UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-23972
AMERICAN MORTGAGE ACCEPTANCE COMPANY
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 13-6972380
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
625 MADISON AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
(212) 317-5700
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).Large Accelerated filer [ ] Accelerated filer [X] Non-accelerated
filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of October 31, 2007, there were 8,406,028 outstanding common shares of the
registrant's shares of beneficial interest, $0.10 par value.
TABLE OF CONTENTS
AMERICAN MORTGAGE ACCEPTANCE COMPANY
FORM 10-Q
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 30
Item 4. Controls and Procedures 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 1A. Risk Factors 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits 32
SIGNATURES 33
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
September 30, December 31,
2007 2006
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 11,528 $ 7,553
Restricted cash 2,507 14,951
Investments:
Mortgage loans receivable, net (Note 2) 710,733 545,898
Available-for-sale investments, at fair value (Note 3):
Debt securities 71,528 82,582
CMBS 108,621 --
CDO securities 8,672 --
Mortgage revenue bonds 4,860 4,967
Real estate owned - discontinued operations (Note 4) -- 48,692
Accounts receivable 11,165 7,670
Deferred charges and other assets, net (Note 5) 7,456 8,671
------------ ------------
Total assets $ 937,070 $ 720,984
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
CDO notes payable $ 362,000 $ 362,000
Repurchase facilities (Note 6) 399,780 163,576
Line of credit - related party (Note 13) 39,300 15,000
Preferred shares of subsidiary (subject to mandatory repurchase) 25,000 25,000
Mortgages payable on real estate owned - discontinued operations
(Note 4) -- 39,944
Accounts payable and accrued expenses (Notes 7 and 9) 27,024 13,666
Due to Advisor and affiliates (Note 13) 1,607 1,670
Dividends payable 2,110 15,120
------------ ------------
Total liabilities 856,821 635,976
------------ ------------
Commitments and contingencies (Note 14)
Shareholders' equity (Note 10):
7.25% Series A Cumulative Convertible Preferred Shares, no par
value; 680 shares issued and outstanding in 2007 16,237 --
Common shares of beneficial interest; $0.10 par value; 25,000
shares authorized; 8,821 issued and 8,406 outstanding in 2007
and 8,815 issued and 8,400 outstanding in 2006 882 881
Treasury shares of beneficial interest at par; 415 shares in 2007
and 2006 (42) (42)
Additional paid-in capital 128,048 127,971
Accumulated deficit (37,612) (40,174)
Accumulated other comprehensive loss (Note 11) (27,264) (3,628)
------------ ------------
Total shareholders' equity 80,249 85,008
------------ ------------
Total liabilities and shareholders' equity $ 937,070 $ 720,984
============ ============
See accompanying notes to condensed consolidated financial statements.
3
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Revenues:
Interest income $ 16,868 $ 8,486 $ 43,753 $ 21,244
Other revenues 80 23 1,008 185
---------- ---------- ---------- ----------
Total revenues 16,948 8,509 44,761 21,429
---------- ---------- ---------- ----------
Expenses:
Interest 11,757 5,669 30,890 12,255
Interest - distributions to preferred shares of
subsidiary 554 591 1,677 1,665
General and administrative 1,548 1,267 2,696 2,245
Impairment of investments 1,276 4,632 1,276 4,632
Fees to Advisor and affiliates (Note 13) 1,044 3,092 2,929 4,895
Amortization and other 208 13 609 43
---------- ---------- ---------- ----------
Total expenses 16,387 15,264 40,077 25,735
---------- ---------- ---------- ----------
Other income (loss):
Gain on sale of ARCap -- 19,223 337 19,223
Change in fair value of derivative instruments (689) (10,439) (39) (8,416)
Equity in earnings of ARCap -- (76) -- 3,000
Loss on repayment or sale of investments (59) (755) (59) (908)
---------- ---------- ---------- ----------
Total other income (loss) (748) 7,953 239 12,899
---------- ---------- ---------- ----------
Income (loss) from continuing operations (187) 1,198 4,923 8,593
Income from discontinued operations, including
gain on sale of real estate owned -- 36 3,531 25
---------- ---------- ---------- ----------
Net income (loss) (187) 1,234 8,454 8,618
---------- ---------- ---------- ----------
7.25% Convertible Preferred dividend requirements (219) -- (219) --
---------- ---------- ---------- ----------
Net income (loss) available to common shareholders $ (406) $ 1,234 $ 8,235 $ 8,618
========== ========== ========== ==========
Earnings per share (Note 12):
Basic
-----
Income (loss) from continuing operations $ (0.05) $ 0.14 $ 0.56 $ 1.03
Income from discontinued operations -- 0.01 0.42 0.01
---------- ---------- ---------- ----------
Net income (loss) $ (0.05) $ 0.15 $ 0.98 $ 1.04
========== ========== ========== ==========
Diluted
-------
Income (loss) from continuing operations $ (0.05) $ 0.14 $ 0.56 $ 1.03
Income from discontinued operations -- 0.01 0.40 0.01
---------- ---------- ---------- ----------
Net income (loss) $ (0.05) $ 0.15 $ 0.96 $ 1.04
========== ========== ========== ==========
Dividends per share $ 0.225 $ 0.400 $ 0.675 $ 1.200
========== ========== ========== ==========
Weighted average shares outstanding:
Basic 8,406 8,307 8,404 8,305
========== ========== ========== ==========
Diluted 8,406 8,315 8,794 8,308
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
4
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
----------------------
2007 2006
--------- ---------
Cash flows from operating activities:
Net income $ 8,454 $ 8,618
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense 336 1,334
Gain on sale of ARCap (337) (19,223)
Equity in earnings of ARCap -- (3,000)
Distributions received from ARCap -- 4,037
(Gain) sale on sale of real state owned (3,611) 98
Loss on impairment or disposal of investments 1,335 5,510
Change in fair value of derivative instruments 39 8,416
Amortization and accretion 194 (212)
Other non-cash (income) expense (565) 89
Changes in operating assets and liabilities:
Accounts receivable (3,495) (611)
Other assets (1) 126
Due to Advisor and affiliates (63) 836
Accounts payable and accrued expenses 8,277 2,916
--------- ---------
Net cash provided by operating activities 10,563 8,934
--------- ---------
Cash flows from investing activities:
Funding and purchase of mortgage loans (246,589) (294,976)
Principal repayments of mortgage loans 81,199 9,993
Investment in CMBS (123,052) --
Investment in CDO securities (10,061) --
Principal repayments or sale of debt securities 9,352 56,785
Prepayment penalty from debt security refinancing -- 3,200
Return of capital and proceeds from the sale of ARCap 337 37,181
Decrease (increase) in restricted cash 12,444 (5,580)
Proceeds from sale of real estate owned 11,987 --
Principal repayments on real estate owned 36 --
Principal repayments of mortgage revenue bonds 137 1,622
--------- ---------
Net cash used in investing activities (264,210) (191,775)
--------- ---------
(CONTINUED)
5
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
----------------------
2007 2006
--------- ---------
Cash flows from financing activities:
Proceeds from repurchase facilities $ 357,223 $ 270,418
Repayments of repurchase facilities (121,019) (70,875)
Proceeds from line of credit - related party 189,715 123,442
Repayments of line of credit - related party (165,415) (123,442)
Repayments of warehouse facility -- (4,070)
Deferred financing costs (217) (1,953)
Dividends paid to shareholders (18,902) (9,966)
Stock options exercised -- 316
Issuance of preferred shares 17,000 --
Equity offering costs (763) --
--------- ---------
Net cash provided by financing activities 257,622 183,870
--------- ---------
Net increase in cash and cash equivalents 3,975 1,029
Cash and cash equivalents at the beginning of the year 7,553 11,214
--------- ---------
Cash and cash equivalents at the end of the period $ 11,528 $ 12,243
========= =========
See accompanying notes to condensed consolidated financial statements.
6
AMERICAN MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The condensed 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 Centerline/AMAC Manager Inc. (the "Advisor", formerly
CharterMac AMI Associates, Inc.), which acts as our Advisor and is an indirect
subsidiary of Centerline Holding Company ("Centerline", formerly CharterMac).
Centerline also owns 5.9% of our common shares of beneficial interest ("Common
Shares") and 41.2% of our 7.25% Series A cumulative convertible preferred shares
("Preferred Shares") at September 30, 2007 (see Notes 10 and 13). We operate in
one business segment.
The condensed consolidated financial statements have been prepared without
audit. In the opinion of management, the financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly our financial position as of September 30, 2007, and the results
of our operations and our cash flows for the periods then ended. However, the
operating results for interim periods may not be indicative of the results for
the full year.
Certain information and footnote disclosures normally included in annual
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") have been
condensed or omitted. These financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2006.
Our Annual Report on Form 10-K for the year ended December 31, 2006, contains a
summary of our significant accounting policies. There have been no material
changes to these items since December 31, 2006.
The preparation of the condensed consolidated 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 as of the date of the financial statements as well as the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
We have reclassified certain prior year amounts to conform to the current year
presentation, in particular the reclassification of operating results for our
real estate owned portfolio to discontinued operations (see Note 4).
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement No. 157, FAIR VALUE MEASUREMENTS, which established a framework for
measuring the fair value of assets and liabilities as required by numerous other
accounting pronouncements and expands disclosure requirements of the fair values
of certain assets and liabilities. The statement is effective as of the
beginning of our 2008 fiscal year. We are currently evaluating the impact, if
any, that the adoption of this statement would have on our consolidated
financial statements.
In February 2007, the FASB issued Statement No. 159, THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES. This statement was issued with the
intent to provide an alternative measurement treatment for certain financial
assets and liabilities. The alternative measurement would permit fair value to
be used for both initial and subsequent measurement, with changes in fair value
recognized in earnings as those changes occur. This "Fair Value Option" would be
available on a contract by contract basis. The effective date for this statement
is the beginning of our 2008 fiscal year. We do not plan to adopt the provisions
of this statement.
