UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
Registrant's telephone number, including area code (212) 317-5700
Securities registered pursuant to Section 12(b) of the Act:
SHARES OF BENEFICIAL INTEREST, PAR VALUE $.10
7.25% SERIES A CUMULATIVE CONVERTIBLE PREFERRED SHARES, NO PAR VALUE
Name of each exchange on which registered:
AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [X] No [ ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is 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]
The approximate aggregate market value of the voting and non-voting common
equity held by non-affiliates of the Registrant as of June 30, 2007 was
approximately $81,960,649.
As of March 7, 2008 there were 8,433,470 outstanding common shares of the
Registrant's shares of beneficial interest.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Those portions of the Registrant's Proxy Statement for the Annual
Meeting of Shareholders to be held in June 2008, which are incorporated into
Items 10, 11, 12, 13 and 14.
TABLE OF CONTENTS
AMERICAN MORTGAGE ACCEPTANCE COMPANY
ANNUAL REPORT ON FORM 10-K
PAGE
PART I
Item 1. Business 4
Item 1A. Risk Factors 6
Item 1B. Unresolved Staff Comments 15
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities 16
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 30
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 68
Item 9A. Controls and Procedures 68
Item 9B. Other Information 68
PART III
Item 10. Directors, Executive Officers and Corporate Governance 69
Item 11. Executive Compensation 69
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 69
Item 13. Certain Relationships and Related Transactions,
and Director Independence 69
Item 14. Principal Accounting Fees and Services 69
PART IV
Item 15. Exhibits, Financial Statement Schedules 69
SIGNATURES 72
2
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements include statements regarding the intent, belief
or current expectations of us and our management (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 in
Item 1A of this document, include, but are not limited to the following:
o Risks related to current liquidity which include, but are not limited
to:
o Market volatility for mortgage products; and
o The availability of financing for our investments.
o Risks associated with the repurchase agreements we utilize to finance
our investments and the ability to raise capital;
o Risks associated with Collateral Debt Obligation ("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.
o Risks associated with investments in real estate generally and the
properties which secure many of our investments;
o Risks of investing in non-investment grade commercial real estate
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; and
o Risks associated with the failure to qualify as a REIT.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this annual 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.
3
PART I
ITEM 1. BUSINESS.
General
- -------
American Mortgage Acceptance Company was formed in 1991 as a Massachusetts
business trust. We elected to be treated as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). We
are externally managed, pursuant to an Advisory Services Agreement, 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 6.9%
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
December 31, 2007, which amounts to an aggregate ownership percentage of over
10%, assuming all Preferred Shares were converted to common shares. We operate
in one business segment, which focuses on investing in mortgage loans and other
debt instruments secured by multifamily and commercial property throughout the
United States. Throughout this report, the terms "we", "us", "our", "our
Company" and similar terms are meant to refer to American Mortgage Acceptance
Company and its consolidated subsidiaries.
Additional Information
- ----------------------
Additional information about us beyond what is included in this Form 10-K,
including our CODE OF BUSINESS CONDUCT AND ETHICS, is available at
www.americanmortgageco.com. As soon as reasonably practicable after such
material is electronically filed with, or furnished to, the Securities and
Exchange Commission ("SEC"), we make available on or through our website, free
of charge:
o our annual report on Form 10-K;
o our quarterly reports on Form 10-Q;
o our current reports on Form 8-K; and
o amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act.
You may also read and copy these materials at the SEC's Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549, or obtain them by calling the SEC at
1-800-SEC-0300. The SEC also maintains an Internet website that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC at www.sec.gov. We will provide a
copy of any of the foregoing documents upon request.
None of the information on our website that is not otherwise expressly set forth
or incorporated by reference in the Form 10-K is a part of this Form 10-K.
Business Strategy
- -----------------
Our business plan focuses on originating and acquiring mortgage loans and other
debt instruments secured by multifamily and commercial properties throughout the
United States and to utilize CDO's and other financing programs to permanently
finance these assets. During 2007, developments in the market for many types of
mortgage products have resulted in reduced liquidity for these assets. Declining
interest rates coupled with widening credit spreads have led to reduced asset
values and the inability to find adequate financing for these assets. This has
resulted in an overall reduction in liquidity across the credit spectrum of
mortgage products. Because of this, we have temporarily suspended investment
activity relating to our business strategy. As market conditions improve, we may
again seek to pursue investment opportunities and move forward with our business
strategy. If market conditions remain constant or worsen, we plan to sell assets
and eliminate variable rate repurchase facility debt and will look to stabilize
the company with term financing.
Investing
- ---------
We have typically invested in the following types of commercial real estate
loans, which may have fixed or variable interest rates:
o First mortgage loans;
o Subordinated B-notes and mezzanine loans;
o Bridge loans;
o Debt securities;
o Commercial Mortgage-Backed Securities ("CMBS");
o Collateralized debt obligation ("CDO") securities; and
o Other investments.
Historically, we invested in government insured or agency guaranteed first
mortgages, insured mortgage pass-through certificates or insured mortgage backed
securities, but we have divested ourselves of many of these assets.
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FIRST MORTGAGE LOANS
Our investment portfolio includes investments in first mortgage loans that are
secured by multifamily or commercial properties. The loans, which are originated
by affiliates of our Advisor, may be in the form of long-term fixed-rate
financing obligations or subordinate interests in long-term fixed-rate financing
obligations.
Our investment portfolio also includes mortgage revenue bonds that are secured
by first mortgages on affordable multifamily housing properties throughout the
country. The mortgage revenue bonds generally rank on par with tax-exempt first
mortgage revenue bonds that are owned by Centerline. The proceeds from these
revenue bonds are generally used for the new construction or substantial
rehabilitation of affordable multifamily properties.
SUBORDINATED B-NOTES AND MEZZANINE LOANS
Our investment portfolio includes B-notes and mezzanine loans (subordinate loans
secured by interests in the borrowing entity) that typically finance newly
stabilized or transitional multifamily and commercial real estate properties.
The interest rates on these assets are either fixed or variable rate. Our
B-notes and mezzanine transactions may involve us:
1) issuing mezzanine debt subordinated to an existing first mortgage
loan;
2) jointly bidding with a senior lender and closing simultaneously;
3) acquiring a subordinated loan from a senior lender; or
4) originating the entire debt structure and selling the first mortgage
to a senior lender.
B-notes and mezzanine loans are subordinate to senior mortgages and may include
a participating component, such as a right to a portion of the cash flow and
proceeds generated from the refinancing and sale of the underlying properties.
Typically, mezzanine loans are secured by equity interests in the borrower and
B-notes are secured by real estate and both have limited recourse to the
borrower.
BRIDGE LOANS
Our investment portfolio includes bridge financing on multifamily and commercial
properties nationwide. Bridge loans are secured by first mortgage liens on
assets undergoing a transition or repositioning. Due to the transitional nature
of the underlying assets, bridge loans typically require additional credit
enhancement such as letters of credit or performance guarantees. Bridge loans
are typically short term financings with terms ranging from one to five years.
The interest rates may be either fixed or variable.
CMBS
Our investment portfolio includes CMBS, which are publicly and privately traded
bond issues backed by pools of commercial real estate mortgages. These
securities are rated by nationally recognized rating agencies such as Fitch
Ratings Ltd. ("Fitch"), Standard & Poor's ("S&P") and Moody's Investor Services
("Moody's"). The senior tranche of a bond issue is the highest rated security,
typically "AAA" while more junior tranches receive lower ratings down to the
most junior class which is not rated. We have typically invested in CMBS with
ratings of BBB+ through BBB-. The purchase of high yield CMBS is similar to the
acquisition of real estate equity investments in that there is a heavy emphasis
on the performance and expected cash flows of the real estate. In the case of
high yield CMBS, a CMBS offering includes hundreds of individual loans secured
by hundreds of discrete real estate projects.
DEBT SECURITIES
Historically, we invested in debt securities which consisted of government
insured or guaranteed investments, primarily through the acquisition of
Government National Mortgage Association ("GNMA" or "Ginnie Mae") and Federal
National Mortgage Association ("FNMA" or "Fannie Mae") mortgage-backed
securities and pass-through certificates. As our business strategy shifted
toward originating and acquiring commercial real estate products, we have
divested ourselves of all of these securities.
OTHER INVESTMENTS
From time to time, we have invested in assets outside of our normal investment
strategy, such as CDO securities, if we believe that making such an investment
was advantageous in maximizing our return on equity.
Financing
- ---------
We have typically financed our investing activity primarily through borrowing
from various debt facilities at short-term rates and in 2006 began utilizing
long-term CDO financing. We have repurchase facilities and a related party line
of credit, all of which are used as financing sources.
5
For further information about these facilities, see MANAGEMENT'S DISCUSSION AND
ANALYSIS - LIQUIDITY AND CAPITAL RESOURCES and Notes 2, 10, 11 and 12 to the
consolidated financial statements.
From time to time, we may also issue other types of securities to raise
additional capital. In addition, we may also issue common shares to fund
investing activity. We have the capacity to raise approximately $153.0 million
of additional funds by issuing either common or preferred shares pursuant to a
shelf registration statement filed with the SEC.
During 2007, we issued 680,000 Preferred Shares using the shelf registration and
used the proceeds to fund additional investments.
Competition
- -----------
We compete with various financial institutions including investment banks,
commercial banks, insurance companies, other REITs, opportunity and private
equity funds and pension fund advisors for investment opportunities.
Management and Governance
- -------------------------
We have engaged our Advisor to manage our day-to-day affairs. Our Advisor has
subcontracted with Centerline to provide the services necessary for our
operations. Through our Advisor, Centerline offers us a core group of
experienced staff and executive management personnel who provide us with
services on both a full- and part-time basis. These services include, among
other things, origination, acquisition, underwriting, asset monitoring,
portfolio management, legal, finance, accounting, capital markets, investor
relations and loan servicing.
We have no employees. Our Advisor receives compensation for the services it
provides to us as set forth in Item 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA; Item 11, EXECUTIVE COMPENSATION; and Item 13, CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. In addition, we reimburse our
Advisor and certain of its affiliates for expenses they incur in connection with
their performance of services for us in accordance with our Advisory Services
Agreement ("Advisory Agreement").
We are governed by a board of trustees comprised of four independent trustees
and three non-independent trustees who are affiliated with our Advisor.
ITEM 1A. RISK FACTORS.
An investment in our common shares involves a number of risks. Before making an
investment decision, you should carefully consider all of the risks described in
this document. If any of the risks discussed actually occur, our business,
financial condition, results of operations and cash flows, and the value of your
investment, could be materially adversely affected.
For convenience, we have grouped these risk factors as follows:
1. Risks related to our liquidity
2. Risks related to our debt obligations
3. Risks related to our investments
4. Risks related to our Advisor
5. Risks related to our classification as a REIT and not as an investment
company
6. Risks related to our common shares and our shareholders
1. RISKS RELATED TO OUR LIQUIDITY.
A FURTHER MARKET DECLINE OF VARIOUS TYPES OF MORTGAGE PRODUCTS MAY FURTHER
DECREASE ASSET VALUES AND FINANCING OPTIONS, AFFECTING OUR LIQUIDITY.
Recent developments in the market for many types of mortgage products (including
mortgage-backed securities) have resulted in reduced liquidity for these assets.
Declining interest rates coupled with widening credit spreads have led to
reduced values and the inability to find adequate financing for these assets.
This has resulted in an overall reduction in liquidity across the credit
spectrum of mortgage products and has presented us with financing challenges. As
credit spreads widened and the value of our assets declined, we have been called
to repay a portion of our debt facilities that collateralize these assets.
During 2007, we paid $21.6 million in margin calls to repay borrowings on
repurchase facilities and $27.3 million to refinance certain of our assets from
a terminated facility using a repurchase facility. Subsequent to December 31,
2007, we paid $11.8 million in margin calls to repay borrowings on repurchase
facilities.
To repay the money borrowed from the terminated facility and as a result of
declining financing spreads on other facilities, we began selling assets in 2007
and incurred losses. At December 31, 2007, we sold $283.8 million of assets and
6
realized a loss of $19.1 million related to these sales. Subsequent to December
31, 2007, we sold an additional $58.1 million of assets and realized a loss of
$3.1 million, which is recorded as impairment of investments in our 2007
consolidated financial statements.
A further decline in market values of our assets would cause us to continue to
repay borrowings on our repurchase facilities (see THE MARKET FOR EXECUTING CDO
TRANSACTIONS HAS CEASED risk factor below) and we may be forced to sell
additional assets to cover these repayments and related costs, which may lead to
additional losses.
THE MARKET FOR EXECUTING CDO TRANSACTIONS HAS CEASED.
To finance our growth, we began utilizing CDO securitizations in 2006 and
originated or acquired certain assets to be placed into the securitization
program. Prior to a securitization, we would finance our investments on a
facility and repay that facility with the proceeds from the CDO securitization.
We were pursuing a CDO execution when real estate and credit market conditions
began to deteriorate in mid-2007 along with the commercial real estate CDO
market and, as a result, we chose not to pursue the CDO securitization,
suspended investment activity and terminated the repurchase facility with
Citigroup Global Markets, Inc. ("Citigroup") that we had used to finance our
investment activity. In December 2007, we entered into an agreement to repay the
entire amount of the facility by selling or refinancing the collateral assets.
If CDO markets do not recover, we may be forced to find alternative financing
strategies.
2. RISKS RELATED TO OUR DEBT OBLIGATIONS.
SHORT-TERM REPURCHASE AGREEMENTS INVOLVE RISK OF LOSS.
While we are planning to repay our existing repurchase facilities, we currently
finance, and may continue to finance, a portion of our investments through
collateralized borrowing in the form of repurchase agreements, which involve us
selling assets concurrently with our agreement to repurchase them at a later
date and at a fixed price. During the repurchase agreement period, we continue
to receive principal and interest payments on the assets. The use of borrowing,
or "leverage," to finance our assets involves a number of risks, including the
following:
IF WE ARE UNABLE TO RENEW OUR BORROWINGS AT FAVORABLE RATES, WE MAY BE
FORCED TO SELL ASSETS, AND OUR PROFITABILITY MAY BE ADVERSELY AFFECTED.
We rely on short-term repurchase agreements to finance a portion of our
assets. There may be some inherent mismatch between the repurchase
agreement terms and the assets that collateralize them causing unfavorable
finance terms. Our ability to achieve our investment objectives depends on
our ability to borrow money in sufficient amounts and on favorable terms
and our ability to renew or replace these short-term borrowings on a
continuous basis as they mature. If we are not able to renew or replace
maturing borrowings, we would be forced to sell some of our assets under
possibly adverse market conditions, which may affect our profitability. As
of December 31, 2007, we had borrowings of approximately $136.4 million
outstanding under our repurchase facilities collateralized by investments
with an aggregate carrying amount of $175.2 million.
