Balance at December 31, 2004 $ 9,988 $ 129 $10,117
================= ================== =================
NOTE 14 - Incentive Share Option Plan
In accordance with our Amended and Restated Incentive Share Option Plan (the
"Plan"), our board of trustees can award share options to trustees, officers and
employees of AMAC and our Advisor and its affiliates. A maximum of 833,680
options can be granted, with annual limits based upon formulas specified in the
Plan. Option terms and vesting requirements are determined at the time of grant,
provided that the term is no longer than ten years.
In April 2003, our Compensation Committee granted 190,000 options to employees
of an affiliate of the Advisor at an exercise price of $15.03, the market price
of our common shares on the grant date. These options vest equally, in thirds,
in April 2004, 2005 and 2006 and expire in April 2013.
In accordance with SFAS No. 123, we accrue compensation cost based on the
estimated fair value of the options issued and amortize those costs over the
vesting period. Because the grant recipients are not our employees and vesting
of the options is contingent upon the recipient continuing to provide services
to us, we estimate the fair value of the options at each period-end up to the
vesting date, and adjust recorded amounts accordingly.
The assumptions used for valuing these options and the results of the valuations
were as follows:
Assumptions: 2004 2003
------------- ---------------
Dividend Yield 9.30% 9.63%
Estimated Volatility 16.00% 16.00%
Risk Free Interest Rate 3.93% 4.27%
Expected Lives 8.30 years 9.41 years
Fair Value $85,100 $51,300
Compensation Costs $45,500 $22,700
No options were exercised during 2004 and 2003 and 90,000 shares were forfeited
during 2004. There were 733,680 shares available for issuance as of December 31,
2004.
60
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - Selected Quarterly Financial Data
(unaudited)
2004 Quarter Ended
-------------------------------------------------------------
(In thousands except per share amounts)
March 31 June 30 September 30 December 31
------------- -------------- -------------- -----------
Total revenues $ 3,879 $ 3,773 $ 4,155 $ 4,102
============= ============== ============== ===========
Net income $ 3,325 $ 3,351 $ 3,249 $ 1,348
============= ============== ============== ===========
Net income per share (basic and diluted) $ 0.40 $ 0.40 $ 0.39 $ 0.16
============= ============== ============== ===========
2003 Quarter Ended
-------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- -------------- -------------- -----------
Total revenues $ 4,233 $ 3,303 $ 3,625 $ 3,890
============= ============== ============== ===========
Net income $ 3,192 $ 2,573 $ 2,776 $ 3,343
============= ============== ============== ===========
Net income per share (basic and diluted) $ 0.50 $ 0.32 $ 0.33 $ 0.40
============= ============== ============== ===========
NOTE 16 - Commitments and Contingencies
a) Legal
On October 27, 2003, prior to taking possession of the real estate collateral
supporting a loan investment, we were named in a lawsuit, Concord Gulfgate, Ltd.
vs. Robert Parker, Sunrise Housing Ltd., and American Mortgage Acceptance
Company, Cause No. 2003-59290 in the State District Court of Harris County,
Texas. The suit claims, among other causes of action against the respective
defendants, that we conducted wrongful foreclosure in that the loan guarantor
did not derive any benefit from our loan and that the limited partners of the
loan guarantor did not authorize the loan transaction. The suit seeks, among
other relief, actual, consequential, exemplary, and punitive damages, a
declaration that the loan made by us is unenforceable, and that we were involved
in a conspiracy to defraud the loan guarantor. The suit is currently in the
discovery phase. A trial date has not been set.
Subsequently, we filed a countersuit on November 25, 2003 against the limited
partners of the loan guarantor seeking to recover unpaid taxes and
misappropriated property receipts. We are currently unable to determine the
possible outcome of the litigation.
b) Guarantees
In June and October of 2000, we originated two loans totaling $3.3 million under
an agreement with Fannie Mae. That agreement provided for our guaranteeing a
first-loss position on the loans, which could potentially result in exposure of
$7.5 million. In September 2003, we transferred and assigned all of our
obligations to the two loans we originated under this program to CMC (which was
formerly known as PW Funding Inc.), a subsidiary of CharterMac, both of which
are affiliates of the Advisor. Pursuant to the agreement with CMC, CharterMac
guaranteed CMC's obligations, and we agreed to indemnify both CMC and CharterMac
for any losses incurred in exchange for retaining all fees which we were
otherwise entitled to receive under the program. The maximum exposure at
December 31, 2004, was $3.2 million, although we expect that we will not be
called upon to fund these guarantees.