In June 2007, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 07-1, CLARIFICATION OF THE SCOPE OF THE
AUDIT AND ACCOUNTING GUIDE INVESTMENT COMPANIES AND ACCOUNTING FOR PARENT
COMPANIES AND EQUITY METHOD INVESTORS FOR INVESTMENTS IN INVESTMENT COMPANIES.
This SOP provides guidance for determining whether an entity is within the scope
of the AICPA AUDIT AND ACCOUNTING GUIDE INVESTMENT COMPANIES (the "Guide").
Entities that are within the scope of the Guide are required, among other
things, to carry their investments at fair value, with changes in fair value
included in earnings. The provisions of this SOP were to become effective on
January 1, 2008. In October 2007, the FASB proposed an indefinite delay of this
standard. We continue to assess the impact that the adoption of this SOP would
have on our consolidated financial statements and have not determined whether we
will be required to apply the provisions of the Guide in presenting our
financial statements.
7
AMERICAN MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2 - MORTGAGE LOANS RECEIVABLE, NET
We partially or fully funded 21 first mortgage, bridge and mezzanine loans and
subordinated notes, totaling $250.1 million during the nine months ended
September 30, 2007, including two to a related party (see Note 13). The loans
bear interest at a weighted average interest rate of 7.97% and mature on dates
ranging from October 2008 to August 2017. Included in these originations is an
$84.0 million participation interest in a mezzanine loan of which $77.6 million
was repaid as of September 30, 2007, and the remainder was repaid subsequent to
September 30, 2007 (see Note 15).
During February 2007, one of our mortgage loans was repaid, resulting in a
one-time participation fee payment of $0.7 million. This payment was recorded in
other income in our condensed consolidated statements of income.
At September 30, 2007, $661.9 million of our first mortgage, bridge and
mezzanine loans and subordinated notes were partially or fully pledged as
collateral under our repurchase facilities or CDO notes payable.
During October 2007, one of our mortgage loans in our specially serviced
portfolio was repaid at par with accrued interest, resulting in proceeds of
$10.1 million. In addition, in connection with the pending termination of a
repurchase facility, we plan to sell certain of these assets (see Note 15).
Accordingly, we reclassified these assets as held for sale and recognized a $1.3
million impairment to reflect the market value of these assets as of September
30, 2007.
NOTE 3 -AVAILABLE-FOR-SALE INVESTMENTS, AT FAIR VALUE
We carry all of our available-for-sale investments at their estimated fair
values. We record the change in fair value as a component of other comprehensive
income within shareholders' equity. If the fair value of an investment is lower
than our cost, and we determine that the decline in fair value is
other-than-temporary, we record an impairment charge in our Condensed
Consolidated Statement of Income.
At September 30, 2007, we had the following investments classified as
available-for-sale:
o debt securities;
o commercial mortgage-backed securities ("CMBS");
o collateralized debt obligation ("CDO") securities; and
o mortgage revenue bonds.
During March 2007, we purchased a $10.1 million investment in CDO securities
(class J, K, L, M, N, O and preferred shares), issued by Nomura CRE CDO 2007-2,
LTD ("Nomura"). These securities bear interest at a weighted average interest
rate of 9.00% and mature in May 2042.
During 2007, we purchased $135.3 million of CMBS, at discounts aggregating $12.2
million, for a net cost of $123.1 million. These securities bear interest at a
weighted average interest rate of 5.92% and mature on dates ranging from June
2022 through June 2049.
CMBS investments we hold were comprised of the following as of September 30,
2007:
Face Unrealized Percentage of
(DOLLARS IN THOUSANDS) amount Accreted cost Fair Value losses fair value
------------- ------------- ------------- ------------- -------------
Security rating:
BBB+ $ 4,750 $ 4,775 $ 4,306 $ (469) 4.0%
BBB 69,556 64,685 55,926 (8,759) 51.5
BBB- 60,995 53,744 48,389 (5,355) 44.5
------------- ------------- ------------- ------------- -------------
$ 135,301 $ 123,204 $ 108,621 $ (14,583) 100.0%
============= ============= ============= ============= =============
8
AMERICAN MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Information regarding our available-for-sale investments is as follows:
(IN THOUSANDS) Mortgage
Debt CDO revenue
September 30, 2007 securities CMBS securities bonds Total
- ------------------ ------------- ------------- ------------- ------------- -------------
Amortized cost $ 73,994 $ 123,204 $ 10,063 $ 4,710 $ 211,971
Unrealized gains 255 -- -- 150 405
Unrealized losses (2,721) (14,583) (1,391) -- (18,695)
------------- ------------- ------------- ------------- -------------
Net unrealized gain (loss) (2,466) (14,583) (1,391) 150 (18,290)
------------- ------------- ------------- ------------- -------------
Fair value $ 71,528 $ 108,621 $ 8,672 $ 4,860 $ 193,681
============= ============= ============= ============= =============
December 31, 2006
- -----------------
Amortized cost $ 83,496 $ -- $ -- $ 4,846 $ 88,342
Unrealized gains 359 -- -- 121 480
Unrealized losses (1,273) -- -- -- (1,273)
------------- ------------- ------------- ------------- -------------
Net unrealized gain (loss) (914) -- -- 121 (793)
------------- ------------- ------------- ------------- -------------
Fair value $ 82,582 $ -- $ -- $ 4,967 $ 87,549
============= ============= ============= ============= =============
The fair value and gross unrealized losses of our available for sale investments
aggregated by length of time that these individual securities have been in a
continuous unrealized loss position at September 30, 2007, and December 31,
2006, is summarized in the table below:
September 30, 2007 December 31, 2006
--------------------------------------- ---------------------------------------
Less than 12 months Less than 12 months
(DOLLARS IN THOUSANDS) 12 months or more Total 12 months or more Total
----------- ----------- ----------- ----------- ----------- -----------
Number of securities:
Debt securities 2 11 13 3 9 12
CMBS 12 -- 12 -- -- --
CDO securities 6 -- 6 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total 20 11 31 3 9 12
Fair value $ 136,075 $ 43,245 $ 179,320 $ 35,799 $ 37,579 $ 73,378
Gross unrealized losses $ 16,412 $ 2,283 $ 18,695 $ 246 $ 1,027 $ 1,273
The unrealized losses shown above are as a result of fluctuations in interest
rates and interest rate spreads subsequent to the acquisition of the
investments. All of the available-for-sale investments are performing according
to their terms. Furthermore, we have the intent and ability to hold these
investments to maturity, or at least until interest rates or interest rate
spreads change such that the fair value is no longer less than book value.
Accordingly, we have concluded that these declines in value are temporary.
At September 30, 2007, $185.7 million of our debt securities, CMBS and CDO
securities were pledged as collateral under our repurchase facilities (see Notes
6 and 15).
9
AMERICAN MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 - REAL ESTATE OWNED - DISCONTINUED OPERATIONS
During 2007, we sold our economic interest in the Concord portfolio to an
affiliated party (see Note 13), resulting in proceeds of $12.0 million and a
gain of $3.6 million. During 2006, we sold the Reserve at Autumn Creek Property
for proceeds of $4.2 million, and recorded a loss of $0.1 million in the third
quarter of 2006. During the fourth quarter of 2006, we received additional
proceeds, resulting in a net gain of $0.2 million. As a result of these sales,
we have reclassified real estate owned property operations for the current
period and all comparable prior periods as discontinued operations, as provided
in the table below.
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
(IN THOUSANDS) 2007 2006 2007 2006
---------- ---------- ---------- ----------
Revenues $ -- $ 2,303 $ 1,815 $ 7,034
========== ========== ========== ==========
Gain (loss) on sale of real estate owned $ -- $ (98) $ 3,611 $ (98)
========== ========== ========== ==========
Net income $ -- $ 36 $ 3,531 $ 25
========== ========== ========== ==========
NOTE 5 - DEFERRED CHARGES AND OTHER ASSETS, NET
Detail of deferred charges and other assets, net is provided in the table below:
September 30, December 31,
(IN THOUSANDS) 2007 2006
------------- -------------
Deferred financing charges, net of accumulated
amortization of $758 in 2007 and $151 in 2006 $ 7,076 $ 7,467
Interest rate derivatives (see Note 9) 318 1,143
Other assets 62 61
------------- -------------
Total $ 7,456 $ 8,671
============= =============
NOTE 6 - REPURCHASE FACILITIES
Our repurchase facilities consisted of financing collateralized by investments
in mortgage loans, CMBS, bridge notes, mezzanine loans, subordinated notes and
CDO securities. They are categorized in the table below by lending institution:
September 30, December 31,
(IN THOUSANDS) 2007 2006
------------- -------------
Citigroup $ 290,365 $ 84,149
Bear Stearns 95,251 --
UBS 14,164 48,928
RBC -- 30,499
------------- -------------
Total $ 399,780 $ 163,576
============= =============
Citigroup Facility
- ------------------
During December 2006, we executed a repurchase facility with Citigroup Global
Markets, Inc. ("Citigroup") for the purpose of funding investment activity for a
planned CDO securitization. Borrowings on this facility had interest rates of
6.49% at September 30, 2007, as compared to 6.13% at December 31, 2006. See Note
15 regarding the pending termination of this facility on February 28, 2008.
10
AMERICAN MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Bear Stearns Facility
- ---------------------
During 2007, we executed a repurchase facility with Bear Stearns International
Limited ("Bear Stearns") for the purposes of financing investments in CMBS and
CDO securities. During the third quarter of 2007, we also began to finance a
portion of our debt securities portfolio previously financed through other
facilities (mentioned below). This facility had borrowings at a weighted average
interest rate of 5.57% at September 30, 2007. The borrowings are subject to
30-day settlement terms. See Note 15 regarding the refinancing of certain assets
utilizing this facility.
UBS and RBC Facilities
- ----------------------
We had two repurchase facilities with RBC Capital Markets ("RBC") and UBS
Financial Services ("UBS") for the purposes of financing our investments in debt
securities. During August of 2007, we obtained new financing for the entire
outstanding balance on our RBC repurchase facility along with a portion of the
outstanding balance on our UBS repurchase facility utilizing our Bear Stearns
facility described above. At September 30, 2007, borrowings on our UBS
repurchase facility had an interest rate of 5.18% as compared to 5.39% at
December 31, 2006. The borrowings are subject to 30-day settlement terms.