A FURTHER DECLINE IN THE MARKET VALUE OF OUR ASSETS MAY RESULT IN
ADDITIONAL MARGIN CALLS THAT MAY FORCE US TO SELL ASSETS UNDER ADVERSE
MARKET CONDITIONS.
Repurchase agreements involve the risk that the market value of the
securities we sold under repurchase agreements may decline and that we will
be required to post additional collateral, reduce the amount borrowed or
suffer forced sales of the collateral. If forced sales were made at prices
lower than the carrying value of the collateral, we would experience
additional losses. If we are forced to liquidate our assets to repay
borrowings, there can be no assurance that we will be able to maintain
compliance with the REIT asset and source of income requirements.
OUR USE OF REPURCHASE AGREEMENTS TO BORROW MONEY MAY GIVE OUR LENDERS
GREATER RIGHTS IN THE EVENT OF BANKRUPTCY.
Our repurchase agreements require us to pledge certain of our assets to the
lender to secure our obligations thereunder. Borrowings made under
repurchase agreements may qualify for special treatment under the U.S.
Bankruptcy Code, which may make it difficult for us to recover our pledged
assets if a lender files for bankruptcy. In addition, if we were to file
for bankruptcy, lenders under our repurchase agreements may be able to
avoid the automatic stay provisions of the U.S. Bankruptcy Code and take
possession of, and liquidate, the assets we pledged under these agreements
without delay.
THERE ARE RISKS ASSOCIATED WITH OUR CDO TRANSACTIONS.
We are exposed to additional risks when we finance a portion of our investment
portfolio through a CDO transaction. Risks associated with financing investments
through a CDO include the following:
7
WE MAY NOT BE ABLE TO ISSUE CDO SECURITIES ON ATTRACTIVE TERMS, WHICH MAY
REQUIRE US TO UTILIZE MORE COSTLY FINANCING FOR OUR INVESTMENTS, OR TO
LIQUIDATE THE INVESTMENTS.
We finance certain of our investments on a non-recourse, long-term basis
through the issuance of CDOs. During the period that we are acquiring
investments for a CDO, we finance our purchases through warehouse
facilities. We use these facilities to finance our acquisition of
investments until we have accumulated a sufficient quantity of them, at
which time we may refinance these lines through a securitization, such as a
CDO issuance, or other types of long-term financing. As a result, we are
subject to the risk that we will not be able to acquire a sufficient amount
of eligible investments to maximize the efficiency of a CDO issuance. In
addition, conditions in the capital markets may make the issuance of CDOs
less attractive to us when we do have a sufficient pool of collateral. If
we are unable to issue a CDO to finance these investments, we may be
required to utilize other forms of potentially less attractive financing,
or otherwise liquidate the collateral.
WE MAY NOT BE ABLE TO FIND SUITABLE INVESTMENTS.
When originating or acquiring assets to be financed through the issuance of
CDOs, we seek to obtain investments suitable for such an execution. Some
CDOs have periods where principal proceeds received from assets securing
the obligation can be reinvested for a defined period of time, commonly
referred to as a reinvestment period. Our ability to find suitable
investments during the origination and acquisition phase or any
reinvestment period that meet the criteria set forth in the CDO
documentation and by rating agencies may determine the success of our CDO
investments. Our potential inability to find suitable investments may cause
our net income to decrease due to, but not limited to, the following
factors:
o interest deficiencies;
o acceleration of the amortization of the senior CDO liabilities;
and
o reduction of the life of our CDOs and acceleration of the
amortization of certain fees and expenses.
THE USE OF CDO FINANCINGS WITH OVER-COLLATERALIZATION AND INTEREST COVERAGE
REQUIREMENTS MAY HAVE A NEGATIVE IMPACT ON OUR CASH FLOW.
The terms governing CDOs generally provide that the principal amount of
investments must exceed the principal balance of the related bonds by a
certain amount and that interest income exceed interest expense by a
certain amount. If delinquencies and/or losses or other factors cause a
decline in collateral or cash flow levels, the cash flow otherwise payable
on our investment may be redirected to repay the senior classes of debt
until such point as the CDO is in compliance with the terms of the CDO. We
cannot assure you that the performance tests will be satisfied. If our
investments fail to perform as anticipated, our over-collateralization,
interest coverage or other credit enhancement expense associated with our
CDO financings will increase.
WE MAY BE REQUIRED TO REPURCHASE LOANS THAT WE HAVE SOLD OR TO INDEMNIFY
HOLDERS OF OUR CDOS.
If any of the loans we originate or acquire and sell or securitize through
CDOs do not comply with representations and warranties that we make about
certain characteristics of the loans, the borrowers and the underlying
properties, we may be required to repurchase those loans or replace them
with substitute loans. In addition, we may be required to indemnify persons
for losses or expenses incurred as a result of a breach of a representation
or warranty. Repurchases or indemnification payments could adversely affect
our financial condition and operating results.
HEDGING TRANSACTIONS CAN LIMIT GAINS AND INCREASE EXPOSURE TO LOSSES.
Hedging involves risk and hedging activities may not have the desired beneficial
impact on our results of operations, financial condition or cash flows. If
credit spreads on debt facilities which the transactions are hedging widen,
losses may occur. Moreover, no hedging activity can completely insulate us from
the risks associated with changes in interest rates and prepayment rates.
We intend generally to hedge as much of the interest rate risk as our Advisor
determines is in our best interests given the cost of such hedging transactions.
REIT provisions of the Code may limit our ability to hedge our assets and
related borrowings. Any limitation on our use of hedging techniques may result
in greater interest rate risk.
WE MAY BE CALLED TO REPAY OUR DEBT FACILITIES IF WE FAIL TO COMPLY WITH CERTAIN
COVENANTS.
For certain lines of credit, we must comply with financial covenants in order to
prevent defaults on the debt agreements. We may be called to repay the debt
facilities in the event of such defaults.
We have covenant compliance requirements on our related party line of credit. At
December 31, 2007, we failed to meet certain of these requirements, causing us
to be in default of the loan agreement. While we have not been called upon to
repay this facility, there can be no assurance that we will not be if defaults
are not cured.
8
3. RISKS RELATED TO OUR INVESTMENTS.
THERE ARE RISKS ASSOCIATED WITH INVESTMENTS SECURED BY REAL ESTATE, WHICH MAY
NEGATIVELY AFFECT OUR EARNINGS.
We derive most of our income by investing, directly and indirectly, in debt
secured by multifamily or commercial properties. Such investments subject us to
various types and degrees of risk that could adversely affect the value of our
investments and our ability to generate revenue and net income.
Multifamily and commercial property values and net operating income derived from
such properties are subject to volatility and may be affected adversely by a
number of factors, including, but not limited to:
o national, regional and local economic conditions (which may be
adversely affected by industry slowdowns and other factors);
o local real estate conditions (such as an oversupply of housing,
retail, industrial, office or other commercial space and market demand
for condominium units) as well as national, regional and local
politics, including current or future rent stabilization and rent
control laws and agreements;
o stability of the controlling entity of our borrower and managing agent
of the borrower's property;
o construction quality, age and design;
o demographic factors;
o retroactive changes to building or similar codes;
o increases in operating expenses (such as energy costs);
o the potential need to expend additional capital in order to preserve
our investment if a mortgage loan is called due to construction not
being completed as required in the mortgage loan documents;
o the costs of removal of certain hazardous substances released on a
property securing our investment; a property operator could be liable
for without regard to whether the owner or operator knew of, or was
responsible for, the release of such hazardous substances; and
o costs to comply with the Americans with Disabilities Act, fire and
safety regulations, building codes, and other land use regulations.
These conditions and events may increase the possibility that a property
operator or developer may be unable to meet its obligations to us or otherwise
expose us to losses, thereby affecting our net income.
From time to time, through the foreclosure process, we may also take title to
properties as a result of loan defaults by borrowers. While our Advisor would
act to improve the operating performance of any such properties and actively
market them for sale, the assets tend to be illiquid and there is no assurance
that we would realize the full carrying amounts when the properties are sold.
COMMERCIAL REAL ESTATE INVESTMENTS THAT ARE NON-INVESTMENT GRADE INVOLVE RISK OF
LOSS.
GENERAL. We have originated and acquired non-investment grade mortgage loans and
mortgage assets as part of our investment strategy. Such loans and assets may
include first mortgage loans, mezzanine loans, construction loans, bridge loans,
subordinated interests in first mortgage loans and CMBS. While holding such
interests, we will be subject to risks of borrower defaults, bankruptcies, fraud
and losses and special hazard losses that are not covered by standard hazard
insurance. In the event of any default under mortgage loans we hold, we will
bear the risk of loss of principal and non-payment of interest and fees to the
extent of any deficiency between the value of the mortgage collateral and the
principal amount of the mortgage loan.
We have invested in subordinated CMBS that typically include "first loss" and
non-investment grade subordinated interests. A first loss security is the most
subordinate class in a structure and accordingly is the first to bear the loss
upon a default, restructuring or liquidation of the underlying collateral, is
the last to receive payment of interest and principal and is often not assigned
an investment rating. Accordingly, such classes are subject to a greater risk of
loss of principal and non-payment of interest than more senior, rated classes.
The market values of subordinated interests in CMBS and other subordinated
securities tend to be more sensitive to changes in economic conditions than more
senior, rated classes. As a result of these and other factors, subordinated
interests generally are not actively traded and are relatively illiquid
investments.
In addition, recent volatility in trading markets for CMBS has caused the value
of investments to decline significantly. As such, our ability to hold these
investments has become impeded and have forced us to record declines in market
value as impairment charges on the statement of operations. At December 31,
2007, we recorded $28.2 million of such charges and expect further fluctuations
in market values to impact earnings in periods subsequent to December 31, 2007.
Furthermore, this circumstance is compounded by the decreased liquidity in the
market for such investments and the decreased availability of long-term
financing. These factors have led to significant margin calls with respect to
our repurchase facilities and have forced us to sell assets to cover these
requirements, including periods subsequent to December 31, 2007. Should such
margin calls continue we may be forced to sell additional assets, the losses
they would realize could be significant and the impact of such losses would
negatively impact our net income.
9
LIMITED RECOURSE LOANS MAY LIMIT OUR RECOVERY TO THE VALUE OF THE MORTGAGED
PROPERTY. Our loans are generally non-recourse, although some may have limited
recourse provisions for a short period. In addition, limited recourse against
the borrower may be further limited by applicable provisions of the laws of the
jurisdictions in which the mortgaged properties are located or by the selection
of remedies and the impact of those laws on that selection. With respect to our
non-recourse mortgage loans, in the event of a borrower default, the value of
the specific mortgaged property and other assets, if any, pledged to secure the
relevant mortgage loan, may be less than the amount owed under the mortgage
loan. As to those mortgage loans that provide for recourse against the borrower
and its assets generally, there can be no assurance that such recourse will
provide a recovery in respect of a defaulted mortgage loan greater than the
liquidation value of the mortgaged property securing that mortgage loan.
In addition, investment in subordinated interests in mortgage loans do not
provide us with foreclosure remedies upon default. Should an investment default,
we may lose our entire investment in such loans.
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 impaired mortgage loans in our investment portfolio in the carrying
amount (including principal and all accrued and unpaid interest and fees) of
$12.2 million as of December 31, 2007, representing 1.8% of our total assets as
of that date. We recognized $5.5 million of impairment losses related to two of
these loans in 2007. We also recognized $1.3 million of interest income in 2007
related to one of these mortgages prior to determining its impairment. This
interest income is included in the impairment amount above.
We held one underperforming mortgage loan in our investment portfolio with a
carrying amount (including principal and all accrued and unpaid interest and
fees) of $1.4 million as of December 31, 2007, representing 0.2% of our total
assets as of that date. We recognized no interest income or impairment losses
from underperforming loans in 2007.
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 Advisor from our other operations.
Our Advisor makes various assumptions and judgments about the collectability 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.
COMPETITION IN ACQUIRING DESIRABLE INVESTMENTS MAY LIMIT THEIR AVAILABILITY
WHICH COULD, IN TURN, NEGATIVELY AFFECT OUR ABILITY TO GENERATE NET INCOME.
We compete for loan investments with numerous public and private real estate
investment vehicles, such as investment banks, commercial banks, insurance
companies, other REITS, opportunity and private equity funds and pension fund
advisors. Mortgages, mezzanine loans, subordinated interests in CMBS and other
investments are often obtained through a competitive bidding process. In
addition, competitors may seek to establish relationships with the financial
institutions and other firms from which we intend to purchase such assets. Many
of our competitors are larger than us, may have access to greater capital
resources and other resources, and may have other advantages over us and our
Advisor in conducting certain business and providing certain services.
Competition may result in higher prices for mortgage assets, lower yields and a
narrower spread of yields over our borrowing costs. There can be no assurance
that we will achieve investment results that will allow any specified level of
cash distribution.
10
INTEREST RATE FLUCTUATIONS WILL AFFECT THE VALUE OF OUR ASSETS AND OUR ABILITY
TO GENERATE NET INCOME.
Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
considerations and other factors beyond our control. Interest rate fluctuations
can adversely affect our net income in many ways and present a variety of risks,
including the risk of a mismatch between asset yields and borrowing rates.
Our income depends primarily on the spread between income we earn and our
borrowing costs to fund investments. Interest rate mismatch occurs because many
of our assets generate income at a fixed rate while our borrowings have interest
rates that reset relatively rapidly, such as monthly or quarterly. In addition,
in periods of declining market rates, income from our variable rate investments
would decline. Consequently, changes in interest rates, particularly short-term
interest rates, may influence our net income and could result in operating
losses. See also Item 7A, QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK.
PREPAYMENT RATES MAY NEGATIVELY AFFECT THE VALUE OF OUR INVESTMENTS.
The value of our investments may be affected by prepayment rates. Prepayment
rates are influenced by changes in current interest rates and a variety of
economic, geographic and other factors beyond our control, and consequently,
such prepayment rates cannot be predicted with certainty. To the extent we
originate mortgage loans, we expect that such mortgage loans will have a measure
of protection from prepayment in the form of prepayment lock-out periods or
prepayment penalties. In periods of declining mortgage interest rates,
prepayments on mortgages generally increase. If general interest rates decline
as well, the proceeds of such prepayments received during such periods are
likely to be reinvested by us in assets yielding less than the yields on the
investments that were prepaid. In addition, the market value of mortgage
investments may, because of the risk of prepayment, benefit less from declining
interest rates than would other fixed-income securities. Conversely, in periods
of rising interest rates, prepayments on mortgages generally decrease, in which
case we would not have the prepayment proceeds available to invest in assets
with higher yields. Under certain interest rate and prepayment scenarios we may
fail to recoup fully our cost of acquisition of certain investments.