In the first quarter of 2003, we discontinued our loan program with Fannie Mae
and will issue no further guarantees pursuant to such program.
61
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Standby, Forward Loan and GNMA Commitments
- ------------------------------------------
We issued the following standby and forward bridge and permanent loan
commitments for the purpose of constructing/rehabilitating certain multifamily
apartment complexes in various locations.
STANDBY AND FORWARD BRIDGE LOAN COMMITMENTS
-------------------------------------------
(In thousands)
MAXIMUM AMOUNT OF COMMITMENTS
-------------------------------
ISSUE DATE PROJECT LOCATION NO. OF APT. UNITS LESS THAN 1YEAR 1-3 YEARS
----------------------------------------------------------------------------------------------------------
May-04 Oak Village Oakland, CA 117 $ 967 $ --
Feb-03 Noble Towers Oakland, CA 195 54 --
Aug-03 Oaks of Baytown Baytown, TX 248 243 --
June-04 Woods of Mandarin Jacksonville, FL 401 428 --
Dec-03 Reserve at Thornton Thornton, CO 216 412 --
----------------------------------------------------
TOTAL STANDBY AND FORWARD BRIDGE LOAN COMMITMENTS 1,177 $ 2,104 $ --
====================================================
STANDBY AND FORWARD MEZZANINE LOAN COMMITMENTS
----------------------------------------------
MAXIMUM AMOUNT OF COMMITMENT
-------------------------------
ISSUE DATE PROJECT LOCATION NO. OF APT. UNITS LESS THAN 1YEAR 1-3 YEARS
----------------------------------------------------------------------------------------------------------
April-03 Villas at Highpoint Lewisville, TX 304 $ -- $ 379
----------------------------------------------------
TOTAL STANDBY AND FORWARD MEZZANINE LOAN COMMITMENT 304 $ -- $ 379
====================================================
FORWARD GNMA COMMITMENTS
------------------------
MAXIMUM AMOUNT OF COMMITMENTS
-------------------------------
ISSUE DATE PROJECT LOCATION LESS THAN 1YEAR 1-3 YEARS
----------------------------------------------------------------------------------------------------------
May-02 Ellington Plaza Washington, DC $ 2,279 $ --
-------------------------------
TOTAL FORWARD GNMA COMMITMENT $ 2,279 --
-------------------------------
TOTAL STANDBY, FORWARD LOAN AND GNMA COMMITMENTS $ 4,383 $ 379
===============================
Mezzanine Loan/Preferred Stock Commitment
- -----------------------------------------
During November 2004, we provided a commitment to fund up to $74.5 million to
Prime/Mansur Investment Partners, LLC in connection with its financing of an
acquisition. In connection with providing the commitment, we received a
commitment fee of $435,000, the recognition of which is deferred on our balance
sheet until either the commitment is funded or expires in April 2005. The
likelihood that we will be required to fund this commitment is remote.
62
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stabilization Loan Guarantees
- -----------------------------
During 2002, we entered into an agreement with Wachovia Bank ("Wachovia") to
provide stabilization guarantees for new construction of multifamily properties
under the LIHTC program in designated areas. We guarantee that properties which
have completed construction will stabilize and the associated construction loans
will convert to permanent Fannie Mae loans. We receive 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, we 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.
MAXIMUM AMOUNT OF GUARANTEE
(IN THOUSANDS)
LOAN
ADMINISTRATION FEE STABILIZATION
LESS THAN 1 (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 $ 4,770 $ -- 0.500% 0.625%
Sept-02 Creekside Apts. Colorado Springs, CO 144 7,500 -- 0.375% --
-------------------------------------------------------------------------------
Total Stabilization Loan Guarantees 304 $ 12,270 $ -- -- --
===============================================================================
(1) Loan Administration Fee is paid quarterly during the guarantee period.
(2) Stabilization Guarantee Fee is an up-front fee - paid at closing and
amortized over the guarantee period.
For each of these guarantees, and for the guarantees issued under the Fannie Mae
loan program discussed above, we monitor the status of the underlying properties
and evaluates our exposure under the guarantees. To date, we have concluded that
no accrual for probable losses is required under SFAS No. 5, ACCOUNTING FOR
CONTINGENCIES.
63
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - Subsequent Events
On February 1, 2005, we purchased the Autumn Creek first mortgage at foreclosure
auction (see Note 7). The purchase price of the first mortgage was approximately
$17.2 million, making the total carrying value of the property, including the
mezzanine loan, approximately $19.1 million.