Borrowings on our RBC repurchase facility had an interest rate of 5.45% at
December 31, 2006. Subsequent to September 30, 2007, the remaining balance on
our UBS repurchase facility was refinanced utilizing the Bear Stearns facility
(see Note 15). Both of these facilities have been terminated and are no longer
available.
Banc of America Facility
- ------------------------
During the third quarter of 2007, we executed a repurchase agreement with Banc
of America Securities, LLC ("Banc of America") to provide financing for
investments in mezzanine loans and subordinated notes. There are no outstanding
amounts on this facility as of September 30, 2007. Advance rates on borrowings,
which will be determined on an asset-by-asset basis, will be subject to 30-day
settlement terms. Interest rates on the borrowings will also be determined on an
asset-by-asset basis.
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Detail of accounts payable and accrued expenses is provided in the table below:
September 30, December 31,
(IN THOUSANDS) 2007 2006
------------- -------------
Accrued interest payable $ 10,416 $ 3,078
Interest rate derivatives (see Note 9) 13,854 8,673
Refundable deposits (1) 162 1,161
Other 2,592 754
------------- -------------
$ 27,024 $ 13,666
============= =============
(1) Refundable deposits collected during the due diligence period of a loan
transaction that are payable to other parties.
NOTE 8 - INCOME TAXES
We have elected to be treated as a Real Estate Investment Trust ("REIT") under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended ("the
Code"). In order to maintain our qualification as a REIT, we are required to,
among other things, distribute at least 90% of our REIT taxable income to our
shareholders and meet certain tests regarding the nature of our income and
assets. As a REIT, we are not subject to federal income tax with respect to the
portion of our income that meets certain criteria and is distributed annually to
shareholders. Accordingly, no provision for federal income taxes is included in
the condensed consolidated financial statements with respect to these
operations. We believe we have and intend to continue to operate in a manner
that allows us to continue to meet the requirements for taxation as a REIT. Many
of these requirements, however, are highly technical and complex. If we were to
fail to meet these requirements, we could be subject to federal income tax.
11
AMERICAN MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 9 - DERIVATIVE INSTRUMENTS
Our derivative instruments are comprised of cash flow hedges of debt and
free-standing derivatives related to investments. While we carry derivative
instruments in both categories at their estimated fair values on our condensed
consolidated balance sheet, the changes in those fair values are recorded
differently. To the extent that the cash flow hedges are effectively hedging the
associated debt, we record changes in their fair values as a component of other
comprehensive income within shareholders' equity. If a cash flow hedge is
ineffective, we include a portion of the change in its fair value in our
condensed consolidated statement of income. With respect to the free-standing
derivatives, we always include the change in their fair value in our condensed
consolidated statement of income.
CASH FLOW HEDGES OF DEBT
Our borrowings under repurchase facilities, CDO notes payable, related party
line of credit and our preferred shares of a subsidiary (subject to mandatory
repurchase) incur interest at variable rates, exposing us to interest rate risk.
We have established a policy for risk management outlining our objectives and
strategies for use of derivative instruments to potentially mitigate such risks.
Effective March 30, 2007, we entered into a three-year interest rate swap to
reduce our exposure to possible increases in the variable interest rate on our
subsidiary's preferred shares (subject to mandatory repurchase). Under the swap
agreement, we are required to pay Bear Stearns a fixed rate of 4.97% on a
notional amount of $25.0 million and will receive a floating rate equivalent to
three-month LIBOR.
As of September 30, 2007, including the above mentioned swap, we had 50 interest
rate swaps with an aggregate notional amount of $656.0 million, which will
expire on dates ranging from March 2008 through March 2022 and are designated as
cash flow hedges, with the hedged item being the interest payments on our
variable-rate repurchase facilities, CDO notes payable and our subsidiary's
preferred shares (subject to mandatory repurchase). Amounts in accumulated other
comprehensive income (as described above) will be reclassified into earnings in
the same period during which the hedged forecasted transaction affects earnings.
Since we are hedging the interest payments on our variable-rate debt, the
forecasted transactions are the interest payments.
At inception and on an ongoing basis, we assess whether the swaps are effective
in offsetting changes in the variable cash flows of the hedged item. We measure
ineffectiveness of our cash flow hedges on a quarterly basis and record any
ineffectiveness in interest expense on the condensed consolidated statements of
income. With the exception of one, all of our swaps have been effective, and we
expect they will continue to be effective in the future. We have recorded an
expense of $0.3 million related to ineffectiveness on one swap. This swap
includes an embedded financing component, which has caused and will continue to
cause some ineffectiveness, within the limits allowed by Statement of Financial
Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, to maintain hedge accounting.
In connection with the disposition and refinancing of certain assets (see Note
15), we expect to terminate 44 of these swaps in the fourth quarter of 2007 and
the first quarter of 2008. Of the agreements to be terminated in connection with
the disposition of 24 assets (with $0.9 million of aggregate unrealized losses
included in accumulated other comprehensive income as of September 30, 2007), we
will record a charge to expense upon termination. In connection with the
refinancing of certain assets, we terminated seven of these swaps in November
2007 (with $2.0 million of aggregated unrealized losses included in accumulated
other comprehensive income as of September 30, 2007) resulting in a termination
fee of $2.6 million. This termination fee will be recorded as expense on the
date of termination in the fourth quarter of 2007, incorporating the realization
of these previously unrealized losses. For the other agreements to be terminated
(with $1.2 million of aggregate unrealized losses included in accumulated other
comprehensive income as of September 30, 2007), we plan to redesignate the
hedges upon refinancing of the debt. The termination costs associated with those
swaps will be amortized into expense over the lives of the new hedging
relationships.
For swap agreements that we do not plan to terminate, we estimate that $2.3
million of the net unrealized losses included in accumulated other comprehensive
loss will be reclassified into interest expense within the next 12 months.
FREE-STANDING DERIVATIVES RELATED TO INVESTMENTS
We have three interest rate swaps with an aggregate notional amount of $20.1
million, which expire on dates ranging from February 2017 through July 2017,
that are hedging changes in the fair value of certain investments. We did not
elect to apply hedge accounting to these swaps.
12
AMERICAN MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
We are required to maintain a minimum balance of collateral with Banc of America
in connection with these interest rate swaps. From time to time, as market rates
fluctuate, we may be called upon to post additional cash collateral with Banc of
America. These payments are held as deposits with Bank of America and will be
used to settle the swap at termination date if market rates fall below the fixed
rates on the swaps. At September 30, 2007, we had $0.6 million of deposits held
by Banc of America.
As with certain of the cash flow hedges described above, we expect that these
swaps will be terminated in the fourth quarter of 2007 (see Note 15).
FINANCIAL STATEMENT IMPACT
Interest rate swaps in a net liability position are recorded in accounts payable
and accrued expenses (see Note 7) and those in a net asset position are recorded
in deferred charges and other assets (see Note 5). The amounts recorded are
provided in the table below:
September 30, December 31,
(IN THOUSANDS) 2007 2006 Dollar Change Percent Change
------------- ------------- ------------- --------------
Net asset position $ 318 $ 1,143 $ (825) (72.2)%
Net liability position (13,854) (8,673) (5,181) (59.7)
------------- ------------- ------------- -------------
Net $ (13,536) $ (7,530) $ (6,006) (79.8)%
============= ============= ============= =============
Net income included the following related to our free-standing derivatives and
interest rate hedges:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
(IN THOUSANDS) 2007 2006 2007 2006
----------- ----------- ----------- -----------
Included in interest expense:
Interest receipts $ 403 $ 187 $ 1,143 $ 378
Interest payments (125) (32) (32) (87)
Change in fair value included in
other income (689) (10,439) (39) (8,416)
----------- ----------- ----------- -----------
Net $ (411) $ (10,284) $ 1,072 $ (8,125)
=========== =========== =========== ===========
NOTE 10 - SHAREHOLDERS' EQUITY
In July 2007, we issued 680,000 Preferred Shares for gross proceeds of $17.0
million. Net of underwriters fees and expenses, our net proceeds were $16.2
million. The shares carry a cumulative preferred 7.25% return based upon the
liquidation amount of $25.00 per share and have no stated maturity. Holders of
the shares may convert them into 1.5 million common shares, and we may also
redeem the shares at our option after July 2012. These shares have no voting
rights. Centerline purchased 280,000 Preferred Shares (see Note 13).
13
AMERICAN MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 11 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the nine months ended September 30, 2007 and
2006 was as follows:
Nine Months Ended
September 30,
------------------------
(IN THOUSANDS) 2007 2006
---------- ----------
Net income $ 8,454 $ 8,618
Net unrealized loss on derivative instruments (6,140) (382)
Net unrealized holding loss on investments (17,497) (6,753)
Reclassification adjustment for realized loss on
investments -- 2,224
---------- ----------
Comprehensive income (loss) $ (15,183) $ 3,707
========== ==========
NOTE 12 - EARNINGS PER SHARE ("EPS")
Diluted earnings per share is calculated using the weighted average number of
shares outstanding during the period plus the additional dilutive effect of
common share equivalents. The dilutive effect of outstanding share options is
calculated using the treasury stock method. The dilutive effect of the preferred
shares is calculated on the if-converted method. For the three months ended
September 30, 2007, the effect of the assumed conversion of our preferred shares
is not included as the effect would be antidilutive.