WE MAY NOT ACCURATELY ASSESS INVESTMENT YIELDS, WHICH MAY NEGATIVELY AFFECT OUR
EARNINGS.
Before making any investment, our Advisor will consider the expected yield of
the investment and the factors that may influence the yield actually obtained on
such investment. These considerations will affect our or our Advisor's decision
whether to purchase such an investment and the price offered for such an
investment. No assurances can be given that we or our Advisor will make an
accurate assessment of the yield to be produced by an investment. Many factors
beyond our and our Advisor's control are likely to influence the yield on the
investments, including, but not limited to, competitive conditions in the local
real estate market, local and general economic conditions and the quality of
management of the underlying property. Our Advisor's inability to accurately
assess investment yields may result in our purchasing assets that do not perform
as well as expected, which may negatively affect our earnings.
PARTICIPATING INTERESTS IN MORTGAGES MAY NOT BE REALIZED.
In connection with the acquisition and origination of mortgages, we have
obtained and may continue to obtain participating interests that may entitle us
to payments based upon a property's cash flow, profits or any increase in the
value of the property that would be realized upon a refinancing or sale of the
property. As the operation of a particular property is subject to numerous
variables and risks, there can be no assurance that a participating interest
will result in additional payments to us.
CONCENTRATION AND THE CREDIT QUALITY OF BORROWERS MAY RESULT IN LOSSES.
We have not established any limit upon the geographic concentration of
properties securing our investments or the credit quality of borrowers of
uninsured investments. As a result, properties securing our investments may be
overly concentrated in certain geographic areas and the underlying borrowers of
our uninsured investments may have low credit quality while CMBS investments are
secured by a pool of mortgage loans for which the underlying properties are
located throughout the United States. As of December 31, 2007, 19.7%, 15.1% and
13.1% of our investment portfolio (excluding CMBS) were secured by properties in
California, New York and Colorado, respectively. As of December 31, 2007, 11.9%
of our investment portfolio (excluding CMBS) consisted of first mortgage loans
made to one borrower who is an affiliate of our Advisor.
4. RISKS RELATED TO OUR ADVISOR.
WE ARE DEPENDENT ON OUR ADVISOR AND IF OUR ADVISOR TERMINATES THE ADVISORY
AGREEMENT, WE MAY NOT BE ABLE TO FIND AN ADEQUATE REPLACEMENT ADVISOR.
We have no employees, although we have officers. We have entered into an
Advisory Agreement with our Advisor under which it provides us with all of the
services necessary for our operations. We are dependent on our Advisor for the
management and administration of our business and investments. The results of
our operations will be dependent upon the availability of, and our Advisor's
ability to identify and capitalize on, investment opportunities. The Advisory
Agreement may be terminated:
11
(i) without cause by our Advisor; or
(ii)with or without cause by a majority of our independent trustees.
The Advisor can terminate the agreement without penalty, but we are subject to a
termination fee, except in certain instances, for termination or non-renewal,
equal to four times the asset management fee and four times the incentive
management fee that our Advisor would have been entitled to receive from us
during the four calendar quarter period immediately proceeding the effective
date of such termination. Termination would be effective upon 60 days prior
written notice to the non-terminating party. This termination fee would have
been $6.3 million if we had terminated the agreement on December 31, 2007. If
our Advisor terminates our agreement, we may not be able to find an adequate
replacement advisor. At this time, we are unable to assess the likelihood of our
Advisor terminating the agreement.
CONFLICTS OF INTEREST COULD ARISE AMONG US AND OUR RELATED PARTIES.
Our Advisor has subcontracted to its affiliates, Centerline Capital Group Inc.
("CCG") and Centerline Servicing Inc. ("CSI"), its obligation to provide
services under the Advisory Agreement, and there are risks involved with this
arrangement. Under our Advisory Agreement, the Advisor, CCG and CSI are
permitted to act as advisor to other entities having investment policies similar
to ours, including other REITs. Generally, in conflict situations with
non-affiliated entities, our Advisor must present an investment opportunity to
us if the opportunity is within our investment objectives and policies, the
opportunity is of a character that could be taken by us, and we have the
financial resources to take advantage of the opportunity.
Additionally, Centerline, the parent of the Advisor, has in the past, and may in
the future, invest in first mortgage loans, including taxable first mortgage
revenue bonds or other investments that are similar to those in which we invest.
To the extent that these existing entities, as well as affiliated entities which
may be formed by affiliates of our Advisor in the future, have funds available
for investment at the same time as we do and a potentially suitable investment
is offered to us or the affiliated entities, our Advisor will review the
affiliated entities' and our investment portfolios and will determine whether or
not the investment should be made by one of the affiliated entities or by us
based upon factors such as the amount of funds available for investment, yield
and portfolio diversification. If the making of a mortgage loan or other
mortgage investment appears equally appropriate for us and these affiliated
entities, the mortgage loan or other mortgage investment will either be made by
a joint venture between two or more of such entities (which may include us), or
will be allocated to one of such entities on a basis of rotation with the
initial order of priority determined by the dates of formation of the entities.
We also have a co-investment agreement with a fund affiliated with (and managed
by an affiliate of) our Advisor whereby we invest together in commercial real
estate loans. In the event that there is a default with respect to any of these
investments, however, a conflict could exist with respect to claims on
underlying assets, proceeds from liquidation, etc.
In addition, Stephen M. Ross is the principal owner of The Related Companies L.P
("Related"), as well as the Chairman and an indirect owner of a 21.4% economic
interest in Centerline as of January 31, 2008. Jeff T. Blau, one of our managing
trustees, is also the President of Related. Affiliates of Related are the
borrowers of commercial real estate loans we own (see Notes 2 and 20 to the
consolidated financial statements) and any defaults with respect to those loans
would present a conflict of interest with respect to exercising our remedies.
CONFLICTS OF INTEREST COULD ARISE IN TRANSACTIONS WHERE WE LEND TO OR BORROW
FROM AFFILIATES OF OUR ADVISOR.
Every transaction entered into between us and an affiliate of our Advisor raises
a potential conflict of interest. In addition to the initial determination to
invest in mortgage investments secured by properties owned by an affiliate of
our Advisor, such conflicts of interest with respect to these mortgage
investments include, among others, decisions regarding:
o whether to waive defaults of such affiliate;
o whether to foreclose on a loan; and
o whether to permit additional financing on the properties securing our
investments other than financing provided by us.
We have invested in, and may in the future invest in, mortgage investments
secured by properties in which affiliates of our Advisor own equity interests in
the borrower. Our declaration of trust requires that any transaction between our
Advisor or any of its affiliates and us be approved by a majority of our
trustees, including a majority of the independent trustees, not otherwise
interested in the transaction, as being fair and reasonable and on terms not
less favorable to us than those available from unaffiliated third parties. As of
December 31, 2007, we had six mortgage loans with a total carrying value of
approximately $143.3 million, and four multifamily housing first mortgage bonds
with a total carrying value of approximately $4.9 million to borrowers that are
affiliates of our Advisor, which represents 22.4% of our total assets.
We have a revolving credit facility with Centerline, which provides up to $80.0
million in borrowings and bears interest at LIBOR plus 3.0%. This facility was
extended through June 2008 and contains terms that are similar to those we would
obtain from a third-party lender. In June 2008, we will have the option to
extend the maturity date one year, which we expect to do. As of December 31,
2007, there was approximately $77.7 million outstanding on this facility.
12
We have covenant compliance requirements on our related party line of credit. At
December 31, 2007, we failed to meet certain of these requirements, causing us
to be in default of the loan agreement. While we have not been called upon to
repay this facility, there can be no assurance that we will not be.
OUR BOARD OF TRUSTEES OR OUR ADVISOR CAN CHANGE OUR BUSINESS POLICIES
UNILATERALLY.
Our board of trustees or our Advisor may amend or revise our business plan and
certain other policies without shareholder approval. Therefore, our shareholders
have no control over changes in our policies, including our business policies
with respect to acquisitions, financing, growth, debt, capitalization and
distributions, which are determined by our board of trustees or our Advisor.
5. RISKS RELATED TO OUR CLASSIFICATION AS A REIT AND NOT AS AN INVESTMENT
COMPANY.
There are risks associated with being a REIT, which include the following:
FAILURE TO QUALIFY AS A REIT WOULD SUBJECT US TO FEDERAL, STATE AND LOCAL INCOME
TAXES, WHICH WOULD REDUCE THE NET INCOME AND CASH AVAILABLE FOR DISTRIBUTION TO
OUR SHAREHOLDERS.
We offer investors the opportunity to invest through an entity intended to
qualify as a REIT for federal income tax purposes. The federal income tax laws
governing REITs are extremely complex, and interpretations of the federal income
tax laws governing REIT qualification are limited. Given the highly complex
nature of the rules governing REITs, the ongoing importance of factual
determinations, including the tax treatment of participation interests in
mortgage loans and mezzanine loans, and the possibility of future changes in its
circumstances, no assurance can be given that we will qualify for any particular
year.
If we fail to qualify as a REIT in any calendar year and do not qualify for
certain statutory relief provisions, we would be required to pay federal, state
and local income taxes on our taxable income. We might need to borrow money or
sell assets in order to pay that tax. Our payment of income tax would decrease
the amount of our cash available for distribution to our shareholders.
Furthermore, if we fail to maintain our qualification as a REIT and we do not
qualify for certain statutory relief provisions, we no longer would be required
to distribute substantially all of our taxable income to our shareholders.
Unless our failure to qualify as a REIT were excused or cured under federal tax
laws, we would be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost.
AS A REIT, OUR INCOME CAN ONLY COME FROM LIMITED TYPES OF SOURCES.
To qualify as a REIT, at least 75% of our gross income must come from qualified
real estate sources and at least 95% of our gross income must come from
qualified real estate sources and certain other sources that are itemized in the
REIT tax laws. In addition to these income tests, we must satisfy certain
requirements concerning our assets on a quarterly basis, including the
requirement that at least 75% of our assets qualify as real estate assets.
Therefore, we may have to forego opportunities to invest in potentially
profitable businesses or assets because they would produce income that could
jeopardize our status as a REIT.
FAILURE TO MAKE REQUIRED DISTRIBUTIONS WOULD SUBJECT US TO TAX, WHICH WOULD
REDUCE THE CASH AVAILABLE FOR DISTRIBUTION TO OUR SHAREHOLDERS.
In order for us to qualify as a REIT, we must distribute to our shareholders,
each calendar year, at least 90% of our taxable income (including certain items
of non-cash income), determined without regard to the deduction for dividends
paid and excluding net capital gains. In addition, we may be subject to a 4%
nondeductible excise tax on the amount, if any, by which our distributions in
any calendar year are less than certain specified amounts.
Our taxable income may substantially exceed our net income as determined based
on generally accepted accounting principles in the United States of America
("GAAP"), because, for example, realized capital losses will be deducted in
determining our GAAP net income, but may not be deductible in computing our
taxable income. In addition, we may invest in assets that generate taxable
income in excess of net income or in advance of the corresponding cash flow from
the assets. To the extent that we generate such non-cash taxable income, or
"phantom" income, in a taxable year, we may incur corporate income tax and the
4% nondeductible excise tax on that income if we do not distribute such income
to our shareholders in that year or we may be required to use cash reserves,
incur debt or liquidate assets at rates or times that we regard as unfavorable
in order to satisfy the distribution requirement and to avoid corporate income
tax and the 4% nondeductible excise tax in that year.
WE ARE ALSO SUBJECT TO OTHER TAX LIABILITIES.
As a REIT, we may be subject to federal, state and local taxes on certain types
of income, property and transactions. Any of these taxes would reduce our
operating cash flow.
13
LIQUIDATION OF COLLATERAL MAY JEOPARDIZE OUR REIT STATUS.
To continue to qualify as a REIT, we must comply with requirements regarding
our assets and our sources of income. If we are compelled to liquidate our
mortgage investments to satisfy our obligations to our lenders, we may be unable
to comply with these requirements, ultimately jeopardizing our status as a REIT.
CHANGES IN TAX LAWS REGARDING REITS COULD ADVERSELY AFFECT OUR NET INCOME.
Congress, and to some extent the United States Department of Treasury, as well
as state legislatures and regulatory authorities, could at any time adversely
change the way in which a REIT and its stockholders are taxed, by imposing
additional entity-level taxes, further restricting the permissible beneficial
ownership and types of assets and income of a REIT, requiring additional
distributions, or changing the law in any other respect. Moreover, such changes
could apply retroactively. Should any such changes be implemented, they may
cause our net income to decline.
LOSS OF INVESTMENT COMPANY ACT EXCLUSION WOULD ADVERSELY AFFECT US.
We intend to conduct our business so as not to become regulated as an investment
company under the Investment Company Act of 1940, as amended (the "Investment
Company Act"). Towards this end, we rely on an exclusion from regulation as an
investment company available to entities that are primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate. Under the current interpretation of the SEC staff, in
order to qualify for this exclusion, we must maintain at least 55% of our assets
directly in these qualifying real estate interests, and 80% of our assets in
qualifying real estate interests and real estate-related interests. In meeting
the 55% requirement, we treat as qualifying real estate interests our
investments in whole mortgage loans and revenue bonds that are secured by first
mortgages on affordable multifamily housing properties. We also treat as
qualifying real estate interests our investments in mortgage-backed securities
issued with respect to an underlying pool as to which we hold all issued
certificates. Mortgage-backed securities that do not represent all the
certificates issued with respect to an underlying pool of mortgages may be
treated as securities separate from the underlying mortgage loans and, thus, may
not be considered qualifying real estate interests for purposes of the 55%
requirement. Instead, we treat our interests in these mortgage-backed securities
as real estate-related interests. Therefore, our ownership of these
mortgage-backed securities is limited by the provisions of the Investment
Company Act.
If we fail to qualify for the exclusion for real estate companies, we would be
regulated as an investment company and our business would be materially
adversely affected. As a regulated investment company, we would be prevented
from conducting our business as described in this document because the
Investment Company Act contains various restrictions that, among other things,
would reduce our ability to borrow. If the SEC or its staff adopts a contrary
interpretation with respect to the treatment of investments in mortgage backed
securities, we could be required to sell a substantial amount of our
mortgage-backed securities under potentially adverse market conditions. In
addition, in order to insure that we at all times qualify for the exclusion from
the Investment Company Act, we may be precluded from acquiring mortgage-backed
securities whose yield is somewhat higher than the yield on those that could be
purchased in a manner consistent with the exemption. The net effect of these
factors may be to lower our net income.
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 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.
6. RISKS RELATED TO OUR OUTSTANDING SHARES AND OUR SHAREHOLDERS.
RESTRICTIONS ON SHARE ACCUMULATION IN REITS COULD DISCOURAGE A CHANGE OF CONTROL
OF OUR COMPANY.