On February 17, we sold the Plaza at San Jacinto property to an unaffiliated
third party for approximately its carrying value (see Note 7).
On March 16, we issued 25,000 Floating Rate Preferred Securities, having a
stated liquidation amount of $1,000 per security, bearing a variable rate, reset
quarterly, equal to LIBOR plus 3.75% per annum. The proceeds from this offering
will be used to make further investments.
64
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Disclosure Controls and Procedures
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures (as such term is defined in
Rule 15(e) 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, our disclosure controls and procedures are
effective to ensure that information required to be disclosed by the
Company in the reports that the Company files or submits under the
Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commission
rules and forms, and to ensure that such information is accumulated
and communicated to the Company's management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
(b) INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any
significant changes in our 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,
our internal control over financial reporting.
65
PART III
Item 10. Directors and Executive Officers of the Company
Incorporated by reference to the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act").
Item 11. Executive Compensation
Incorporated by reference to the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Exchange Act.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Exchange Act.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference to the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Exchange Act.
Item 14. Principal Accounting Fees and Services
Incorporated by reference to the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Exchange Act.
PART IV
Item 15. Exhibits and Financial Statement Schedules
Sequential
Page
----------
(a) 1. Financial Statements
--------------------
American Mortgage Acceptance Company
------------------------------------
Report of Independent Registered Public Accounting Firm 32
Consent of Independent Registered Public Accounting Firm 33
Management's Report on the Effectiveness of Internal
Control over Financial Reporting 34
Report of Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting 35
Consolidated Balance Sheets as of December 31, 2004
and 2003 37
Consolidated Statements of Income for the years ended
December 31, 2004, 2003 and 2002 38
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2004, 2003 and 2002 39
66
Item 15. Exhibits and Financial Statement Schedules (continued)
Sequential
Page
----------
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 40
Notes to Consolidated Financial Statements 42
ARCap Investors, LLC
--------------------
Consolidated 2004 financial statements for ARCap Investors,
LLC (see Exhibit 99 (a))
Consolidated 2003 financial statements for ARCap Investors,
LLC (see Exhibit 99 (b))
Consolidated 2002 financial statements for ARCap Investors,
LLC (see Exhibit 99 (c))
(a) 2. Financial Statement Schedules
All schedule have been omitted because they are not
required or because the required information is contain-
ed in the financial statements or notes thereto.
(a) 3. Exhibits
--------
3.4 Second Amended and Restated Declaration of trust, dated
as of April 6, 1999 (incorporated by reference to Exhibit
3.4(c) to the Company's March 31, 1999 Quarterly Report
on Form 10-Q).
3.5 By-laws*
10(a) Amended and Restated Advisory Services Agreement, ef-
fective as of April 6, 1999 (incorporated by reference
to Exhibit 10(z) to the Company's September 30, 1999
Quarterly Report on Form 10-Q).
10(b) First Amendment to Amended and Restated Advisory Services
Agreement between Related AMI Associates, Inc. and the
Company dated November 29, 2001 (incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement
on Form S-2, filed with the Commission on November 30, 2001).
10(c) Second Amendment to Amended and Restated Advisory
Services Agreement between Related AMI Associates, Inc.
and the Company dated February 8, 2002*.
10(d) Third Amendment to Amended and Restated Advisory Services
Agreement between Related AMI Associates, Inc. and the
Company dated November 12, 2003*.
10(e) Fourth Amendment to Amended and Restated Advisory
Services Agreement between Related AMI Associates, Inc.
and the Company dated June 9, 2004 (incorporated herein
by reference to Exhibit 10(d) to the Company's June 30,
2004 Amended Quarterly Report on Form 10-Q/A).
10(f) First Amendment to the Amended and Restated Incentive
Share Option Plan of the Company dated June 9, 2004 (in-
corporated herein by reference to Exhibit 10(e) to the
Company's June 30, 2004 Amended Quarterly Report on Form
10-Q/A).