Three Months Ended Nine months Ended
September 30, 2007 September 30, 2007
------------------------------------- ------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Income Shares Per Share Income Shares Per Share
- ------------------------------------------- ----------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations $ (187) $ 4,923
Preferred dividends (219) (219)
----------- ----------
Income (loss) from continuing operations
available to shareholders (Basic EPS) (406) 8,406 $ (0.05) 4,704 8,404 $ 0.56
========== ==========
Effect of dilutive securities -- -- 219 390
----------- ---------- ---------- ----------
Diluted EPS from continuing operations $ (406) 8,406 $ (0.05) $ 4,923 8,794 $ 0.56
=========== ========== ========== ========== ========== ==========
Three Months Ended Nine months Ended
September 30, 2007 September 30, 2007
------------------------------------- ------------------------------------
Income Shares Per Share Income Shares Per Share
- ------------------------------------------- ----------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations $ 1,198 $ 8,593
Preferred dividends -- --
----------- ----------
Income from continuing operations available
to shareholders (Basic EPS) 1,198 8,307 $ 0.14 8,593 8,305 $ 1.03
========== ==========
Effect of dilutive securities -- 8 -- 3
----------- ---------- ---------- ----------
Diluted EPS from continuing operations $ 1,198 8,315 $ 0.14 $ 8,593 8,308 $ 1.03
=========== ========== ========== ========== ========== ==========
14
AMERICAN MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 13 - RELATED PARTY TRANSACTIONS
The following summarizes all costs paid or payable to our Advisor and its
affiliates:
Three months ended Nine months ended
(IN THOUSANDS) September 30, September 30,
----------------------- -----------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Fees to Advisor and affiliates:
Shared services expenses $ 474 $ 450 $ 1,267 $ 1,149
Asset management fees 421 486 1,240 1,402
Servicing fees 149 -- 422 --
Incentive management fee(1) -- 2,156 -- 2,344
---------- ---------- ---------- ----------
Total fees to Advisor and affiliates $ 1,044 $ 3,092 $ 2,929 $ 4,895
========== ========== ========== ==========
Other costs:
Interest paid on related party line of credit $ 856 $ 360 $ 1,758 $ 1,105
========== ========== ========== ==========
(1) Accrual based on the proportion of actual earnings as compared to estimates
of full-year results at September 30, 2006. Later in 2006, when it was
determined that certain financial thresholds would not be achieved, the
accrual was reversed and no incentive fees were paid. In 2007, no incentive
fees are accrued, as we do not anticipate current year earnings to reach
incentive fee payment hurdles.
Fees to Advisor and Affiliates
- ------------------------------
ADVISORY AGREEMENT
Under our amended Advisory Services Agreement with our Advisor (the "Advisory
Agreement"), which was amended in March 2007, we pay certain fees, in addition
to reimbursements of certain administrative and other costs that our Advisor
incurs on our behalf for its ongoing management and operations of our Company:
Fees/Compensation Annual Amount
- ----------------- -------------
I. Asset management fees Our Advisor receives an asset management fee
equal to 1.75% per year for the first $300.0
million of our adjusted equity balance (as
defined in the Advisory Agreement) and 1.50%
per year of our adjusted equity balance in
excess of $300.0 million.
II. Loan origination fees Our Advisor is entitled to receive, with respect
to each investment originated by us, the
origination points, if any, paid by borrowers.
In connection with the acquisition of
investments for us, our Advisor also may act as
an advisor to third parties which participate
with us in such investments and may receive
origination points, if any, from such third
parties or their borrowers. In the event our
Advisor is not entitled to an origination
fee from a borrower for a loan the Advisor
originated for investment by us, we will pay
an origination fee or a referral fee consistent
with industry practice, amount and terms.
III. Annual incentive Our Advisor is entitled to receive incentive
management fees compensation for each fiscal year in an amount
equal to the product of:
(A) 25% of the dollar amount by which
(1) Adjusted Funds from Operations
("AFFO") before this incentive
management fee per share (based on
the weighted average number of
shares outstanding) and excluding
non-cash gains or losses due to the
recording of fair value hedges
exceeds
(2) the weighted average per share value
of (x) $20 and (y) the prices per
share of any secondary offerings by
the Company multiplied by the
greater of:
15
AMERICAN MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(a) 9.00%; and
(b) the Ten-Year U.S. Treasury Rate
plus 2.00% per annum
multiplied by
(B) the weighted average number of shares
outstanding during such year.
AFFO means net income (computed in accordance
with GAAP) including realized gains (or losses)
from debt restructuring and sales of non-real
estate assets, plus depreciation and
amortization on real property, and after
adjustments for unconsolidated partnerships and
joint ventures.
A minimum of 10% and a maximum of 50% of the
annual incentive management fee is to be paid in
common shares, at the discretion of our Board of
Trustees.
IV. Shared services expenses Our Advisor is reimbursed by us for (i) the
actual costs to the Advisor of goods, materials
and services used for and by us obtained
from unaffiliated parties, (ii) the costs of
certain personnel employed by the Advisor and
directly involved in the organization and
business of our Company and for legal,
accounting, transfer agent, reinvestment and
redemption plan administration, data processing,
duplication and investor communications services
performed by employees or officers of the
Advisor.
V. Termination Fees The Advisory agreement will be subject to early
termination for "cause", without payment of a
termination fee. However, if termination occurs
without cause, or is not renewed after its one-
year term, the Advisor will be entitled to
receive a termination fee based on historical
Asset Management and Annual Incentive Management
fees or a market rate.
Prior to the March 2007 amendment to the Advisory Agreement, the following fees
were paid to the Advisor differently than they are currently paid:
o ASSET MANAGEMENT FEES - We paid asset management fees equal to 1.75%
of our total equity balance, adjusted by certain costs and one-time
events.
o INCENTIVE MANAGEMENT FEES - We paid incentive management fees based on
a calculation that used an AFFO and specified yield-based threshold.
Payment of this fee was made in cash only.
Other fees as described above are consistent with the Advisory Agreement prior
to the March 2007 amendment.
SERVICING FEES
We pay Centerline Servicing Inc ("CSI"), an affiliate of Centerline, a fee for
servicing and special servicing our mortgage loans and other investments equal
to the Advisor's actual costs of performing such services but not less than
0.08% per year of the principal balance of the related mortgage loan or other
investment.
Other Related Party Transactions
- --------------------------------
During 2006, we entered into a co-investment agreement with Centerline Real
Estate Special Situations Mortgage Fund LLC ("CRESS"), whereby we and CRESS
participate in investment opportunities that are originated by affiliates and
which meet the investment criteria of both companies. A portion of our 2007
investments was made pursuant to this agreement, and we will continue to pursue
investment opportunities with CRESS in the future.
During March 2007, we sold our economic interest in the Concord properties to
CRESS (see Note 4).
During April 2007, we amended our revolving credit facility with Centerline to
increase our borrowing capacity from $50.0 million to $80.0 million. The
maturity date of the facility was also extended to June 2008 with a one-year
optional extension. In the opinion of our Advisor, the terms of this facility
are consistent with those of transactions with independent third parties. At
September 30, 2007, and December 31, 2006, we had $39.3 million and $15.0
million, respectively, in borrowings outstanding, bearing interest at a rate of
8.12% and 8.35%, respectively.
16
AMERICAN MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
During 2007, we partially or fully funded 21 first mortgage, bridge and
mezzanine loans and subordinated notes, totaling $250.1 million (see Note 2),
originated by Centerline Mortgage Capital Inc. ("CMC", formerly CharterMac
Mortgage Capital Corporation), an affiliate of our Advisor. CMC received $0.9
million in loan origination fees related to these originations, all of which
were paid by the borrowers.
During 2007, we funded two mezzanine loans aggregating $50.7 million to
properties developed by a company partly owned by the chairman of Centerline.
Those transactions were approved by the independent members of our Board of
Trustees and, in the opinion of management, the terms of these mezzanine
transactions were consistent with independent third-party transactions.
During March 2007, Centerline entered into a 10b5-1 Plan whereby it may purchase
our common shares in open market purchases based on pre-determined parameters,
up to the 9.8% share ownership limit in our trust agreement. Through September
30, 2007, it has purchased 494,000 common shares under this plan, amounting to
5.9% of our outstanding common shares at September 30, 2007. Centerline has also
purchased 280,000 of our preferred shares that we issued in July 2007 (see Note
10), which amounts to an aggregate economic ownership percentage of over 10%,
assuming all preferred shares were converted to common shares.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Guarantees
- ----------
Prior to 2000, we entered into a loan program with Fannie Mae, under which we
agreed to guarantee a first-loss position on certain loans. In June and October
of 2000, we originated two loans totaling $3.3 million under the program. In
September 2003, we transferred and assigned all of our obligations with respect
to these two loans to CMC. Pursuant to the agreement with CMC, Centerline
guaranteed CMC's obligations, and we agreed to indemnify both CMC and Centerline
for any losses incurred in exchange for retaining all fees that we were
otherwise entitled to receive from Fannie Mae under the program. The maximum
exposure at September 30, 2007, was $3.1 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.
We monitor the status of the underlying properties and evaluate 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.
Future Funding Commitments
- --------------------------
We are committed to additionally fund the following first mortgage and mezzanine
loans at September 30, 2007:
(IN THOUSANDS)
Maximum Amount of Commitment
------------------------------------------
Less than
Issue Date Project Location Total 1 Year 1-3 Years
- ---------- -------------------- ---------------- ------------ ------------ ------------
Apr-05 Atlantic Hearthstone Hillsborough, NJ $ 431 $ 431 $ --
Nov-06 12 Atlantic Station Atlanta, GA 1,000 1,000 --
Feb-07 Aberdeen Apartments Houston, TX 245 245 --
Jun-07 122 Greenwich Ave New York, NY 4,968 4,968 --
------------ ------------ ------------
Total Future Funding Commitments $ 6,644 $ 6,644 $ --
============ ============ ============
NOTE 15 - Market Conditions and Subsequent Events
Beginning in July 2007, developments in the market for many types of mortgage
products (including mortgage-backed securities) have resulted in reduced
liquidity for these assets. Although this reduction in liquidity has been most
acute with regard to single-family subprime mortgage assets, to which we are not
exposed, there has been an overall reduction in liquidity across the credit
spectrum of mortgage products. Nonetheless, Management believes our current
financing sources and cash flows from operations are adequate to meet our
ongoing liquidity needs for the near term.
17
AMERICAN MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Due to these market factors, in October 2007, we decided not to pursue a second
CDO securitization. In connection with that determination, we entered into an
agreement that will terminate our Citigroup repurchase facility on February 28,
2008, and we recorded a charge to general and administrative expense of $1.1
million in the third quarter of 2007 to accrue estimated costs incurred through
September 30, 2007, that we would have paid at closing of the CDO. With respect
to assets pledged as collateral for the Citigroup facility and in accordance
with the termination agreement, we plan to refinance our mezzanine loans,
subordinated notes and CMBS utilizing our other repurchase facilities. We also
plan to sell all of the first mortgages pledged as collateral for the Citigroup
line to a third party and recognized an impairment loss of $1.3 million as of
September 30, 2007, reflecting the market value of the loans as of that date.