In order for us to qualify as a REIT, not more than 50% of the number or value
of our outstanding shares may be owned, directly or indirectly, by five or fewer
individuals during the last half of a taxable year or during a proportionate
part of a shorter taxable year.
In order to prevent five or fewer individuals from acquiring more than 50% of
our outstanding shares and a resulting failure to qualify as a REIT, our
declaration of trust provides that, no person may own, or be deemed to own by
virtue of the attribution provisions of the Code, more than 9.8% of the
outstanding shares. The shares most recently acquired by a person that are in
excess of the 9.8% limit will not have any voting rights and will be deemed to
have been offered for sale to us for a period subsequent to the acquisition. Any
person who acquires shares in excess of the 9.8% limit is obliged to immediately
give written notice to us and provide us with any information we may request in
order to determine the effect of the acquisition on our status as a REIT.
14
While these restrictions are designed to prevent any five individuals from
owning more than 50% of our shares, preserving our status as a REIT, they also
discourage a change in control of our company. These restrictions may also deter
tender offers that may be attractive to shareholders or limit the opportunity
for shareholders to receive a premium for their shares if an investor makes
purchases of shares to acquire a block of shares.
SUPERMAJORITY VOTING REQUIREMENTS FOR ACQUISITIONS, MERGERS AND OTHER FACTORS
COULD DISCOURAGE A CHANGE OF CONTROL OF OUR COMPANY.
Our declaration of trust requires that 80% of our shareholders and all of our
independent trustees approve exchange offers, mergers, consolidations or similar
transactions involving us in which our shareholders receive securities in a
surviving entity having materially different investment objectives and policies,
or that is anticipated to provide significantly greater compensation to
management, except for transactions affected because of changes in applicable
law, or to preserve tax advantages for a majority in interest of our
shareholders. Our Advisory Agreement also requires us to pay a significant
termination fee if the termination of the agreement occurs without cause or is
not renewed after its one-year term. These restrictions may also deter tender
offers that may be attractive to shareholders or limit the opportunity for
shareholders to receive a premium for their shares if an investor makes
purchases of shares to acquire a block of shares.
ISSUANCES OF LARGE AMOUNTS OF OUR COMMON SHARES COULD CAUSE OUR SHARE PRICE TO
DECLINE.
Our declaration of trust permits our trustees to issue an unlimited number of
shares (subject to SEC registration requirements and the consent of shareholders
if required pursuant to the rules of the American Stock Exchange). The issuance
of common shares could cause dilution of our existing common shares and a
decrease in the market price of our common shares.
OUR SHAREHOLDERS MAY HAVE PERSONAL LIABILITY FOR OUR ACTS AND OBLIGATIONS.
It is possible that certain states may not recognize the limited liability of
shareholders, although our declaration of trust provides that our shareholders
shall not be subject to any personal liability for our acts or obligations. In
certain states, our shareholders may be held personally liable for contract
claims where the underlying agreement does not specifically exclude shareholder
liability. Our shareholders may also be held personally liable for other claims
against us, such as tort claims, claims for taxes and certain statutory
liability. Upon payment of any such liability, however, the shareholder will, in
the absence of willful misconduct on the shareholder's part, be entitled to
reimbursement from our general assets, to the extent such assets are sufficient
to satisfy the claim.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
We utilize office space of our Advisor, located at 625 Madison Avenue, New York,
and otherwise have no owned or leased properties that we use to conduct our
business.
ITEM 3. LEGAL PROCEEDINGS.
We are not party to any pending material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
As of March 7, 2008, there were 199 registered shareholders owning 8,433,470
shares. Our common shares have been listed on the American Stock Exchange since
July 1, 1999, under the symbol "AMC". Prior to July 1, 1999, there was no
established public trading market for our shares.
The high and low common share prices for each quarterly period in the past two
fiscal years in which the shares were traded is as follows:
2007 2006
----------------------- -----------------------
Quarter Ended Low High Low High
- ---------------------- ---------- ---------- ---------- ----------
March 31 $ 8.94 $ 18.20 $ 14.66 $ 16.05
June 30 $ 8.01 $ 11.00 $ 14.15 $ 15.86
September 30 $ 6.94 $ 9.88 $ 14.65 $ 18.11
December 31 $ 1.10 $ 9.02 $ 16.13 $ 19.82
The last reported sale price of our common shares on the American Stock Exchange
on March 7, 2008 was $1.35.
Incentive Share Option Plan
- ---------------------------
The following table provides information related to our Incentive Share Option
Plan as of December 31, 2007:
Equity Compensation Plan Information
(a) (b) (c)
Number of
securities
remaining
Number of available for
securities to be Weighted- future issuance
issued upon average under equity
exercise exercise price of compensation
of outstanding outstanding plans (excluding
options, options, securities
warrants and warrants and reflected in
rights rights column (a))
---------------- ---------------- ----------------
Equity compensation plans approved by security holders 93,000 $ 15.03 685,295
Equity compensation plans not approved by security
holders -- -- --
---------------- ---------------- ----------------
Totals 93,000 $ 15.03 685,295
================ ================ ================
16
Dividends
- ---------
After providing for dividends to our 7.25% convertible preferred shares, our net
income is allocated among the common shares outstanding (see Note 17 to the
Consolidated Financial Statements). Quarterly cash dividends per share for the
years ended December 31, 2006 and 2007 were as follows:
Total Amount
Cash Dividends for Distributed
Quarter Ended Date Paid Per Share (in thousands)
- ------------------ -------------- -------------- -------------
March 31, 2006 5/12/06 $ 0.40 $ 3,322
June 30, 2006 8/11/06 0.40 3,322
September 30, 2006 11/13/06 0.40 3,331
Special dividend 1/15/07 1.40 11,760
December 31, 2006 2/14/07 0.40 3,360
-------------- -------------
Total for 2006 $ 3.00 $ 25,095
============== =============
March 31, 2007 5/15/07 $ 0.225 $ 1,890
June 30, 2007 8/14/07 0.225 1,891
September 30, 2007 11/14/07 0.225 1,891
December 31, 2007* -- -- --
-------------- -------------
Total for 2007 $ 0.675 $ 5,672
============== =============
* There were no dividends declared or paid on our common shares for the quarter
ended December 31, 2007.
There are no material legal restrictions upon our present or future ability to
make distributions in accordance with the provisions of our declaration of
trust. Future distributions paid by us will be at the discretion of our board of
trustees and will depend on our actual cash flow, our financial condition,
capital requirements, REIT requirements and such other factors as the trustees
deem relevant.
Share Repurchases
- -----------------
We did not repurchase any of our common shares during the fourth quarter of
2007.
Other information required by this item, as well as additional information
regarding our share repurchase program and share compensation paid to our
independent trustees, is included in Notes 17 and 18 to our consolidated
financial statements.
17
ITEM 6. SELECTED FINANCIAL DATA.
The information set forth below presents our selected financial data. See Item
7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS for factors affecting the comparability of this data. Additional
financial information is set forth in the audited financial statements and
footnotes thereto contained in Item 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Years Ended December 31,
-------------------------------------------------------------------
OPERATIONS 2007 (1) 2006 (2) 2005 (3) 2004 2003
- ---------- ----------- ----------- ----------- ----------- -----------
Total revenues $ 60,109 $ 31,694 $ 27,160 $ 15,909 $ 15,051
=========== =========== =========== =========== ===========
(Loss) income from continuing operations $ (62,113) $ 2,432 $ 15,035 $ 9,373 $ 11,425
=========== =========== =========== =========== ===========
Net (loss) income $ (58,582) $ 2,687 $ 15,235 $ 11,273 $ 11,884
=========== =========== =========== =========== ===========
(Loss) income from continuing operations per share,
basic and diluted $ (7.45) $ 0.29 $ 1.81 $ 1.12 $ 1.46
=========== =========== =========== =========== ===========
Net (loss) income per share, basic and diluted $ (7.03) $ 0.32 $ 1.83 $ 1.35 $ 1.52
=========== =========== =========== =========== ===========
Dividends per share $ 0.675 $ 3.00 $ 1.90 $ 1.60 $ 1.60
=========== =========== =========== =========== ===========
December 31,
-------------------------------------------------------------------
FINANCIAL POSITION 2007 2006 2005 2004 2003
- ------------------ ----------- ----------- ----------- ----------- -----------
Total assets $ 666,399 $ 720,984 $ 400,723 $ 349,033 $ 327,107
=========== =========== =========== =========== ===========
CDO notes payable $ 362,000 $ 362,000 $ -- $ -- $ --
=========== =========== =========== =========== ===========
Repurchase facilities $ 136,385 $ 163,576 $ 209,101 $ 157,633 $ 149,529
=========== =========== =========== =========== ===========
Warehouse facility $ -- $ -- $ 4,070 $ 3,827 $ 34,935
=========== =========== =========== =========== ===========
Line of credit - related party $ 77,685 $ 15,000 $ -- $ 4,600 $ --
=========== =========== =========== =========== ===========
Mortgages payable on real estate owned $ -- $ 39,944 $ 40,487 $ 56,993 $ 15,993
=========== =========== =========== =========== ===========
Preferred shares of subsidiary
(subject to mandatory repurchase) $ 25,000 $ 25,000 $ 25,000 $ -- $ --
=========== =========== =========== =========== ===========
Total liabilities $ 645,773 $ 635,976 $ 286,540 $ 228,501 $ 206,212
=========== =========== =========== =========== ===========
Total shareholders' equity $ 20,626 $ 85,008 $ 114,183 $ 120,532 $ 120,895
=========== =========== =========== =========== ===========
(1) During 2007, net income was impacted by losses resulting from the sale of
twenty-four first mortgage loans, two CMBS and the remaining portfolio of
debt securities, as well as impairments on certain of our mortgage loans,
and CMBS losses incurred upon the termination of certain interest rate
swaps and expenses related to changes in the fair value of certain interest
rate swaps to which we do not apply hedge accounting.
(2) During 2006, net income was impacted by a gain resulting from the sale of
our ARCap membership interests, offset by a substantial expense related to
changes in the fair value of certain interest rate swaps to which we do not
apply hedge accounting, a loss incurred from the sale of 20 FNMA securities
and impairment charges recorded on two notes receivable and three mezzanine
loans.
(3) During 2005, net income was impacted by the recognition of fees relating to
an early payoff of a GNMA certificate and a mezzanine loan.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
- --------
During 2007, we incurred significant losses upon selling assets in response to
market conditions, including reduced liquidity of mortgage products, declining
interest rates and widening credit spreads as discussed more fully in Note 2 to
the consolidated financial statements and "LIQUIDITY AND CAPITAL RESOURCES"
below. We have suspended our investment activity and our current intent is to
maintain our liquidity until market conditions improve. However, continuation or
deterioration of market conditions could impede our ability to hold certain
available-for-sale securities, resulting in significant impairment charges
discussed in greater detail in Note 4 to the consolidated financial statements
and "LIQUIDITY AND CAPITAL RESOURCES" below.
Beginning in 2006, as we revised our investment strategy, we recorded gains and
losses that are not comparable between periods, and experienced growth in
numerous other income statement accounts in line with an increase in our
investment portfolio. That growth was suspended during 2007 as a result of the
market conditions noted above. The non-comparable gains and losses and the
changes in our investment portfolio are detailed in the following sections of
this discussion.
One of the assets sold during 2006 was our membership interest in ARCap
Investors, L.L.C. ("ARCap"), resulting 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 we had earned from this
investment. We received additional proceeds from the sale (and recorded an
additional gain) upon release of an escrow during 2007. The 2005 period included
equity income from the ARCap investment and a conversion premium for when we
converted a portion of our preferred membership units to common units.
During 2006, we also entered into fair value swaps to which we do 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 on our consolidated
statements of operations. In 2007, there were fewer of these swaps, resulting in
less of a negative change in the fair value as compared to 2006. There were no
such gains or losses recorded in the 2005 period.
INVESTMENT PORTFOLIO
- --------------------
During the years ended December 31, we originated the following investments:
2007 2006 2005
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Weighted Weighted Weighted
Average Average Average
Interest Interest Interest
(DOLLARS IN THOUSANDS) Amount Rate Amount Rate Amount Rate
- ---------------------- ----------- ----------- ----------- ----------- ----------- -----------
Mortgage loans
receivable $ 255,124 7.93% $ 500,140 6.32% $ 47,500 15.00%
Debt securities -- -- -- -- 61,691 6.04
CMBS 135,301 5.92 -- -- -- --
CDO securities 10,084 9.00 -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total $ 400,509 7.26% $ 500,140 6.32% $ 109,191 9.94%
=========== =========== =========== =========== =========== ===========
During 2006, the composition of our investment portfolio shifted to include a
large portion of mortgage loans that collateralize our CDO notes payable, or
were to collateralize another CDO securitization in 2007. We had shifted our
investment strategy away from debt securities and increased our investments in
mortgage loans, which are in the form of first mortgage loans, mezzanine and
bridge loans and subordinated B-notes. During 2007, we began investing in CMBS,
for similar purposes of collateralizing a CDO securitization. However, while the
volatility in the market presented us with investment opportunities, it also
presented us with financing challenges. As the credit markets worsened, so did
the commercial real estate CDO market and as a result, we decided not to pursue
a second CDO securitization in October 2007 and began selling assets to repay
the repurchase facilities that were collateralized by these investments and to
meet our margin call requirements.
19
The following investments were sold in connection with the change in our
investment strategy and to repay debt and meet margin requirements in 2007 and
2006:
2007 2006
---------------------------------------- ----------------------------------------
Weighted Weighted
Average Average
Interest (Loss) on Interest (Loss) gain
(DOLLARS IN THOUSANDS) Amount Rate sale Amount Rate on sale
- ------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Mortgage loans receivable $ 181,534 6.77% $ (4,448) $ -- --% $ --
Debt securities 71,518 6.39 (2,153) 75,784 5.49 (2,224)
CMBS 22,113 5.66 (10,373) -- -- --
CDO securities 8,672 8.80 (2,123) -- -- --
ARCap -- -- -- 19,641 12.00 19,223
----------- ----------- ----------- ----------- ----------- -----------
Total $ 283,837 6.65% $ (19,097) $ 95,425 6.83% $ 16,999
=========== =========== =========== =========== =========== ===========
RESULTS OF OPERATIONS
- ---------------------
The following is a summary of our operations:
% Change % Change
2007 vs. 2006 vs.
(IN THOUSANDS) 2007 2006 2006 2005 2005
- ------------------------- ----------- ----------- ----------- ----------- -----------
Total revenues $ 60,109 $ 31,694 89.7% $ 27,160 16.7 %
Total expenses (91,822) (45,252) 102.9 (15,106) 199.6
Total other (loss) income (30,400) 15,990 (290.1) 2,981 436.4
Income from discontinued
operations 3,531 255 NM 200 27.5
----------- ----------- ----------- ----------- -----------
Net (loss) income $ (58,582) $ 2,687 NM% $ 15,235 (82.4)%
=========== =========== =========== =========== ===========
NM = Not meaningful due to amount being greater than 1,000%.