10(g) Form of Non-Qualified Share Option Award Agreement*
23(a) Consent of Ernst & Young LLP with respect to incorpor-
ation by reference of its report relating to the 2002,
2003 and 2004 financial statements of ARCap Investors, LLC
in the Company's Registration Statement on form S-3
and Form S-8**
67
Item 15. Exhibits and Financial Statement Schedules (continued)
Sequential
Page
----------
24.1 Power of Attorney (Included on signature page hereto)
31.1 Chief Executive Officer certification pursuant to Section
302 of the Sarbanes-Oxley Act of 2002*
31.2 Chief Financial Officer certification pursuant to Section
302 of the Sarbanes-Oxley Act of 2002*
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
99. Additional Exhibits
99(a) The 2004 Financial Statements of ARCap Investors, LLC
which invests primarily in subordinated commercial mortgage-
backed securities, as required by Regulation S-X, Rule 3-09**
99(b) The 2003 Financial Statements of ARCap Investors, LLC
which invests primarily in subordinated commercial mortgage-
backed securities, as required by Regulation S-X, Rule 3-09**
99(c) The 2002 Financial Statements of ARCap Investors, LLC
which invests primarily in subordinated commercial mortgage-
backed securities, as required by Regulation S-X, Rule 3-09**
* Filed herewith
** Pursuant to Rule 3-09 of Regulation S-X, SEPARATE
FINANCIAL STATEMENTS OF SUBSIDIARIES NOT CONSOLIDATED
AND 50 PERCENT OR LESS OWNED PERSONS, as amended
effective December 23, 2004, the financial statements
of ARCap, a non-accelerated filer, plan to be filed as
an amendment to this report within 90 days after the
end of our fiscal year.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN MORTGAGE ACCEPTANCE COMPANY
(Registrant)
Date: March 16, 2005 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Chairman of the Board of Trustees,
President and Chief Executive Officer
Date: March 16, 2005 By: /s/ Alan P. Hirmes
------------------
Alan P. Hirmes
Managing Trustee and Chief Financial Officer
69
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Stuart
J. Boesky and Alan P. Hirmes, and each or either of them, his true and lawful
attorney-in-fact with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report, and to cause the same to be filed, with all
exhibits thereto and other documents in connection therewith, with the
Securities Exchange Commission, hereby granting to said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing whatsoever requisite or desirable to be done in and about
the premises, as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all acts and things that
said attorneys-in-fact and agents, or either of them, or their substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated:
Signature Title Date
- -------------------- ------------------------------------- ----------------
/s/ Stuart J. Boesky
- --------------------
Stuart J. Boesky Chairman of the Board of Trustees,
President and Chief Executive Officer March 16, 2005
/s/ Alan P. Hirmes
- -------------------
Alan P. Hirmes Managing Trustee
and Chief Financial Officer March 16, 2005
/s/ Stanley R. Perla
- --------------------
Stanley R. Perla Trustee March 16, 2005
/s/ Richard M. Rosan
- --------------------
Richard M. Rosan Trustee March 16, 2005
/s/ Scott M. Mannes
- --------------------
Scott M. Mannes Trustee March 16, 2005
70
Exhibit 31.1
CERTIFICATION
I, Stuart J. Boesky, hereby certify that:
1. I have reviewed this annual report on Form 10-K of American Mortgage
Acceptance Company;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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 annual report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principals;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors or persons performing the equivalent
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: March 16, 2005 By: /s/ Stuart J. Boesky
----------------- --------------------
Stuart J. Boesky
Chief Executive Officer
71
Exhibit 31.2
CERTIFICATION
I, Alan P. Hirmes, hereby certify that:
1. I have reviewed this annual report on Form 10-K of American Mortgage
Acceptance Company;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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 annual report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principals;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors or persons performing the equivalent
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: March 16, 2005 By: /s/ Alan P. Hirmes
----------------- ------------------
Alan P. Hirmes
Chief Financial Officer
72
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 Annual Report of American Mortgage Acceptance Company
(the "Company") on Form 10-K for the year ending December 31, 2004, 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
March 16, 2005
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
73
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 Annual Report of American Mortgage Acceptance Company
(the "Company") on Form 10-K for the year ending December 31, 2004, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Alan P. Hirmes, 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/ Alan P. Hirmes
-------------------
Alan P. Hirmes
Chief Financial Officer
March 16, 2005
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
74
EXHIBIT 23 (a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement (Form S-3
No. 33-42481) of American Mortgage Acceptance Company and in the related
Prospectus of our report dated February 6, 2004 and February 4, 2003 on the
consolidated financial statements of ARCap Investors, L.L.C. included in this
Annual Report (Form 10-K) for the year ended December 31, 2003.
/s/ Ernst & Young LLP
Dallas, Texas
March 5, 2004
75
Exhibit 99 (a)
Report of Independent Auditors
The Board of Managers
ARCap Investors, L.L.C.
We have audited the accompanying consolidated balance sheet of ARCap Investors,
L.L.C. and subsidiaries (the Company) as of December 31, 2003, and the related
consolidated statements of operations, members' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ARCap Investors,
L.L.C. and subsidiaries at December 31, 2003, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
February 6, 2004
76