Any difference between proceeds of the sale and the refinancing of the other
assets and the amount needed to repay the Citigroup facility will be obtained
from our available cash or related party line of credit. To the extent that any
of these assets remain on the facility after January 1, 2008, interest on
borrowings will be increased to a range of LIBOR plus 0.75% to LIBOR plus 1.40%.
To the extent that any of these assets remain on the facility after February 1,
2008, the rate will increase to a range from LIBOR plus 0.95% to LIBOR plus
1.60%.
During the November 2007, we refinanced our CMBS investments (with an aggregate
carrying amount of $62.2 million as of September 30, 2007) utilizing our Bear
Stearns repurchase facility. Advance rates on this transaction were 70% of
market value as of the refinancing date and the interest rate on the borrowings
is LIBOR plus 1.00%. The refinancing resulted in a net cash payment of $27.3
million.
In connection with terminating the Citigroup repurchase facility, we will also
terminate all of the associated interest rate swap derivatives (see Note 9). In
November 2007, when we refinanced the CMBS investments, we paid a termination
fee of $2.6 million for seven of the swaps. This termination fee will be
recorded as expense in the fourth quarter of 2007, on the date of termination,
incorporating the realization of those previously unrealized losses.
During October 2007, the remaining balance ($6.4 million) of an $84.0 million
participation interest in a mezzanine loan was repaid (see Note 2).
During October 2007, we obtained new financing for the remaining $14.2 million
balance on our UBS repurchase facility utilizing our Bear Stearns repurchase
facility (see Note 6).
During October 2007, one mortgage loan in our specially serviced portfolio was
repaid at par plus accrued interest, resulting in proceeds of $10.1 million (see
Note 2).
For the period from October 1, 2007 through November 7, 2007, we paid $0.5
million due to margin calls on our repurchase facilities.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
- --------
During 2006 and 2007, as we have revised our investment strategy, we have
recorded gains and losses that are not comparable between periods and have
experienced growth in numerous other income statement accounts in line with our
increased investment portfolio. Given current market conditions, there have been
revisions to our current investment strategy. See "LIQUIDITY AND CAPITAL
RESOURCES" for further discussion.
The non-comparable gains and losses and the changes in our investment portfolio
are detailed in the following sections of this discussion.
Factors Affecting Comparability
- -------------------------------
During August 2006, we sold our membership interests in ARCap, which resulted in
a significant gain on the sale, as well as additional equity income recognized
from a special distribution prior to the sale, while eliminating any further
equity income from ARCap. We received additional proceeds from the sale (and
recorded an additional gain) upon release of an escrow during the third quarter
of 2007.
During 2006, we entered into fair value swaps for which we did not apply hedge
accounting. As a result, changes in the market value of these derivatives have
been recorded as gains and losses in other income in our condensed consolidated
statements of income. In 2007, there were fewer of these swaps, resulting in
less of a negative change in the fair value as compared to 2006.
During the third quarter of 2006, we recognized impairment losses on three
mortgage loans and the anticipated sale of debt securities. As a result, these
charges were recorded in impairment of investments in our condensed consolidated
statements of income. During the third quarter of 2007, we recognized impairment
of $1.3 million related to the planned sale of mortgage loans in connection with
the termination of a credit facility. We also accrued $1.1 million of costs
associated with a CDO securitization into which we decided not to go forward
(see Note 15 to the consolidated condensed financial statements and "LIQUIDITY
AND CAPITAL RESOURCES").
During March 2007, we sold our economic interest in the Concord portfolio,
resulting in a gain of $3.6 million. This amount is recorded in discontinued
operations along with rental income, property operations, mortgage interest and
depreciation for the period up to the sale.
Investment Activity
- -------------------
During the three months ended September 30, 2007 and 2006, we funded (partially
or in full) or purchased the following investments, not reflecting any discounts
or premiums:
Three Months Ended
------------------------------------------------------------------
September 30, 2007 September 30, 2006
------------------------------- -------------------------------
Weighted Weighted
Average Average
(DOLLARS IN THOUSANDS) Amount Interest Rate Amount Interest Rate
-------------- -------------- -------------- --------------
Mortgage loans:
First mortgage loans $ 4,150 6.62% $ 124,050 6.01%
Mezzanine loans 1,100 9.74 16,500 10.00
CMBS 20,000 5.82 -- --
-------------- -------------- -------------- --------------
Total $ 25,250 6.12% $ 140,550 6.48%
============== ============== ============== ==============
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
During the nine months ended September 30, 2007 and 2006, we funded (partially
or in full) or purchased the following investments, not reflecting any discounts
or premiums:
Nine Months Ended
------------------------------------------------------------------
September 30, 2007 September 30, 2006
------------------------------- -------------------------------
Weighted Weighted
Average Average
(DOLLARS IN THOUSANDS) Amount Interest Rate Amount Interest Rate
-------------- -------------- -------------- --------------
Mortgage loans:
First mortgage loans $ 47,050 5.83% $ 244,250 6.16%
Bridge loans 19,660 6.51 -- --
Mezzanine loans 156,924 8.74 22,000 9.76
Subordinated notes 26,490 8.30 -- --
CMBS 135,301 5.92 -- --
CDO securities 10,084 9.00 -- --
-------------- -------------- -------------- --------------
Total $ 395,509 7.28% $ 266,250 6.45%
============== ============== ============== ==============
Results of Operations
- ---------------------
The following is a summary of our operations for the periods ended September 30,
2007 and 2006:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ------------------------------
(DOLLARS IN THOUSANDS) 2007 2006 Change 2007 2006 Change
-------- -------- -------- -------- -------- --------
Total revenues $ 16,948 $ 8,509 99.2% $ 44,761 $ 21,429 NM%
Total expenses 16,387 15,264 7.4 40,077 25,735 55.7
Total other income (loss) (748) 7,953 NM 239 12,899 (98.1)
Income from discontinued
operations, including gain on
sale -- 36 NM 3,531 25 NM
-------- -------- -------- -------- -------- --------
Net (loss) income $ (187) $ 1,234 NM% $ 8,454 $ 8,618 (1.9)%
======== ======== ======== ======== ======== ========
NM = Not meaningful as change is 100% or greater
The growth in our revenues during the three and nine month periods ended
September 30, 2007, as compared to the same periods in 2006, resulted primarily
from increases in investment volume, as well as participation income received in
connection with a paydown of one of our mortgage loans.
Expenses increased during the nine months ended September 30, 2007, particularly
due to higher financing costs mainly from higher debt balances and a slight
increase in interest rates from the comparable period, as well as from certain
costs incurred in association with a securitization program that will no longer
be executed (see Note 15). These increases were partially offset by a decrease
in impairment losses, advisory fees (due to the absence of an accrual of
incentive management fees in the 2007 period, as we do not anticipate current
year earnings to reach incentive fee payment hurdles) and general and
administrative costs (particularly lower legal fees in the 2007 period compared
to the settlement of a lawsuit in the third quarter of 2006).
Expenses decreased during the three months ended September 30, 2007, due to the
reasons mentioned above; however, the decrease in impairment losses and the
absence of an incentive management fee accrual has a more significant impact in
the three-month period as compared to the nine-month period.
Other income decreased for the three and nine months ended September 30, 2007,
as compared to 2006, primarily due to the sale of our investment in ARCap in
2006 and the resulting absence of equity income we had earned in the 2006 period
prior to the sale. This was offset by a sharp drop in fair value changes of
derivatives that we terminated in the fourth quarter of 2006.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Income from discontinued operations includes operations from real estate owned
that was sold during 2007 and 2006. The increase for the nine months ended
September 30, 2007, as compared to 2006, is due to the recognition of a gain on
sale of a portfolio of properties in the first quarter of 2007.
REVENUES
Three Months Ended
-----------------------------
% of 2007 % of 2006
September 30, September 30, Change from Total Total
(DOLLARS IN THOUSANDS) 2007 2006 Prior Period Revenues Revenues
------------- ------------- ------------- ------------- -------------
Interest income:
Mortgage loans $ 12,942 $ 5,563 NM% 76.4% 65.4%
Debt securities 1,104 2,717 (59.4) 6.5 31.9
CMBS 2,036 -- NM 12.0 --
Mortgage revenue bonds 104 112 (7.1) 0.6 1.3
Temporary investments 163 94 73.4 1.0 1.1
CDO securities 519 -- NM 3.1 --
Total interest income 16,868 8,486 98.8 99.5 99.7
------------- ------------- ------------- ------------- -------------
Other revenues 80 23 NM 0.5 0.3
------------- ------------- ------------- ------------- -------------
Total revenues $ 16,948 $ 8,509 99.2% 100.0% 100.0%
============= ============= ============= ============= =============
NM = Not meaningful as change is 100% or greater.