The growth in our annual revenues in both 2007 and 2006 resulted primarily from
increases in investment volume activity, as well as participation fees received
in connection with the paydown of one of our mortgage loans during 2007.
Expenses also increased for these periods due to:
o financing costs (particularly due to higher debt balances and
increases in interest rates); and
o impairment charges recorded with respect to mortgage loans and CMBS in
2007 and mortgage loans in 2006.
The 2006 expense increase was offset by reduced advisory fees because we did not
pay incentive management fees for that period.
Other income decreased substantially during 2007 as a result of the incurrence
of losses relating to sales of assets, as well as an increase in losses related
to the termination of certain interest rate derivatives and changes in the fair
value of other freestanding interest rate derivatives to which we do not apply
hedge accounting. The increase in other income during 2006 was due to a gain on
the sale of our ARCap investment, partially offset by significant losses related
to the changes in the fair value of freestanding derivatives mentioned above.
20
REVENUES
Changes in the components of our revenues were as follows:
Year Ended December 31,
------------------------------------ % Change % Change % of Total % of Total % of Total
2007 vs. 2006 vs. 2007 2006 2005
(DOLLARS IN THOUSANDS) 2007 2006 2005 2006 2005 Revenues Revenues Revenues
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Interest income:
Mortgage loans $ 47,970 $ 20,024 $ 6,988 139.6% 186.5% 79.9% 63.2% 25.7%
Debt securities 4,118 10,497 12,823 (60.8) (18.1) 6.9 33.1 47.2
CMBS 4,916 -- -- 100.0 -- 8.1 -- --
CDO securities 865 -- -- 100.0 -- 1.4 -- --
Mortgage revenue bonds 418 503 581 (16.9) (13.4) 0.7 1.6 2.1
Temporary investments 678 384 233 76.6 64.8 1.1 1.2 0.9
Other revenues 1,144 286 6,535 300.0 (95.6) 1.9 0.9 24.1
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues $ 60,109 $ 31,694 $ 27,160 89.7% 16.7% 100.0% 100.0% 100.0%
========== ========== ========== ========== ========== ========== ========== ==========
At December 31, we had the following investments (exclusive of Real Estate Owned
and temporary investments):
2007 2006 2005
------------------------------ ------------------------------ ------------------------------
Weighted Weighted Weighted
Average Average Average
Carrying % of Interest Carrying % of Interest Carrying % of Interest
(DOLLARS IN THOUSANDS) Amount Total Rate Amount Total Rate Amount Total Rate
-------- -------- -------- -------- -------- -------- -------- -------- --------
Mortgage loans receivable $529,644 87.7% 7.62% $545,898 86.2% 7.20% $ 65,706 22.3% 13.75%
Debt securities -- -- -- 82,582 13.0 6.49 222,723 75.5 6.23
CMBS 69,269 11.5 4.89 -- -- -- -- -- --
Mortgage revenue bonds 4,879 0.8 8.70 4,967 0.8 8.70 6,626 2.2 8.68
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total $603,792 100.0% 7.31% $633,447 100.0% 7.12% $295,055 100.0% 7.96%
======== ======== ======== ======== ======== ======== ======== ======== ========
Interest income from mortgage loans increased in 2007 and 2006 due to the
funding and purchase of a significant amount of first mortgage loans, bridge
notes, mezzanine loans, and subordinated B-notes throughout 2006 and the first
half of 2007. The decrease in the weighted average interest rates on mortgage
loans during 2006 was due to a large portion of investments made in the form of
first mortgage loans, which are lower yielding than the mezzanine loan
investments we acquired in 2005.
Interest income from debt securities decreased during 2007 and 2006, primarily
due to the sale of 20 FNMA certificates as a result of a change in our
investment strategy from market conditions described above, as well as the
payoff of three GNMA certificates during 2006. During November of 2007, we sold
our remaining portfolio of these securities to meet margin requirements.
Interest income from CMBS and CDO securities in 2007 relates to the purchase of
a portion of various classes of CMBS investments and Nomura CDO securities
during 2007. There were no investments in CMBS or CDO securities prior to 2007.
We sold our entire portfolio of CDO securities during 2007.
Interest income from temporary investments increased during 2007 and 2006
primarily due to 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 2007, due to a one-time payment received from an
early repayment on one debt security, as well as a one time payment received
pursuant to a participating arrangement for a mortgage loan that was repaid in
2007. During 2005, we received larger fees from similar transactions. We had no
comparable transactions in 2006.
Due to various asset sales during 2007, we expect our revenues to decline in
future periods.
21
EXPENSES
Changes in the components of our expenses were as follows:
Year Ended December 31,
------------------------------------ % Change % Change % of Total % of Total % of Total
2007 vs. 2006 vs. 2007 2006 2005
(DOLLARS IN THOUSANDS) 2007 2006 2005 2006 2005 Revenues Revenues Revenues
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Interest $ 42,302 $ 19,372 $ 7,057 118.4% 174.5% 70.4% 61.1% 26.0%
Interest - distributions
to preferred shareholders
of subsidiary 2,216 2,241 1,452 (1.1) 54.3 3.7 7.1 5.3
General and administrative 4,232 3,490 1,956 21.3 78.4 7.0 11.0 7.2
Impairment of investments 38,295 16,443 -- (132.9) 100.0 63.7 51.9 --
Fees to Advisor 3,796 3,546 4,347 7.1 (18.4) 6.3 11.2 16.0
Amortization and other 981 160 294 513.1 (45.6) 1.6 0.5 1.1
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses $ 91,822 $ 45,252 $ 15,106 102.9% 199.6% 152.8% 142.8% 55.6%
========== ========== ========== ========== ========== ========== ========== ==========
Interest expense increased for both 2007 and 2006, primarily related to
increases in borrowings used to fund increases in loan originations and the
increase in market interest rates during 2005, 2006 and the first half of 2007.
Excluding mortgages on real estate owned in the 2006 and 2005 periods, we had
total debt as follows as of December 31:
(DOLLARS IN THOUSANDS) 2007 2006 2005
----------- ---------- -----------
Average outstanding $ 753,395 $ 376,203 $ 222,065
Weighted average interest rate
(including effect of interest rate swaps) 5.92% 5.69% 3.83%
Average notional amount of interest rate swaps $ 606,479 $ 226,599 $ 30,000
Weighted average rate of interest rate swaps 5.20% 5.07% 3.48%
As we have repaid a substantial amount of debt in 2007, we expect our interest
expense to decline accordingly. Although market interest rates have recently
declined also, we may not experience a corresponding decline as a result due to
fixed-rate swaps that we have in place.
In accordance with SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS
WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY, we classify distributions
made on trust preferred shares of our wholly owned subsidiary (issued in March
2005) as interest expense. While in-line with 2007, distributions to trust
preferred shareholders increased during 2006, as compared to 2005, as the 2006
period included twelve months of distributions compared to nine months in 2005.
The increase is also due to the increase in interest rates during 2005 and 2006,
as the distributions are at a variable rate, based on LIBOR.
General and administrative expenses increased during 2007, as compared to 2006,
due to increased accounting, consulting, and custodial fees. The 2007 period
also includes expenses related to certain costs incurred in association with a
CDO securitization that will no longer be pursued. These increases were
partially offset by fewer legal costs incurred during 2007 (as costs in 2006
included defending and settling a suit), decreased insurance costs and share
based compensation costs (as all such costs were fully amortized in 2006).
General and administrative expenses increased during 2006, as compared to 2005,
primarily due to increased legal fees (for the reasons mentioned above), trustee
fees and insurance costs. The 2006 period also includes higher share based
compensation costs due to the accelerated vesting of certain share options in
2006. These increases were partially offset by decreased investor services
expenses as compared to 2005 (due to costs in 2005 related to changes in our
trust agreement for which we needed shareholder approval) and a decrease in
excise taxes because distributions were in excess of taxable earnings for the
year.
Impairment of investments during 2006 relates to debt securities we sold in 2006
that no longer met our investment return criteria and impairments recognized on
mortgage loans due to deteriorating operating performance. The impairment losses
in 2007 relate to impairment charges taken on two mortgage loans in our
specially serviced portfolio due to deteriorating operating performance,
impairments taken on several first mortgage loans before they were sold during
2007 and on mortgage loans sold or to be sold in 2008, and impairments resulting
from declines in market values of our CMBS investments.
Fees to Advisor were higher in 2007 as compared to 2006 due to servicing fees
paid for the larger investment portfolio. These fees decreased during the 2006
period as compared to 2005 as the 2005 period included an incentive management
fee expense because of the level of earnings in that year. That decrease was
partially offset by higher shared services costs because of the expansion of our
business. Due to the retrenchment of the business in 2007, we do not expect to
incur incentive management fees in 2008 and expect other advisory fees to
decline as well.
22
Amortization and other costs increased during the 2007 period, as compared to
2006, due to higher amortization of higher deferred financing costs as a result
of our 2006 CDO securitization, which were incurred at the end of 2006. These
costs are lower for the 2006 and 2005 periods, due to the deferred financing
costs related to our warehouse facility being fully amortized in August 2005.
OTHER INCOME
Changes in the components of other income were as follows:
12 Months
------------------------------------ 2007 vs. 2006 vs.
2006 2005 2007 % of 2006 % of 2005 % of
(DOLLARS IN THOUSANDS) 2007 2006 2005 Change Change Revenue Revenue Revenue
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Other income:
Change in fair value
and loss on
termination of
derivative instruments $ (11,581) $ (5,299) $ -- 118.6 (100.0)% (19.27)% (16.7)% --%
Equity in earnings of
ARCap -- 3,000 2,837 (100.0) 5.7 -- 9.5 10.4
Gain on sale of ARCap 337 19,223 -- (98.2) 100.0 0.6% 60.7 --
(Loss) gain on sale or
repayment of
investments (19,156) (934) 183 N/M 100.0 (31.9)% (2.9) 0.7
Other -- -- (39) -- (100.0) -- -- (0.1)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses $ (30,400) $ 15,990 $ 2,981 (290.1)% 428.9% (50.6)% 50.5% 11.0%
========== ========== ========== ========== ========== ========== ========== ==========
N/M = Not meaningful due to amount being greater than 1,000%.
Other income decreased during the 2007 period, as compared to 2006, primarily
due to significant losses resulting from the sales of certain assets in 2007 and
the absence of equity in earnings or the gain on the sale of ARCap, as well as
losses incurred from the termination of several derivative instruments and the
expenses related to changes in the fair value of certain interest rate swaps to
which we do not apply hedge accounting.
The increase in other income during the 2006 period, as compared to 2005, was
primarily due to a gain resulting from the sale of our ARCap membership
interests offset by a substantial expense related to changes in the fair value
of certain interest rate swaps to which we did not apply hedge accounting and
the loss incurred on the sale of 20 FNMA securities.
INCOME FROM DISCONTINUED OPERATIONS
Income from discontinued operations increased during the 2007 period, as
compared to 2006, due to the realization of a gain resulting from the sale of
real estate owned in 2007.
FUNDS FROM OPERATIONS
- ---------------------
Funds from operations ("FFO"), represents net income or loss (computed in
accordance with GAAP), excluding gains or losses from sales of property,
excluding depreciation and amortization related to real property and including
funds from operations for unconsolidated joint ventures calculated on the same
basis. FFO is calculated in accordance with the National Association of Real
Estate Investment Trusts ("NAREIT") definition. FFO does not represent cash
generated from operating activities in accordance with GAAP and is not
necessarily indicative of cash available to fund cash needs. FFO should not be
considered as an alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flows as a measure of
liquidity. Our management considers FFO a supplemental measure of operating
performance, and, along with cash flows from operating activities, financing
activities, and investing activities, it provides investors with an indication
of our ability to incur and service debt, make capital expenditures, and to fund
other cash needs. Refer to Note 2 to our consolidated financial statements and
discussion throughout Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS in this document for factors causing FFO to
be negative in the current year. 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.
23
The following table reconciles net income to FFO for the years ended December
31:
(IN THOUSANDS) 2007 2006 2005
---------- ---------- ----------
Net (loss) income $ (58,582) $ 2,687 $ 15,235
Add back: depreciation of real property 336 1,671 2,389
Less: gain on sale of real property (3,611) (230) --
---------- ---------- ----------
FFO $ (61,857) $ 4,128 $ 17,624
========== ========== ==========
Cash flows from:
Operating activities $ 10,374 $ 8,290 $ 18,049
========== ========== ==========
Investing activities $ (32,190) $(320,856) $ (64,512)
========== ========== ==========
Financing activities $ 30,107 $ 308,905 $ 55,003
========== ========== ==========
Weighted average shares outstanding:
Basic 8,404 8,323 8,316
========== ========== ==========
Diluted 8,404 8,330 8,317
========== ========== ==========
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
MARKET FACTORS
During 2007, developments in the market for many types of mortgage products have
resulted in reduced liquidity for these assets. Declining interest rates coupled
with significantly widening credit spreads have led to reduced values and the
inability to find adequate financing for these assets. This has resulted in an
overall reduction in liquidity across the credit spectrum of mortgage products.
Because of this we have suspended most investment activity, decided not to
pursue a second CDO securitization and terminated a repurchase facility used to
finance our investment activity prior to securitization (see "REPURCHASE
FACILITIES" discussion below). As a result, we are currently carrying out a
plan, in accordance with the termination agreement for this facility, to sell
our existing assets that collateralize this facility.
As market conditions fluctuate, we will continue to evaluate strategies that
could require us to sell additional assets and extinguish any related debt
obligations that are secured by these assets. By repaying most of our debt
obligations, we believe we will regain adequate financing when market conditions
improve, to actively pursue our investment strategy and begin growing our
company for the future. However, aspects outside of our control, such as the
continuing uncertainty of the credit markets could further restrict our
liquidity.
Absent further margin calls and further deterioration of the credit markets, we
expect that cash generated through sales of assets that collateralize our debt
obligations, interest receipts from our remaining investments, as well as our
borrowing capacity, will meet our needs for short-term liquidity and will be
sufficient to pay all expenses and distributions to our shareholders in amounts
sufficient to retain our REIT status in the foreseeable future. In order to
qualify as a REIT under the Internal Revenue Code, as amended ("the Code"), we
must, among other things, distribute at least 90% of our taxable income (see
Note 13). We believe that we are in compliance with the REIT-related provisions
of the Code.
SOURCES OF FUNDS
As of December 31, 2007, our credit facilities consisted of:
o repurchase facilities; and
o a related party line of credit.
At December 31, 2007, we had $2.3 million available to borrow from 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 or repayment of debt (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
24
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 sell additional assets to repay borrowings.