Nine Months Ended
-----------------------------
% of 2007 % of 2006
September 30, September 30, Change from Total Total
(DOLLARS IN THOUSANDS) 2007 2006 Prior Period Revenues Revenues
------------- ------------- ------------- ------------- -------------
Interest income:
Mortgage loans $ 35,870 $ 11,687 NM% 80.1% 54.5%
Debt securities 3,539 8,932 (60.4) 7.9 41.7
CMBS 2,898 -- NM 6.5 --
Mortgage revenue bonds 315 396 (20.5) 0.7 1.8
Temporary investments 422 229 84.3 0.9 1.1
CDO securities 709 -- NM 1.6 --
Total interest income 43,753 21,244 NM 97.7 99.1
------------- ------------- ------------- ------------- -------------
Other revenues 1,008 185 NM 2.3 0.9
------------- ------------- ------------- ------------- -------------
Total revenues $ 44,761 $ 21,429 NM% 100.0% 100.0%
============= ============= ============= ============= =============
NM = Not meaningful as change is 100% or greater.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
At September 30, we had the following investments (exclusive of Real Estate
Owned and temporary investments):
2007 2006
----------------------------------------------- -----------------------------------------------
Weighted Weighted
Carrying Average Carrying Average
(DOLLARS IN THOUSANDS) Amount % of Total Interest Rate Amount % of Total Interest Rate
------------- ------------- ------------- ------------- ------------- -------------
Mortgage loans $ 710,733 78.6% 6.27% $ 345,033 67.9% 7.70%
Debt securities 71,528 7.9 6.49 157,982 31.1 6.02
CMBS 108,621 12.0 5.06 -- -- --
CDO securities 8,672 1.0 8.80 -- -- --
Mortgage revenue
bonds 4,860 0.5 8.70 4,972 1.0 8.70
------------- ------------- ------------- ------------- ------------- -------------
$ 904,414 100.0% 6.18% $ 507,987 100.0% 7.19%
============= ============= ============= ============= ============= =============
Interest income from mortgage loans increased significantly for the 2007 periods
as compared to 2006, primarily due to the funding and purchase of a significant
amount of first mortgage loans, bridge notes, mezzanine loans and subordinated
notes throughout 2006 and 2007 and the partial funding of several existing
mezzanine loans during 2006. The decrease in the weighted average interest rates
on mortgage loans as of September 30, 2007, as compared to September 30, 2006,
was primarily due to the funding and purchase of a greater amount of higher
credit quality loans, as opposed to riskier, higher coupon loans as we had
funded in the past.
Interest income from debt securities decreased for the three and nine months
ended September 30, 2007, primarily due to the sale of 20 FNMA certificates in
November 2006, as well as the payoff of four GNMA certificates during 2007 and
2006. The increase in the weighted average interest rate on debt securities
during 2007 is due to the lower yields of the FNMA certificates sold relative to
the yields of those retained.
Interest income from CMBS and CDO securities in 2007 relates to the purchase of
a portion of 12 classes of CMBS investments and various classes of Nomura CDO
securities during 2007. There were no investments in CMBS or CDO securities
prior to 2007.
Interest income from mortgage revenue bonds for the three and nine months ended
September 30, 2007 was lower than the comparable prior year period primarily due
to the payoff of two revenue bonds during 2006.
Interest income from temporary investments increased for the 2007 periods, as
compared to 2006, primarily due to the investment of excess cash on hand
resulting from the payoff of several mortgage loans and debt securities, as well
as interest earned on restricted cash balances held with custodians.
Other revenues increased for the nine months ended September 30, 2007 due to a
one-time payment received from an early repayment one of a debt security, as
well as a one-time payment received pursuant to a participating arrangement for
a mortgage loan that was repaid in the first quarter of 2007. There were no such
fees received during 2006.
EXPENSES
Three Months Ended
----------------------------- % of 2007 % of 2006
September 30, September 30, Change from Total Total
(DOLLARS IN THOUSANDS) 2007 2006 Prior Period Revenues Revenues
------------- ------------- ------------- ------------- -------------
Interest $ 11,757 $ 5,669 NM% 69.4% 66.6%
Interest-subsidiary preferred shares 554 591 (6.3) 3.3 7.0
General and administrative 1,548 1,267 22.2 9.1 14.9
Impairment of investments 1,276 4,632 (72.5) 7.5 54.4
Fees to Advisor and affiliates 1,044 3,092 (66.2) 6.2 36.3
Amortization and other 208 13 NM 1.2 0.1
------------- ------------- ------------- ------------- -------------
Total expenses $ 16,387 $ 15,264 7.4% 96.7% 179.3%
============= ============= ============= ============= =============
NM = Not meaningful as change is 100% or greater.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Nine Months Ended
----------------------------- % of 2007 % of 2006
September 30, September 30, Change from Total Total
(DOLLARS IN THOUSANDS) 2007 2006 Prior Period Revenues Revenues
------------- ------------- ------------- ------------- -------------
Interest $ 30,890 $ 12,255 NM% 69.0% 57.2%
Interest-subsidiary preferred shares 1,677 1,665 0.7 3.8 7.8
General and administrative 2,696 2,245 20.1 6.0 10.5
Impairment of investments 1,276 4,632 (72.5) 2.9 21.6
Fees to Advisor and affiliates 2,929 4,895 (40.2) 6.5 22.8
Amortization and other 609 43 NM 1.4 0.2
------------- ------------- ------------- ------------- -------------
Total expenses $ 40,077 $ 25,735 55.7% 89.5% 120.1%
============= ============= ============= ============= =============
NM = Not meaningful as change is 100% or greater.
Interest expense increased for the three and nine months ended September 30,
2007, as compared to 2006, primarily due to the increased borrowings made
through 2007 and 2006 to fund origination activity and the slight increase in
market interest rates during the nine months ended September 30, 2007 as
compared to 2006. Excluding mortgages on real estate owned (in the 2006 period),
information related to our debt is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
(DOLLARS IN THOUSANDS) 2007 2006 2007 2006
---------- ---------- ---------- ---------
Average outstanding $ 833,026 $ 419,647 $ 762,038 $ 330,857
Weighted average interest rate
(including effect of interest rate swaps) 5.92% 5.97% 5.70% 5.61%
Average notional amount of interest rate swaps $ 676,120 $ 270,829 $ 613,855 $ 152,410
Weighted average rate of interest rate swaps 5.21% 5.14% 5.19% 4.96%
General and administrative expenses increased for the three and nine months
ended September 30, 2007, as compared to 2006 due to certain costs incurred in
association with a CDO securitization program that will no longer be executed
(see Note 15) and recurring CDO administrative costs incurred during the 2007
period as a result of our 2006 CDO securitization. These increases were
partially offset by fewer legal costs incurred during 2007 (as costs in the
third quarter of 2006 included defending and settling a lawsuit) decreased
insurance costs, share option costs (all of which were fully amortized in April
2006) and excise taxes (as none are anticipated for 2007).
Impairment of investments during 2006 relates to impairments recognized on two
mortgage loans due to deteriorating operating performance and on certain debt
securities that no longer met our investment return criteria and were sold. The
impairment losses in 2007 relate to the planned sale of mortgage loans in
connection with the termination of the associated credit facility.
Fees to Advisor and affiliates decreased for the 2007 periods, as compared to
2006, due to the absence of an accrual of incentive management fees in the 2007
period, as we do not anticipate current year earnings to reach incentive fee
payment hurdles. Offsetting this decrease is a higher level of servicing fees
due to growth of our investment portfolio.
Amortization and other costs increased for the 2007 periods, as compared to the
same periods in 2006, due to higher amortization of higher deferred financing
costs as a result of our 2006 CDO securitization.
OTHER INCOME (LOSS)
Other income (loss) decreased during 2007 primarily as a result of the gain on
sale of our investment in ARCap during 2006 and the resulting absence of equity
income afterward. These 2006 income amounts were partially offset by significant
fair value changes with respect to free-standing derivatives. The balance in
2007 relates to the change in the fair value of free-standing derivatives, as
well as an additional gain recognized from the sale of our investment in ARCap
resulting from the release of escrow funds upon the expiration of certain
holdback requirements.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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 our 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 because it provides management and investors with an
indication of our ability to incur and service debt, make capital expenditures
and fund other cash needs. 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.
The following table reconciles net income to FFO for the three and nine months
ended September 30, 2007 and 2006:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
(DOLLARS IN THOUSANDS) 2007 2006 2007 2006
---------- ---------- ---------- ---------
Net (loss) income $ (187) $ 1,234 $ 8,454 $ 8,618
Adjustments:
Depreciation of real property (1) -- 435 336 1,334
Loss (gain) on sale of real property (1) -- 98 (3,611) 98
---------- ---------- ---------- ---------
FFO $ (187) $ 1,767 $ 5,179 $ 10,050
========== ========== ========== =========
Cash flows from:
Operating activities $ 5,288 $ 3,702 $ 10,563 $ 8,934
========== ========== ========== =========
Investing activities $ 6,737 $ (61,501) $ (264,210) $(191,775)
========== ========== ========== =========
Financing activities $ 7,330 $ 66,350 $ 257,622 $ 183,870
========== ========== ========== =========
Weighted average shares outstanding:
Basic 8,406 8,307 8,404 8,305
========== ========== ========== =========
Diluted 8,406 8,315 8,794 8,308
========== ========== ========== =========
(1) Related to properties sold during 2007 and 2006 and included in
discontinued operations in our condensed consolidated statements of income.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
SOURCES OF FUNDS
During 2007, developments in the market for many types of mortgage products have
resulted in reduced liquidity for these assets. Although this reduction in
liquidity has been most acute with regard to single family subprime mortgage
assets, to which we are not exposed, there has been an overall reduction in
liquidity across the credit spectrum of mortgage products. Because of this we
have suspended most investment activity. The impact on the financial results has
been included, where appropriate, in our discussion of the results of operations
for the third quarter of 2007.
If current market conditions persist, we believe our current financing sources
and cash flows from operations would be adequate to meet our ongoing liquidity
needs for the near term, while limiting our ability to pursue previous
investment levels. If market conditions continue to decline, we will explore and
evaluate investment strategies and alternative financing for our existing asset
base. If current market conditions improve, we believe we have adequate
financing to actively pursue our investment strategies.
We expect that cash generated, principally interest 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
24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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 ("the Code"),
we must, among other things, distribute at least 90% of our taxable income (see
Note 8). We believe that we are in compliance with the REIT-related provisions
of the Code.
As of September 30, 2007, our credit facilities consisted of:
o repurchase facilities; and
o a related party line of credit.
At September 30, 2007, we had $40.7 million available to borrow, all of which
capacity is the unused portion of our related party line of credit.
Repurchase Facilities
- ---------------------
Under our repurchase agreements we pledge additional assets as collateral to our
repurchase agreement counterparties (lenders) when the estimated fair value of
the existing pledged collateral under such agreements declines and such lenders
demand additional collateral (i.e., a margin call). Margin calls result from a
decline in the value of our investments collateralizing our repurchase
agreements, generally due to changes in the estimated fair value of such
investments. This could result from principal reduction of such investments due
to scheduled amortization payments or unscheduled principal prepayments on the
mortgages underlying our investments, changes in market interest rates and other
market factors. To cover a margin call, we may pledge additional securities or
cash.