For the year ended December 31, 2007, there were net cash payments of $21.6
million due to margin calls/margin receipts on our existing repurchase
facilities. We also paid $27.3 million upon refinancing certain of our assets
from a terminated facility onto a repurchase facility due to lower advance rates
on the new facility and decreased value of the collateral. Should market
interest rates and/or prepayment speeds on our investments continue to increase,
margin calls on our repurchase agreements could substantially increase, causing
an adverse change in our liquidity position and strategy. The sources mentioned
above may not be sufficient to meet our obligations, including margin calls, as
they come due; as a result, further margin calls may result in additional asset
sales.
At December 31, 2007, the following repurchase facilities were in place,
categorized by lending institution:
o CITIGROUP FACILITY
During December 2006, we executed a repurchase agreement with
Citigroup for the purpose of funding investment activity for a planned
second CDO securitization. In October 2007, for the reasons mentioned
above we decided not to pursue that CDO securitization. In connection
with that determination, we entered into an agreement that will
terminate our Citigroup repurchase facility on May 31, 2008.
At December 31, 2007, 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 0.60% to LIBOR plus 1.25%, is also determined on an
asset-by-asset basis. At December 31, 2007, we had $81.3 million of
borrowings outstanding under this facility at a weighted average
interest rate of 5.68%, including the effect of interest rate hedges.
With respect to assets pledged as collateral for the Citigroup
facility, and in accordance with the termination agreement, we are
currently carrying out a plan to sell or refinance the assets
collateralizing this facility utilizing our other repurchase
facilities (see Note 11 and Note 23 or our consolidated financial
statements).
o BEAR STEARNS FACILITY
During 2007, we executed a repurchase agreement with Bear Stearns for
the purpose of providing financing for our investments in mortgage
loans, CMBS and available-for-sale securities. At December 31, 2007,
advance rates on borrowings from this facility were at 70% of the
collateral value, and interest on the borrowings ranged from 30-day
LIBOR plus 1.00% to 30-day LIBOR plus 2.00%, both as determined on an
asset-by-asset basis. The borrowings are subject to 30-day settlement
terms. At December 31, 2007, we had $55.0 million of borrowings
outstanding under this facility at a weighted average interest rate of
5.41%, including the effect of interest rate hedges (see Note 11 or
our consolidated financial statements).
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 and subordinated notes.
There are no outstanding amounts on this facility as of December 31,
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 be based on 30-day LIBOR and
will also be determined on an asset-by-asset basis.
For information regarding the amount of borrowings and the amounts of hedged
debt on our repurchase facilities secured by our investments, see Note 2 of the
consolidated financial statements.
Related Party Line of Credit
- ----------------------------
We finance our remaining investing and operating 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 December 31, 2007, the amount outstanding was $77.7
million with an interest rate of 7.60%.
We have covenant compliance requirements on our related party line of credit. At
December 31, 2007, we failed to meet certain of these requirements, causing us
to be in default of the loan agreement. While we have not been called upon to
repay this facility, there can be no assurance that we will not be.
Other Financing
- ---------------
In 2006, we executed our first CDO securitization. At December 31, 2007, we had
outstanding CDO securitization certificates totaling $362.0 million at a
weighted average rate of 5.41%, including the effect of interest rate hedges.
25
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
Year Ended December 31,
--------------------------------------------------------
Dollar Percent
2007 2006 Change Change
----------- ----------- ----------- -----------
Cash flows provided by (used in):
Operating activities $ 10,374 $ 8,290 $ 2,084 25.1%
Investing activities (32,190) (320,856) 288,666 (90.0)
Financing activities 30,107 308,905 (278,798) (90.3)
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents $ 8,291 $ (3,661) $ 11,952 (326.5)%
=========== =========== =========== ===========
Despite the net loss in 2007, our cash flows from operations increased over the
2006 level. As much of the net loss was caused by non-cash charges (such as fair
value changes in interest rate derivatives and impairment charges) and realized
losses from investing activities (such as asset sales) those amounts are
excluded from the calculation of operating cash flows. The underlying increase
in cash flows in this category was due to increased balances for interest
payable due to the higher level of debt at year end.
The decrease in net cash used in investing activities was due to lower
origination activity in the 2007 period as compared to 2006, and proceeds
received from the sale of assets in 2007.
The decrease in net cash provided by financing activities can be attributed to
the lower level of investing activity during the 2007 period and the repayment
of credit facilities during 2007, as well as an increase in escrow balance
requirements due to the liquidity factors described above. The decrease was
partially offset by proceeds received from a preferred stock offering made in
2007.
LIQUIDITY REQUIREMENTS AFTER DECEMBER 31, 2007
For the period from January 1, 2008 through March 11, 2008, we paid $11.8
million due to margin calls on our repurchase facilities.
During January 2008, preferred dividends of $0.3 million ($0.453 per share),
declared in December 2007, were paid to the preferred shareholders.
During 2008, in accordance with the termination agreement with Citigroup, we
sold 11 first mortgage loans with an aggregate carrying amount of $58.1 million,
repaid $44.3 million of related repurchase facility debt and incurred $3.1
million of realized losses relating to these sales. As of March 7, 2008, five
first mortgage loans remain as collateral on this facility, which will be
refinanced or sold in 2008 to repay the remaining outstanding balance on the
facility prior to the termination date of May 31, 2008.
Absent further margin calls, we expect that cash generated from normal
operations, principally interest from our investments, will meet our short-term
operating needs. Market conditions have continued to deteriorate in 2008,
causing us to fund additional margin requirements with our repurchase facility
lenders and if market conditions remain the same or become worse, we may be
called upon to fund more. While these margin requirements cannot be quantified
at this time, we may not generate enough cash from operations or have adequate
availability under our existing debt facilities to cover these requirements, and
may need to sell additional assets that could result in additional losses to
satisfy these cash needs.
We also have $0.3 million of funding commitments subsequent to December 31,
2007, which we expect to fund, if necessary, through cash generated from normal
operations.
OTHER MATTERS
We are not aware of any trends or events, commitments or uncertainties, not
otherwise disclosed, that will or are likely to impact liquidity in a material
way.
26
DIVIDENDS
- ---------
The following table outlines our total dividends and return of capital amounts,
determined in accordance with GAAP, for the year ended December 31:
(IN THOUSANDS) 2007 2006
----------- -----------
Total preferred dividends $ 527 $ --
=========== ===========
Total common dividends $ 5,673 $ 25,095
=========== ===========
Return of capital:
Amount $ 6,200 $ 22,407
Per share $ 0.74 $ 2.69
Percent of total dividends 100% 89.29%
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
- --------------------------------------------
Our consolidated financial statements are based on the selection and application
of GAAP, which requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. These estimates
and assumptions sometimes involve future events which cannot be determined with
absolute certainty. Therefore, our determination of estimates requires that we
exercise our judgment. While we have used our best estimates based on the facts
and circumstances available to us at the time, different results may actually
occur and any such differences could be material to our financial statements.
We believe the following policies may involve a higher degree of judgment and
complexity and represent the critical accounting estimates used in the
preparation of our financial statement:
o assessment of impairment of mortgage loans;
o classification and valuation of mezzanine loan investments; and
o accounting for losses related to terminated interest rate derivatives.
ASSESSMENT OF IMPAIRMENT OF MORTGAGE LOANS
SFAS No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, establishes
standards regarding impairment issues related to our mortgage loans. Our
portfolio of mortgage loans is periodically evaluated for impairment to
establish appropriate loan loss reserves, if necessary. Our Advisor has a credit
review committee which meets monthly and reviews the status of each loan and
note and maintains a "watch list" of loans (including loans for which we have
issued guarantees) for which the underlying property may be experiencing
construction cost overruns, delays in construction completion, occupancy
shortfalls, lower than expected debt service coverage ratios, or other matters
which might cause the borrower to be unable to make scheduled interest and
principal payments. If a loan is experiencing difficulties, members of this
credit committee work with the borrower to try to resolve the issues, which
could include extending the loan term, making additional advances, or reducing
required payments. If, in the judgment of our Advisor, it is determined that it
is probable that we will not receive all contractually required payments when
they are due, the loan or note would be deemed impaired, and a loan loss reserve
established.
CLASSIFICATION AND VALUATION OF MEZZANINE LOAN INVESTMENTS
Our mezzanine loan investments bear interest at fixed or variable rates, and
some also include provisions that allow us to participate in a percentage of the
underlying property's cash flows from operations and proceeds from a sale or
refinancing. At the inception of each such investment, our management must
determine whether such investment should be accounted for as a loan, joint
venture or as real estate, using the guidance contained in the Third Notice to
Practitioners issued by the AICPA. Although the accounting methodology does not
affect our cash flows from these investments, this determination affects the
balance sheet classification of the investments as well as the classification,
timing and amounts of reported earnings.
Accounting for the investment as real estate is required if we expect that the
amount of profit, regardless of its nature, is over 50 percent of the property's
total expected residual profit. If a mezzanine investment were accounted for as
an investment in real estate, our consolidated balance sheets would show the
underlying property and its related senior debt (if such debt were not also held
by us), and our consolidated statements of operations would include the
property's rental revenues, operating expenses and depreciation.
If we expect to receive less than 50 percent of the property's residual profit,
loan or joint venture accounting is applied. Loan accounting is appropriate:
o if the borrower has a substantial equity investment in the property;
o if we have recourse to substantial assets of the borrower;
27
o if the property is generating sufficient cash flow to service normal
loan amortization; or
o if certain other conditions are met.
Under loan accounting, we recognize interest income as earned and additional
interest from participations as received. Joint venture accounting would require
that we only record our share of the net income from the underlying property.
Our management must exercise judgment in making the required accounting
determinations. For each mezzanine arrangement, we project total cash flows over
the loan's term and our share in those cash flows, and consider the borrower's
equity, the contractual cap, if any, on total yield to us over the term of the
loan, market yields on comparable loans, borrower guarantees, and other factors
in making an assessment of the proper accounting. To date, we have determined
that all mezzanine investments should be accounted for as loans.
ACCOUNTING FOR LOSSES RELATED TO TERMINATED INTEREST RATE DERIVATIVES
We enter into interest rate swaps, which are designated at inception as cash
flow hedges with the hedged item being interest payments on our variable-rate
repurchase facilities. In accordance with SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133"), we record these
swaps at fair value and record changes in fair value in other comprehensive
income to the extent the hedge is effective in achieving offsetting cash flows.
In the event that the interest rate swap is terminated and it is probable that
no variable-rate debt will remain, we reclassify any unrealized amounts from
accumulated other comprehensive income to earnings in the same period as the
termination. However, if variable-rate debt remains, we assess the probability
of ongoing variable-rate interest payments through the maturity dates of the
terminated swaps. If it is determined that a probability of having these
payments exists, any unrealized losses in other comprehensive income would
remain until such time as the interest payments affect earnings or are deemed
probable not to occur. The balance from the termination date is then amortized
over the life of the terminated hedge transactions and we reassess the
probability on an ongoing basis.
COMMITMENTS, CONTINGENCIES AND OFF BALANCE SHEET ARRANGEMENTS
- -------------------------------------------------------------
We have no unconsolidated subsidiaries, special purpose off-balance sheet
financing entities, or other off-balance sheet arrangements.
The following table reflects our maximum exposure and carrying amount as of
December 31, 2007, for guarantees we have entered into:
Maximum
Exposure Carrying
(In thousands) Amount
-------------- --------------
FNMA loan program (1) $ 3,109 $ --
-------------- --------------
Total $ 3,109 $ --
============== ==============
(1) These are guarantees that relate to a program we initiated and have since
discontinued. We believe the risk of any cost associated with these
agreements is minimal.
The maximum exposure amount is not indicative of any expected losses under the
guarantees. For a full description of these guarantees, see Note 22 to the
consolidated financial statements.
28
CONTRACTUAL OBLIGATIONS
- -----------------------
In conducting business, we enter into various contractual obligations. Details
of these obligations, including expected settlement periods, are contained
below.
Payments Due by Period
(In thousands)
-------------------------------------------------------------------
Less than 3 - 5 More than
Total 1 Year 1 - 3 Years Years 5 Years
----------- ----------- ----------- ----------- -----------
Debt:
CDO notes payable (1)(2) $ 362,000 $ -- $ -- $ -- $ 362,000
Repurchase facilities (1)(2)(3) 136,385 136,385 -- -- --
Line of credit-related party (1)(2) 77,685 77,685
Preferred shares of subsidiary (subject
to mandatory repurchase) (1)(2) 25,000 -- -- -- 25,000
Funding commitments:
Future funding loan commitments 5,027 5,027 -- -- --
----------- ----------- ----------- ----------- -----------
Total $ 606,097 $ 219,097 $ -- $ -- $ 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. See also SOURCES OF
FUNDS - REPURCHASE FACILITIES above.
(2) Includes principal amounts only. At December 31, 2007, the weighted average
interest rate on our debt was 6.01%.
(3) $81.3 million of this debt is related to a repurchase facility that will be
terminated during 2008. See discussion in SOURCES OF FUNDS - REPURCHASE
FACILITIES above.
RECENTLY ISSUED ACCOUNTING STANDARDS
- ------------------------------------
2007 ADOPTIONS
On January 1, 2007, we adopted Financial Accounting Standards Board ("FASB")
FASB Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES, AN
INTERPRETATION OF FASB STATEMENT NO. 109 ("FIN 48"). FIN 48 established new
evaluation and measurement processes for all income tax positions taken and
requires expanded disclosures of income tax matters. The adoption of this
interpretation had no impact on our consolidated financial statements.
PENDING ADOPTION
In September 2006, the FASB issued SFAS No. 157, FAIR VALUE MEASUREMENTS ("SFAS
157"). SFAS 157 define fair value, establishes a framework for measuring fair
value with respect to GAAP and expands disclosures about fair value
measurements. SFAS 157 is effective for our financial assets and liabilities on
January 1, 2008. The FASB has deferred the provisions of SFAS 157 relating to
nonfinancial assets and liabilities to January 1, 2009. Due to the requirement
to consider nonperformance factors with respect to the determination of fair
value for liabilities and based on our evaluation to date, we expect the
adoption of SFAS 157 to result in a reduction in our swap liability in the
amount of $1.4 million.
In February 2007, the FASB issued SFAS 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. We did not elect the fair value
option for any of our existing financial statements on the effective date and
have not determined whether or not we will elect this option for any eligible
financial instruments we acquire in the future.
In December 2007, FASB issued SFAS No. 160, NONCONTROLLING INTERESTS IN
CONSOLIDATED FINANCIAL STATEMENTS - AN AMENDMENT OF ARB NO. 51 ("SFAS 160").