Through September 30, 2007, there were net cash payments of $21.0 million due to
margin calls/margin receipts on our repurchase facilities. We believe we have
adequate financial resources to meet our obligations, including margin calls, as
they come due and to fund dividends we declare. However, should market interest
rates and/or prepayment speeds on our investments suddenly increase, margin
calls on our repurchase agreements could result, causing an adverse change in
our liquidity position.
At September 30, 2007, the following repurchase facilities were in place,
categorized by lending institution:
o CITIGROUP FACILITY
During 2006, we began financing our growth by utilizing CDO
securitizations. Prior to a securitization, we finance investments
through a repurchase facility, which is repaid from the proceeds
received when the CDO securitization is complete.
During December 2006, we executed a repurchase agreement with
Citigroup for the purpose of funding investment activity. Advance
rates on the borrowings from this facility, ranging from 80% to 90% of
collateral value, are determined on an asset-by-asset basis. Interest
on the borrowings, which ranges from LIBOR plus 0.40% to LIBOR plus
1.25%, is also determined on an asset-by-asset basis.. At September
30, 2007, we had $290.4 million of borrowings outstanding under this
facility at a weighted average interest rate of 5.24%, including the
effect of interest rate hedges.
In October 2007, for the reasons mentioned above we decided not to
pursue a second CDO securitization. In connection with that
determination, we entered into an agreement that will terminate our
Citigroup repurchase facility on February 28, 2008, and we recorded a
charge to general and administrative expense of $1.1 million in the
third quarter of 2007 to record estimated costs incurred through
September 30, 2007, that we would have paid at closing of the CDO.
With respect to assets pledged as collateral for the Citigroup
facility and in accordance with the termination agreement, we plan to
sell or refinance our first mortgage and mezzanine loans, subordinated
notes and CMBS utilizing our other repurchase facilities (see Note
15).
o BEAR STEARNS FACILITY
During the second quarter of 2007, we executed a repurchase agreement
with Bear Stearns for the purpose of providing financing for our
investments in CMBS and CDO securities. We also began to finance a
portion of our debt securities portfolio previously financed through
other facilities. Advance rates on borrowings from this facility range
from 58% to 80% of the collateral value, and interest on the
borrowings ranged from 30-day LIBOR plus 0.55% to 30-day LIBOR plus
0.85%, both as determined on an asset-by-asset basis. The borrowings
are subject to 30-day settlement terms. At September 30, 2007, we had
$95.3 million of borrowings outstanding under this facility at a
weighted average interest rate of 4.93%, including the effect of
interest rate hedges. During November 2007, we refinanced our CMBS
investments utilizing this facility (see Note 15).
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
o UBS FACILITY
As a vehicle to leverage our investments in debt securities, we had a
repurchase agreement with UBS. During August of 2007, we obtained new
financing for a portion of the outstanding balance on this facility
with the Bear Stearns facility. The remaining balance was refinanced
in October 2007, also utilizing the Bear Stearns facility, and this
facility was terminated and is no longer available. This facility
offered advance rates between 94% and 97% of collateral value, and
borrowings between 30-day LIBOR minus 0.03% and 30-day LIBOR plus
0.10%, both as determined on an asset-by-asset basis. The borrowings
were subject to 30-day settlement terms. As of September 30, 2007, the
amount outstanding under this facility was $14.2 million, with a
weighted average interest rate of 5.18%.
o BANC OF AMERICA FACILITY
During the third quarter of 2007, we executed a repurchase agreement
with Banc of America Securities, LLC ("Banc of America") to provide
financing for investments in mezzanine loans, subordinated notes.
There are no outstanding amounts on this facility as of September 30,
2007. Advance rates on borrowings, which will be determined on an
asset-by-asset basis, will be subject to 30-day settlement terms.
Interest rates on the borrowings will also be determined on an
asset-by-asset basis.
Following is a summary of our investment assets as of September 30, 2007,
illustrating the amount of leverage and the amounts of hedged debt:
Interest rate
Carrying Amount hedges on
amount Amount securing Associated associated
Carrying pledged as securing repurchase repurchase repurchase
(in thousands) amount collateral CDO Dect (1) debt debt debt
- ----------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Mortgage loans:
First mortgages $ 478,025 $ 478,025 $ 352,550 $ 125,475 $ 113,584 $ 116,733
Fixed rate bridge loans 56,574 56,574 -- 56,574 50,343 51,496
Variable rate bridge loans 9,356 -- -- -- -- --
Fixed rate mezzanine loans 25,041 16,031 13,588 2,443 1,954 2,443
Variable rate mezzanine loans 84,719 59,713 4,746 54,967 43,903 --
Subordinated notes 57,018 51,518 24,278 27,240 23,154 12,314
------------- ------------- ------------- ------------- ------------- -------------
Total mortgage loans 710,733 661,861 395,162 266,699 232,938 182,986
------------- ------------- ------------- ------------- ------------- -------------
Debt securities 71,528 71,528 -- 71,528 66,819 30,000
CMBS 108,621 108,621 -- 108,621 96,437 51,985
CDO securities 8,672 5,554 -- 5,554 3,586 --
Mortgage revenue bonds 4,860 -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Totals $ 904,414 $ 847,564 $ 395,162 $ 452,402 $ 399,780 $ 264,971
============= ============= ============= ============= ============= =============
(1) Of the $362.0 million of CDO notes payable, we have hedged $346.4 million.
Related Party Line of Credit
- ----------------------------
We finance our remaining investing activity primarily through borrowings from a
credit facility we maintain with Centerline, which was amended in April 2007 to
increase our borrowing capacity and extend the maturity date of the facility to
June 2008. This $80.0 million facility offers borrowing rates of LIBOR plus
3.00%. As of September 30, 2007, the amount outstanding was $39.3 million with
an interest rate of 8.12%.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Other Financing
- ---------------
As noted above, in 2006, we began financing our growth by utilizing CDO
securitizations. At September 30, 2007, we had outstanding CDO securitization
certificates totaling $362.0 million at a weighted average rate of 5.45%,
including the effect of interest rate hedges. Due to current securitization
market conditions, we are not pursuing a second CDO securitization. If market
conditions improve, we may pursue other securitization strategies.
We have capacity to raise $153.0 million of additional funds by issuing either
common or preferred shares pursuant to a shelf registration statement filed with
the SEC. 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
Nine Months Ended
September 30,
----------------------------------------------------------------
Percent
2007 2006 Dollar Change Change
------------- ------------- ------------- -------------
Cash flows provided by (used in):
Operating activities $ 10,563 $ 8,934 $ 1,629 18.2%
Investing activities (264,210) (191,775) (72,435) 37.8
Financing activities 257,622 183,870 73,752 40.1
------------- ------------- ------------- -------------
Net increase in cash and cash equivalents $ 3,975 $ 1,029 $ 2,946 NM%
============= ============= ============= =============
NM = Not meaningful
The increase in operating cash flows was caused primarily by an increase in net
income when adjusted to exclude non-cash items. This increase was aided by
increased liability balances, particularly interest accruals, which more that
offset higher receivable balances related to accrued income.
The increase in net cash used in investing activities was due to investments
made in mortgage loans, CMBS and CDO securities during 2007 as compared to lower
origination activity in the 2006 period. The higher origination volume was
partially offset by proceeds received from the sale of real estate owned, a
decrease in restricted cash balances and a higher amount of principal repayments
received on our mortgage loan investments.
The increase in net cash provided by financing activities can be attributed to
the higher level of investing activity during the 2007 period, as well as net
proceeds received from a preferred stock offering, offset by partial repayments
of the repurchase facilities and our related party line of credit.
LIQUIDITY REQUIREMENTS AFTER SEPTEMBER 30, 2007
For the period from October 1, 2007 through November 7, 2007, we paid $0.5
million due to margin calls on our repurchase facilities.
During November 2007, common dividends of $1.9 million ($0.225 per share) and
preferred dividends of $0.2 million (0.322 per share), declared in September
2007, will be paid to shareholders.
As we sell or refinance assets pledged as collateral for our Citigroup
repurchase facility (see Sources of Funds - Repurchase Facilities above), we
expect to draw upon our related party line of credit to cover the difference
between the outstanding balance of that facility and the proceeds of assets sold
or refinanced. During November 2007 we refinanced all of our CMBS investments on
our Bear Stearns facility, resulting in a cash payment of $27.3 due to tighter
borrowing margins. Additionally, we will terminate all swaps associated with the
Citigroup line and redesignate the hedges to the extent possible. During
November 2007, in connection with the CMBS refinancing, we paid a $2.6 million
fee due to the termination of related swaps.
OTHER MATTERS
We are not aware of any trends or events, commitments or uncertainties, not
otherwise been disclosed, that will or are likely to impact liquidity in a
material way.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Dividends
- ---------
The following table outlines our total dividends and return of capital amounts,
determined in accordance with GAAP, for the nine months ended September 30:
(IN THOUSANDS) 2007 2006
----------- -----------
Total preferred dividends $ 219 $ --
=========== ===========
Total common dividends $ 5,673 $ 9,966
=========== ===========
Return of capital:
Amount $ -- $ 1,348
Per share $ -- $ 0.16
Percent of total dividends --% 13.53%
Commitments, Contingencies and Off-Balance Sheet Arrangements
- -------------------------------------------------------------
See Note 14 to our condensed consolidated financial statements for a summary of
our guarantees and commitments and contingencies.
We have no unconsolidated subsidiaries, special purpose off-balance sheet
financing entities, or other off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
In conducting business, we enter into various contractual obligations. Details
of these obligations, including expected settlement periods as of September 30,
2007, are contained below.
Payments Due by Period
-----------------------------------------------------------------------------
Less than More than
(IN THOUSANDS) Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years
------------- ------------- ------------- ------------- -------------
Debt:
CDO notes payable (1)(2) $ 362,000 $ -- $ -- $ -- $ 362,000
Repurchase facilities (1)(2)(3) 399,780 399,780 -- -- --
Line of credit - related party (1)(2) 39,300 39,300 -- -- --
Preferred shares of subsidiary
(subject to mandatory repurchase)(1)(2) 25,000 -- -- -- 25,000
Funding Commitments:
Future funding loan commitments 6,644 6,644 -- -- --
------------- ------------- ------------- ------------- -------------
Total $ 832,724 $ 445,724 $ -- $ -- $ 387,000
============= ============= ============= ============= =============
(1) The amounts included in each category reflect the current expiration, reset
or renewal date of each facility or security certificate. Management
believes we have the ability and it has the intent to renew, refinance or
remarket the borrowings beyond their current due dates.
(2) Includes principal amounts only. At September 30, 2007, the weighted average
interest rate on our debt was 5.54%.
(3) $290.4 million of this debt is related to a repurchase facility that will be
terminated in the fourth quarter of 2007. See discussion in SOURCES OF FUNDS
- REPURCHASE FACILITIES above.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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 and Exchange Act of 1934, as amended.
Such forward-looking statements include statements regarding the intent, belief
or current expectations of us and our management (which includes our Advisor)
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. These factors, which are outlined in detail
under the heading "Item 1A. Risk Factors" in our Annual Report on Form 10-K for
the year ended December 31, 2006, include, but are not limited to, the
following:
o Risks of investing in non-investment grade commercial real estate
investments;
o Competition in acquiring desirable investments;
o Interest rate fluctuations;
o Risks associated with investments in real estate generally and the
properties which secure many of our investments;
o General economic conditions and economic conditions in the real estate
markets specifically, particularly as they affect the value of our
assets and the credit status of our borrowers;
o Dependence on our Advisor for all services necessary for our
operations;
o Conflicts which may arise among us and other entities affiliated with
our Advisor that have similar investment policies to ours;
o Risks associated with the repurchase agreements we utilize to finance
our investments and our ability to raise capital;
o Risks associated with the failure to qualify as a REIT; and
o Risks associated with CDO securitization transactions, which include,
but are not limited to:
o The inability to acquire eligible investments for a CDO issuance;
o Interest rate fluctuations on variable-rate swaps entered into to
hedge fixed-rate loans;
o The inability to find suitable replacement investments within
reinvestment periods; and
o The negative impact on our cash flow that may result from the use
of CDO financings with over-collateralization and interest
coverage requirements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this quarterly report. We
expressly disclaim any obligations or undertaking to release publicly any
updates or revisions to any forward-looking statements contained herein to
reflect any change in our expectations with regard thereto or change in events,
conditions, or circumstances on which such statement is based.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the exposure to loss resulting from changes in interest rates and
equity prices. The primary market risk to which we are exposed is interest rate
risk, which is highly sensitive to many factors, including governmental monetary
and tax policies, domestic and international economic and political
considerations and other factors beyond 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. Although we have
originated variable-rate loans, 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 our assets with borrowings that have variable interest
rates that reset relatively rapidly, such as weekly, 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 our related party line of credit, repurchase facilities and our
subsidiary's preferred securities subject to mandatory redemption 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. We
enter into certain hedging transactions to protect our positions from interest
rate fluctuations and other changes in market conditions. These transactions
include interest rate swaps and fair value hedges. Interest rate swaps are
entered into in order to hedge against increases in floating rates on our
repurchase facilities. Fair value hedges are entered into for some of our
investments to hedge our risk that interest rates may affect the fair value of
these investments, prior to securitization.
Based on the $826.1 million of borrowings outstanding at September 30, 2007, of
which $122.5 million remains unhedged, a 1% change in LIBOR would impact our
annual net income and cash flows by $0.1 million, including the impact on
variable rate assets. In addition, a change in LIBOR could also impede the
collections of interest on our variable-rate loans, as there might not be
sufficient cash flow at the properties securing such loans to pay the increased
debt service. Because the value of our debt securities fluctuates with changes
in interest rates, rate fluctuations will also affect the market value of our
net assets.
ITEM 4. 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 defined
in Rule 13a-15(e) or Rule 15a-15(e) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of the end of the period
covered by this quarterly report. Based on such evaluation, such
officers have concluded that our disclosure controls and procedures as
of the end of the period covered by this quarterly report were
effective to ensure that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
the SEC rules and forms, and to ensure that such information is
accumulated and communicated to our 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 were no changes in our internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during the quarter ended September 30, 2007, that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not party to any pending material legal proceedings.
ITEM 1A. RISK FACTORS.
In addition to those risk factors disclosed in our filing on Form
10-K for the year ended December 31, 2006, the following additional
risk factors were included in the registration statement for our
preferred share offering:
OUR INVESTMENT PORTFOLIO INCLUDES UNDER-PERFORMING AND
IMPAIRED LOANS, WHICH MAY BE IN DEFAULT OR SUBJECT TO AN
INCREASED RISK OF DELINQUENCY, FORECLOSURE OR LOSS. THE
OCCURRENCE OF SUCH EVENTS COULD REDUCE OUR EARNINGS AND
NEGATIVELY AFFECT THE CASH AVAILABLE FOR DISTRIBUTION TO OUR
SHAREHOLDERS.
We have under-performing and impaired mortgage loans in our
investment portfolio and we could experience additional
under-performing and impaired mortgage loans in the future.
We classify mortgage loans as being impaired when we do not
expect full repayment of all principal and interest and
classify mortgage loans as under-performing when debt
service payments on such loans are not current. We accrue
interest on under-performing mortgage loans only when we
expect to receive all principal and accrued interest.
We held under-performing and impaired mortgage loans in our
investment portfolio in the carrying amount (including
principal and all accrued and unpaid interest and fees) of
$18.4 million respectively, as of September 30, 2007
representing 1.3% of our total assets as of that date. The
aggregate carrying amount of our under-performing mortgage
loans represented 2.0% of our total assets as of September
30, 2007. We recognized no interest income or impairment
losses from impaired loans for the nine months ended
September 30, 2007. We accrued interest income from
under-performing loans in the amount of $2.9 million during
the nine months ended September 30, 2007, which represented
4.6% of our interest income (net of amounts written off as
unrecoverable). During October 2007, one asset included in
the under-performing asset portfolio repaid. We received our
full principal amount as well as all unpaid and accrued
interest. Also in October 2007, we recorded an impairment
charge of $1.3 million relating to an asset class that was
reclassified as held for sale and carried at the lower of
cost or market.
In the event of a default under a mortgage loan we hold, we
bear a risk of loss to the extent of any deficiency between
the value of the collateral (net of our collection costs)
and the principal and accrued interest of the mortgage loan,
which could have a material adverse effect on our cash flow
from operations. In cases where we have mortgage loans where
we do have recourse to the borrower, in the event of the
bankruptcy of a mortgage loan borrower, the mortgage loan to
such borrower will be deemed to be secured only to the
extent of the value of the underlying collateral at the time
of bankruptcy (as determined by the bankruptcy court), and
the lien securing the mortgage loan will be subject to the
avoidance powers of the bankruptcy trustee or
debtor-in-possession to the extent the lien is unenforceable
under state law, which could have a negative effect on our
anticipated return on the foreclosed loan. Further,
foreclosing upon a loan can be very expensive, could subject
us to environmental liabilities and may distract our
management from our other operations.
Management makes various assumptions and judgments about the
collectibility of our investment portfolio loans, which may
prove to be inaccurate. With respect to individual loans, we
write down the value of impaired loans in our financial
statements based upon our assessment of the probability that
we will recover our principal and interest. Our assessment
is based upon our evaluation of the nature of the borrower,
the value of the underlying collateral, whether we have a
senior or subordinated position and many other objective and
subjective factors. As a result, our assessment of the
carrying value of an impaired loan could prove to be
inaccurate.
DIVIDENDS PAYABLE BY REITS DO NOT QUALIFY FOR THE REDUCED
TAX RATES.
Tax legislation enacted in 2004 reduced the maximum U.S.
federal tax rate on certain corporate dividends paid to
individuals and other non-corporate taxpayers to 15%
(through 2010). Dividends paid by REITs to these
shareholders are generally not eligible for these reduced
rates. Although this legislation does not adversely affect
the taxation of REITs or dividends paid by REITs , the more
favorable rates applicable to non-REIT corporate dividends
could cause investors who are individuals, trusts and
31
estates to perceive investments in REITs to be relatively
less attractive than investments in the shares of non-REIT
corporations that pay dividends, which could adversely
affect the value of the shares of REITs, including our
preferred and common shares.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None
ITEM 5. OTHER INFORMATION. None
ITEM 6. EXHIBITS.
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1 Certification of the Chief Executive Officer and the Chief
Financial Officer pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.*
* Filed herewith.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN MORTGAGE ACCEPTANCE COMPANY
(Registrant)
Date: November 9, 2007 By: /s/ James L. Duggins
--------------------
James L. Duggins
Chief Executive Officer
(Principal Executive Officer)
Date: November 9, 2007 By: /s/ Robert L. Levy
------------------
Robert L. Levy
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
33
Exhibit 31.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002.
I, James L. Duggins, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period ended
September 30, 2007, of American Mortgage Acceptance Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer 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 have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this 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
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly 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 officer 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 the
registrant's board of trustees (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 9, 2007 By: /s/ James L. Duggins
--------------------
James L. Duggins
Chief Executive Officer
(Principal Executive Officer)
34
Exhibit 31.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002.
I, Robert L. Levy, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period ended
September 30, 2007, of American Mortgage Acceptance Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer 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 have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this 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
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly 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 officer 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 the
registrant's board of trustees (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 9, 2007 By: /s/ Robert L. Levy
------------------
Robert L. Levy
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
35
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of American Mortgage Acceptance Company
(the "Company") on Form 10-Q for the period ending September 30, 2007 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
James L. Duggins, as Chief Executive Officer of the Company, and Robert L. Levy,
as Chief Financial Officer of the Company each hereby certifies, 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/ James L. Duggins By: /s/ Robert L. Levy
-------------------- ------------------
James L. Duggins Robert L. Levy
Chief Executive Officer Chief Financial Officer
November 9, 2007 November 9, 2007
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.
36