SFAS 160 requires that a noncontrolling interest in a subsidiary be reported as
equity and the amount of consolidated net income specifically attributable to
the noncontrolling interest be identified in the consolidated financial
statements. It also calls for consistency in the manner of reporting changes in
the parent's ownership interest and requires fair value measurement of any
noncontrolling equity investment retained in a deconsolidation. SFAS 160 is
effective for us on January 1, 2009. We are currently evaluating the impact of
adopting SFAS 160 on our consolidated financial condition, results of operations
and cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), BUSINESS
COMBINATIONS ("SFAS 141(R)"). SFAS 141(R) broadens the guidance of SFAS 141,
extending its applicability to all transactions and other events in which one
entity obtains control over one or more other businesses. It broadens the fair
value measurement and recognition of assets acquired, liabilities assumed and
29
interests transferred as a result of business combinations. SFAS 141(R) expands
on required disclosures to improve the statement users' abilities to evaluate
the nature and financial effects of business combinations. SFAS 141(R) is
effective for us on January 1, 2009. We do not expect the adoption of SFAS
141(R) to have a material effect on our financial condition, results of
operations or cash flows.
There are no other new pending accounting pronouncements which we are required
to adopt that would have a significant impact on our consolidated financial
statements.
INFLATION
- ---------
Inflation did not have a material effect on our results for the periods
presented.
ITEM 7A. 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 risks to which we are exposed are interest
rate risk and credit spreads, which are highly sensitive to many factors,
including governmental monetary and tax policies, domestic and international
economic and political considerations and fluctuations in indices 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 $601.1 million of borrowings outstanding at December 31, 2007, of
which $131.4 million remains unhedged, a 1% change in LIBOR would impact our
annual net income and cash flows by $0.4 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.
CREDIT SPREAD AND MARGIN RISK
Credit spreads measure the yield demanded on loans and securities by the market
based on their credit relative to U.S. Treasuries, for fixed rate credit, or
LIBOR, for floating rate credit. Our fixed rate loans and securities are valued
based on a market credit spread over the rate payable on fixed rate U.S.
Treasuries of like maturity. Our variable rate investments are valued based on a
market credit spread over LIBOR. Excessive supply of such loans and securities
combined with reduced demand will generally cause the market to require a higher
yield on such loans and securities, resulting in the use of higher (or "wider")
spread over the benchmark rate to value them.
Widening credit spreads would result in higher yields being required by the
marketplace on loans and securities. This widening would reduce the value of the
loans and securities we hold at the time because higher required yields result
in lower prices on existing securities in order to adjust their yields upward to
meet the market.
As of December 31, 2007, a 100 basis point movement in credit spreads would
decrease the book value of the applicable assets by approximately 5.8%. Under
the terms of our repurchase agreements, when the estimated fair value of the
existing collateral declines, the lenders may demand additional collateral or
repayment of debt (i.e., a margin call). This could result from principal
reductions due to scheduled amortization payments, unscheduled principal
prepayments on the mortgages underlying our investments, changes in market
interest rates and other market factors.
30
Should market interest rates and/or credit spreads on our investments continue
to increase, margin calls on our repurchase agreements could substantially
increase, causing an adverse change in our liquidity position and strategy. The
sources mentioned above may not be sufficient to meet our obligations, including
margin calls, as they come due; as a result, further margin calls may result in
additional asset sales.
We expect that cash generated from normal operations, principally interest from
our investments, will meet our short-term operating needs; however, if market
conditions remain the same or become worse, we may be called upon to fund
additional requirements with our repurchase facility lenders. While these margin
requirements cannot be quantified at this time, as advance rates and spreads may
vary, we may not generate enough cash from operations or have adequate
availability under our existing debt facilities to cover these requirements, and
may need to sell additional assets to satisfy these cash needs.
31
MANAGEMENT'S REPORT ON THE EFFECTIVENESS OF
INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of American Mortgage Acceptance Company and its subsidiaries (the
"Company") is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control system was designed to
provide reasonable assurance to our management and Board of Trustees regarding
the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
American Mortgage Acceptance Company management assessed the effectiveness of
the Company's internal control over financial reporting as of December 31, 2007.
In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in
INTERNAL CONTROL - INTEGRATED FRAMEWORK. Based upon our assessment we believe
that, as of December 31, 2007, our internal control over financial reporting is
effective in accordance with those criteria.
Deloitte & Touche LLP, our independent auditors, have issued an audit report on
our effectiveness of the Company's internal control over financial reporting,
which appears on page 33
/s/ James L. Duggins /s/ Robert L. Levy
- -------------------- ------------------
James L. Duggins Robert L. Levy
Chief Executive Officer Chief Financial Officer
March 28, 2008 March 28, 2008
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of
American Mortgage Acceptance Company
New York, New York
We have audited the internal control over financial reporting of American
Mortgage Acceptance Company and subsidiaries (the "Company") as of December 31,
2007, based on criteria established in INTERNAL CONTROL -- INTEGRATED FRAMEWORK
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
"Management's Report on the Effectiveness of Internal Control Over Financial
Reporting". Our responsibility is to express an opinion on the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on the
criteria established in INTERNAL CONTROL -- INTEGRATED FRAMEWORK issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2007, of the Company and
our report dated March 28, 2008 expressed an unqualified opinion on those
consolidated financial statements, and includes an explanatory paragraph
regarding developments in the credit markets impacting the Company's liquidity
and the Company's suspension of investment activity in order to manage liquidity
until market conditions improve.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 28, 2008
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE
(a) 1. Financial Statements
--------------------
Report of Independent Registered Public Accounting Firm 35
Consolidated Balance Sheets as of December 31, 2007 and 2006 36
Consolidated Statements of Operations for the years ended
December 31, 2007, 2006 and 2005 37
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2007, 2006 and 2005 38
Consolidated Statements of Cash Flows for the years ended
December 31, 2007, 2006 and 2005 39
Notes to Consolidated Financial Statements 41
(a) 2. Financial Statement Schedules
-----------------------------
All schedules have been omitted because they are not
required or because the required information is contained
in the consolidated financial statements or notes thereto.
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of
American Mortgage Acceptance Company
New York, New York
We have audited the accompanying consolidated balance sheets of American
Mortgage Acceptance Company and subsidiaries (the "Company") as of December 31,
2007 and 2006, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2007. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of American Mortgage Acceptance
Company and subsidiaries as of December 31, 2007 and 2006, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, developments in
the credit markets have reduced the Company's liquidity. Declining interest
rates coupled with widening credit spreads have led to reduced asset values. In
order to meet margin calls on the Company's leveraged assets, the Company has
been required to sell assets and record losses. Further reductions in asset
values or further margin calls may require the Company to continue to sell
assets and realize further losses. As a result, the Company has suspended
investment activity in order to manage liquidity until market conditions
improve.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company's internal control over
financial reporting as of December 31, 2007, based on the criteria established
in INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 28, 2008
expressed an unqualified opinion on the Company's internal control over
financial reporting.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 28, 2008
35
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
ASSETS
December 31,
----------------------
2007 2006
--------- ---------
Cash and cash equivalents $ 15,844 $ 7,553
Restricted cash 9,783 14,951
Investments
Mortgage loans receivable, net (Note 3) 529,644 545,898
Available-for-sale investments, at fair value (Note 4):
CMBS 69,269 --
Mortgage revenue bonds 4,879 4,967
Debt securities -- 82,582
Real estate owned - discontinued operations (Note 6) -- 48,692
Accounts receivable (Note 7) 30,066 7,670
Deferred charges and other assets, net (Note 8) 6,914 8,671
--------- ---------
Total assets $ 666,399 $ 720,984
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
CDO notes payable (Note 10) $ 362,000 $ 362,000
Repurchase facilities (Note 11) 136,385 163,576
Line of credit - related party (Note 12) 77,685 15,000
Preferred shares of subsidiary (subject to mandatory
repurchase) (Note 14) 25,000 25,000
Accounts payable and accrued expenses (Note 15) 42,924 13,666
Due to Advisor and affiliates (Note 20) 1,471 1,670
Dividends payable 308 15,120
Mortgages payable on real estate owned - discontinued
operations (Note 6) -- 39,944
--------- ---------
Total liabilities 645,773 635,976
--------- ---------
Commitments and contingencies
Shareholders' equity (Note 17):
7.25% Series A Cumulative Convertible Preferred Shares,
no par value; 680 shares issued and outstanding in 2007 15,905 --
Shares of beneficial interest; $0.10 par value; 25,000
shares authorized; 8,848 issued and 8,433 outstanding
in 2007 and 8,815 issued and 8,400 outstanding in 2006 885 881
Treasury shares of beneficial interest at par; 415 shares
in 2007 and 2006 (42) (42)
Additional paid-in capital 128,087 127,971
Accumulated deficit (104,956) (40,174)
Accumulated other comprehensive loss (19,253) (3,628)
--------- ---------
Total shareholders' equity 20,626 85,008
--------- ---------
Total liabilities and shareholders' equity $ 666,399 $ 720,984
========= =========
See accompanying notes to consolidated financial statements.
36
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
Years Ended December 31,
--------------------------------------
2007 2006 2005
---------- ---------- ----------
Revenues:
Interest income $ 58,965 $ 31,408 $ 20,625
Other revenues 1,144 286 6,535
---------- ---------- ----------
Total revenues 60,109 31,694 27,160
---------- ---------- ----------
Expenses:
Interest 42,302 19,372 7,057
Interest - distributions to preferred shareholders of subsidiary
(subject to mandatory repurchase) 2,216 2,241 1,452
General and administrative 4,232 3,490 1,956
Fees to Advisor (Note 20) 3,796 3,546 4,347
Impairment of investments 38,295 16,443 --
Amortization and other 981 160 294
---------- ---------- ----------
Total expenses 91,822 45,252 15,106
---------- ---------- ----------
Other income (loss):
Change in fair value and loss on termination of derivative instruments
(Note 16) (11,581) (5,299) --
Equity in earnings of ARCap (Note 5) -- 3,000 2,837
Gain on sale of ARCap (Note 5) 337 19,223 --
(Loss) gain on sale or repayment of investments (19,156) (934) 183
Other non-operating expense -- -- (39)
---------- ---------- ----------
Total other (loss) income (30,400) 15,990 2,981
---------- ---------- ----------
(62,113) 2,432 15,035
(Loss) income from continuing operations
Income from discontinued operations, including gain on sale of
real estate owned (Note 6) 3,531 255 200
---------- ---------- ----------
Net (loss) income (58,582) 2,687 15,235
7.25% Convertible Preferred dividend requirements (527) -- --
---------- ---------- ----------
Net (loss) income available to common shareholders $ (59,109) $ 2,687 $ 15,235
========== ========== ==========
Earnings per share (basic and diluted) (Note 19):
(Loss) income from continuing operations $ (7.45) $ 0.29 $ 1.81
Income from discontinued operations $ 0.42 $ 0.03 $ 0.02
---------- ---------- ----------
Net (loss) income $ (7.03) $ 0.32 $ 1.83
========== ========== ==========
Dividends per share $ 0.675 $ 3.00 $ 1.90
========== ========== ==========
Weighted average shares outstanding:
Basic 8,404 8,323 8,316
========== ========== ==========
Diluted 8,404 8,330 8,317
========== ========== ==========
See accompanying notes to consolidated financial statements.
37
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except per share amounts)
7.25% Series A Cumulative
Convertible Preferred Shares Shares of Beneficial Interest
---------------------------- -----------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Balance at January 1, 2005 -- $ -- 8,716 $ 871
Net income
Other comprehensive income (loss):
Net unrealized gain on derivative instruments
Unrealized holding loss on investments
Less: reclassification adjustment
Total other comprehensive loss
Comprehensive income
Issuance of share based compensation 3
Amortization of share option costs
Purchase of treasury shares
Dividends
----------- ----------- ----------- -----------
Balance at December 31, 2005 -- -- 8,719 871
Net income
Other comprehensive income (loss):
Net unrealized loss on derivative instruments
Unrealized holding loss on investments
Plus: reclassification adjustment
Total other comprehensive loss
Comprehensive loss
Reclassification of unamortized share based
compensation upon adoption of SFAS No. 123(R)
Options exercised and other share based
compensation 96 10
Amortization of share option costs
Dividends
----------- ----------- ----------- -----------
Balance at December 31, 2006 -- -- 8,815 881
Net loss
Other comprehensive income (loss):
Net unrealized loss on derivative instruments
Unrealized holding loss on investments
Plus: reclassification adjustments
Total other comprehensive loss
Comprehensive loss
Options exercised and other share based
compensation 33 4
Issuance of preferred shares 680 15,905
Dividends
----------- ----------- ----------- -----------
Balance at December 31, 2007 680 $ 15,905 8,848 $ 885
=========== =========== =========== ===========
Treasury Shares of
Beneficial Interest
------------------------- Additional
Paid-in Share-Based
Shares Amount Capital Compensation
----------- ----------- ---------- ------------
Balance at January 1, 2005 (379) $ (38) $ 126,800 $ (16)
Net income
Other comprehensive income (loss):
Net unrealized gain on derivative instruments
Unrealized holding loss on investments
Less: reclassification adjustment
Total other comprehensive loss
Comprehensive income
Issuance of share based compensation 47 (2)
Amortization of share option costs (2)
Purchase of treasury shares (36) (4) (490)
Dividends
----------- ----------- ---------- ------------
Balance at December 31, 2005 (415) (42) 126,357 (20)
Net income
Other comprehensive income (loss):
Net unrealized loss on derivative instruments
Unrealized holding loss on investments
Plus: reclassification adjustment
Total other comprehensive loss
Comprehensive loss
Reclassification of unamortized share based
compensation upon adoption of SFAS No. 123(R) (20) 20
Options exercised and other share based
compensation 1,614
Amortization of share option costs 20
Dividends
----------- ----------- ---------- ------------
Balance at December 31, 2006 (415) (42) 127,971 --
Net loss
Other comprehensive income (loss):
Net unrealized loss on derivative instruments
Unrealized holding loss on investments
Plus: reclassification adjustments
Total other comprehensive loss
Comprehensive loss
Options exercised and other share based
compensation 116
Issuance of preferred shares
Dividends
----------- ----------- ---------- ------------
Balance at December 31, 2007 (415) $ (42) $ 128,087 $
=========== =========== =========== ============
Accumulated
Other
Accumulated Comprehensive Comprehensive
Deficit Income (Loss) (Loss) Income Total
----------- ------------- ------------- -----------
Balance at January 1, 2005 $ (17,202) $ 10,117 $ 120,532
Net income 15,235 $ 15,235 15,235
Other comprehensive income (loss):
Net unrealized gain on derivative instruments 679
Unrealized holding loss on investments (2,916)
Less: reclassification adjustment (3,097)
Total other comprehensive loss (5,334) (5,334) (5,334)
-------------
Comprehensive income $ 9,901
=============
Issuance of share based compensation 45
Amortization of share option costs (2)
Purchase of treasury shares (494)
Dividends (15,799) (15,799)
----------- ------------- ------------- -----------
Balance at December 31, 2005 (17,766) 4,783 114,183
Net income 2,687 $ 2,687 2,687
Other comprehensive income (loss):
Net unrealized loss on derivative instruments (3,642)
Unrealized holding loss on investments (6,993)
Plus: reclassification adjustment 2,224
-------------
Total other comprehensive loss (8,411) (8,411) (8,411)
-------------
Comprehensive loss $ (5,724)
=============
Reclassification of unamortized share based
compensation upon adoption of SFAS No. 123(R)
Options exercised and other share based
compensation 1,624
Amortization of share option costs 20
Dividends (25,095) (25,095)
----------- ------------- -----------
Balance at December 31, 2006 (40,174) (3,628) 85,008
Net loss (58,582) $ (58,582) (58,582)
Other comprehensive income (loss):
Net unrealized loss on derivative instruments (26,070)
Unrealized holding loss on investments (41,746)
Plus: reclassification adjustments 52,191
-------------
Total other comprehensive loss (15,625) (15,625) (15,625)
------------- ------------- -----------
Comprehensive loss $ (74,207)
=============
Options exercised and other share based
compensation 120
Issuance of preferred shares 15,905
Dividends (6,200) (6,200)
----------- ------------- -----------
Balance at December 31, 2007 $ (104,956) $ (19,253) $ 20,626
=========== ============= ===========
See accompanying notes to consolidated financial statements.
38
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-----------------------------------------
2007 2006 2005
----------- ----------- -----------
Cash flows from operating activities:
Net (loss) income $ (58,582) $ 2,687 $ 15,235
Adjustments to reconcile net (loss) income to net cash
provided by operating
activities:
Depreciation expense 336 1,671 2,389
Gain on sale of ARCap (337) (19,223) --
Equity in earnings of ARCap -- (3,000) (2,837)
Loss on impairment or disposal of investments 56,122 17,147 (183)
(Gain) loss on sale of real estate owned (3,611) -- --
Change in fair value or termination of derivative instruments 11,581 5,299 39
Amortization and accretion (58) (207) 135
Other non-cash (income) expense, net 930 1,142 45
Distributions received from ARCap -- 4,037 2,400
Changes in operating assets and liabilities:
Accounts receivable 1,891 (3,961) (1,154)
Other assets 13 405 (705)
Due to Advisor and affiliates (198) (1,291) 2,191
Accounts payable and accrued expenses 2,287 3,584 494
----------- ----------- -----------
Net cash provided by operating activities 10,374 8,290 18,049
----------- ----------- -----------
Cash flows from investing activities:
Funding and purchase of mortgage loans (253,266) (509,191) (42,718)
Principal repayments or sale of mortgage loans 256,083 11,490 21,736
Investment in CMBS (123,052) -- --
Principal repayments or sale of CMBS 15,562 -- --
Investment in CDO securities (10,061) -- --
Principal repayments or sale of CDO securities 7,940 -- --
Investment in debt securities -- -- (64,173)
Principal repayments or sale of debt securities 81,182 131,813 29,627
Prepayment penalty from debt security refinancing -- 3,200 --
Purchase of mortgage loans on real estate owned -- -- (17,150)
Return of capital and proceeds from the sale of ARCap 337 37,181 --
Decrease (increase) in restricted cash 5,168 (14,951) --
Increase in escrow receivables (24,287) -- --
Proceeds from sale of real estate owned 11,987 17,951 7,474
Principal repayment on real estate owned 36 -- 480
Principal repayment of revenue bonds 181 1,651 212
----------- ----------- -----------
Net cash used in investing activities (32,190) (320,856) (64,512)
----------- ----------- -----------
(CONTINUED)
See accompanying notes to consolidated financial statements.
39
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-----------------------------------------
2007 2006 2005
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from CDO notes payable -- 362,000 --
Proceeds from repurchase facilities 1,044,314 432,881 104,418
Repayments of repurchase facilities (1,071,505) (478,406) (52,707)
Proceeds from line of credit - related party 260,850 206,242 32,561
Repayments of line of credit - related party (198,165) (191,242) (37,161)
Repayments of warehouse facility -- (4,070) --
Deferred financing costs (280) (6,760) (802)
Dividends paid to shareholders (21,012) (13,297) (15,812)
Treasury stock purchases -- -- (494)
Stock options exercised -- 1,557 --
Issuance of preferred shares 17,000 -- 25,000
Equity offering costs (1,095) -- --
----------- ----------- -----------
Net cash provided by financing activities 30,107 308,905 55,003
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 8,291 (3,661) 8,540
Cash and cash equivalents at the beginning of the year 7,553 11,214 2,674
----------- ----------- -----------
Cash and cash equivalents at the end of the year $ 15,844 $ 7,553 $ 11,214
=========== =========== ===========
Supplemental information:
Interest paid (including distributions to preferred shareholders
of subsidiary (subject to mandatory repurchase)) $ 34,441 $ 19,399 $ 8,383
=========== =========== ===========
Non-cash investing and financing activities:
Capitalized interest income $ 520 $ 169 $ --
=========== =========== ===========
See accompanying notes to consolidated financial statements.
40
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of American Mortgage
Acceptance Company and its wholly owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation. Unless otherwise
indicated, we herein refer to American Mortgage Acceptance Company and its
subsidiaries as "AMAC," "we", "us", "our", and "our Company". We are externally
managed by Centerline AMAC Manager, Inc., which acts as our Advisor and is a
subsidiary of Centerline. We operate in one business segment.
Our consolidated financial statements are prepared on the accrual basis of
accounting in accordance with United States generally accepted accounting
principles ("GAAP"). The preparation of financial statements in conformity with
GAAP requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Certain amounts from prior years have been reclassified to conform to the 2007
presentation, in particular, the results of operations of real estate owned
properties sold now recorded as discontinued operations.
b) Revenue Recognition
We derive our revenues from a variety of sources as follows:
o INTEREST INCOME FROM MORTGAGE LOANS - We recognize interest on
mortgage loans on the accrual basis as it becomes due. We amortize
deferred loan origination costs and fees on the interest method over
the life of the applicable loan as an adjustment to interest income.
Certain mortgage loans contain provisions that allow us to participate
in a percentage of the underlying property's excess cash flows from
operations and excess proceeds from a sale or refinancing. We evaluate
these loans in accordance with EITF 86-21, APPLICATION OF THE AICPA
NOTICE TO PRACTITIONERS REGARDING ACQUISITION, DEVELOPMENT, AND
CONSTRUCTION ARRANGEMENTS TO ACQUISITION OF AN OPERATING PROPERTY to
determine the classification of the investment as a loan. This income
is recognized on the accrual basis as it becomes due. We place these
assets on non-accrual status when collectability is not assured.
o INTEREST INCOME ON AVAILABLE-FOR-SALE SECURITIES - We recognize
interest on available-for-sale securities on the accrual basis as it
becomes due. Interest income also includes the amortization or
accretion of premiums and discounts arising at the purchase date,
using the effective yield method. We place these assets on non-accrual
status when collectability is not assured.
o INTEREST INCOME ON TEMPORARY INVESTMENTS - Interest income from
temporary investments, such as cash in banks and short-term
instruments, is recognized on the accrual basis as it becomes due.
o OTHER REVENUES
o STANDBY LOAN COMMITMENT FEES - We receive fees for issuing
standby loan commitments. If we do not expect to fund the
commitment, we recognize the fee ratably over the commitment
period. If we determine that it is probable that a commitment
will be exercised, we defer the fee and, if the commitment is
exercised, amortize it over the life of the loan as an adjustment
to interest income; if the commitment expires unexercised, we
recognize it upon expiration.
o STABILIZATION GUARANTEE AND LOAN ADMINISTRATION FEES - We receive
fees from borrowers for guaranteeing construction loans made by
third-party lenders for the period between construction
completion and funding of the permanent loan. We receive these
fees in advance and amortize them over the guarantee periods. We
also receive loan administration fees on these guaranteed loans,
on a monthly basis during the guarantee period. We recognize
these fees when due.
o FNMA LOAN GUARANTEE FEES - We receive monthly loss
sharing/guarantee fees related to the FNMA loan program (see Note
22) and recognize them when due.
o PREPAYMENT FEES - We may receive fees from borrowers that repay
loans earlier than their maturity dates. We recognize these fees
as earned, unless a loan is refinanced, in which case the
prepayment fees may be deferred and amortized over the life of
the refinanced loan.
41
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
c) Available-for-Sale Investments
We account for our available-for-sale investments pursuant to SFAS No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES ("SFAS No.
115"). For these investments, we record changes in fair value in other
comprehensive income unless we consider an investment impaired, or a decline in
fair value to be other than temporary (see IMPAIRMENT below).
1. CMBS
We classify our investments in CMBS as available-for-sale debt
securities and use third-party quoted market prices as our primary
source of valuation.
2. Revenue Bonds
We classify our investments in revenue bonds as available-for-sale debt
securities. Because revenue bonds have a limited market, we estimate
fair value for each bond as the present value of its expected cash
flows using a discount rate for comparable investments.
3 Debt Securities
Prior to the 2007 sale of our debt security portfolio, we accounted for
our investments in GNMA and FNMA certificates as available-for-sale
debt securities and obtained third-party quoted market prices as our
primary source of valuation.
4. Impairment
For any investments classified as available-for-sale, a decline in
market value below cost that we deem other than temporary is charged to
earnings. If, in the judgment of our Advisor, it is determined probable
that we will not receive all contractual payments required when due,
the asset is deemed impaired and is written down to its then estimated
fair value, with the amount of the write-down accounted for as a
realized loss. The fair value at that time is then considered the cost
basis of the investment, and subsequent increases in the fair value
over this new cost basis are included in other comprehensive income;
subsequent decreases in fair value, if not an other-than-temporary
impairment, are also included in other comprehensive income.
5. Gain or Loss on Sale
Realized gains and losses on securities are included in earnings and
are recorded on the trade date and calculated as the difference between
the amount of cash received and the carrying cost of the specific
investment, including any unamortized discounts, premiums, origination
costs and fees.
d) Mortgage Loans Receivable
Pursuant to SFAS 65, ACCOUNTING FOR CERTAIN MORTGAGE BANKING EVENTS, we carry
mortgage loans at the lower of cost or at fair market value, including
unamortized loan origination costs and fees.
For investments in mortgage loans, we follow the provisions of SFAS No. 114,
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN ("SFAS No. 114"). Under SFAS
No. 114, a loan is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. SFAS No. 114 requires lenders to
measure impaired loans based on:
(i) the present value of expected future cash flows discounted at the
loans' effective interest rate;
(ii) the loan's observable market price; or
(iii) the fair value of the collateral if the loan is collateral-dependent.
We periodically evaluate our portfolio of mortgage loans for possible impairment
to establish appropriate loan loss reserves, if necessary. If, in the judgment
of our Advisor, we determine that it is probable that we will not receive all
contractually required payments when they are due, we deem the loan impaired and
establish a loan loss reserve.
42
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
e) Investment in ARCap
Our investment in ARCap Investors, L.L.C. ("ARCap") consisted of preferred and
common membership interests. We accounted for this investment under the equity
method until we sold it in August 2006. A portion of the equity income recorded
was based on the preferred dividend, while the balance was based on our
proportionate share of common interests outstanding.
f) Real Estate Owned
Prior to 2007 and 2006 sales, real estate owned consisted of properties of which
we took possession by exercising our rights under subordinated promissory notes
and other documents. In some cases, we also purchased the first mortgage loans
on the properties. We recorded these properties at the lower of fair value of
the real estate, less estimated disposal costs, or the carrying amount of the
foreclosed loan. The determination of fair value of the real estate was based on
independent appraisals.
When the properties were sold, the results of operations of the property were
reclassified into income from discontinued operations for all periods presented.
When we own a portfolio of real estate, it is periodically evaluated for
possible impairment. If, in the judgment of our Advisor, we determine that the
property's fair value is below its carrying value, we will deem the property
impaired and it will be written down to its then estimated fair value, with the
amount of the write-down accounted for as a realized loss.
g) Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash in banks and temporary investments in
short-term instruments with original maturity dates equal to or less than three
months. Restricted cash includes escrow deposits set aside for future funding
obligations or required collateral deposits made by us due to the decline in the
fair value of our cash flow hedges.
h) Loan Origination Costs and Fees
In accordance with SFAS No. 91, ACCOUNTING FOR NONREFUNDABLE FEES AND COSTS
ASSOCIATED WITH ORIGINATING OR ACQUIRING LOANS AND INITIAL DIRECT COSTS OF
LEASES, we capitalize acquisition fees and other direct expenses incurred for
activities performed to originate mortgage loans and include them in Investment
in Mortgage Loans, net of any fees received from borrowers for loan
originations. We amortize these costs on a straight-line basis, which
approximates effective yield, over the lives of the loans.
i) Repurchase Facilities
We finance a portion of our investments using repurchase facilities pursuant to
repurchase agreements. We sell our mortgage loans or investment securities to a
counterparty for a price set upon the value of the collateral, as determined on
a loan-by-loan basis. We account for these transactions as collateralized
borrowings; accordingly, the loans and securities remain on our consolidated
balance sheets with the proceeds from the sales recorded as debt. We defer the
fees relating to the facilities and amortize them over the life of the
facilities. If it is determined that a facility will be terminated, any fees
relating to the facility will be expensed upon termination. In some instances,
the repurchase agreements settle every 30 days from the sale date. In these
cases, the difference between the sale proceeds and the fixed repurchase price
is recorded as interest expense ratably over the period between the sale and
repurchase dates.
j) Subsidiary Equity
We account for our preferred securities of our subsidiary under SFAS No. 150,
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY, which requires that mandatorily redeemable financial
instruments be classified as liabilities in the consolidated financial
statements and the payments or accruals of dividends and other amounts to be
paid to the holders of these securities be reported as interest costs. The fair
value of the securities approximates the liquidation amount due to the variable
rate nature of their dividends.
k) Stock Options
We account for stock options we issue under the fair value based method pursuant
to SFAS No. 123(R), SHARE-BASED PAYMENT ("SFAS No. 123(R)"). Under SFAS No.
123(R), we are required to select a valuation technique or option pricing model
that meets the criteria as stated in the standard and we use the Black-Scholes
model, which requires the input of subjective assumptions. These assumptions
include estimating the length of time optionees will retain their vested stock
options before exercising them ("expected term"), the estimated volatility of
the Company's common stock price over the expected term ("volatility"), the risk
free interest rate and the dividend yield.
43
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with SFAS No. 123(R), we accrue compensation cost based on the
estimated fair value of the options issued and amortize those costs over the
vesting period. Because the grant recipients are not our employees and vesting
of the options is contingent upon the recipient continuing to provide services
to us, we estimate the fair value of the options at each period-end up to the
vesting date and adjust recorded amounts accordingly.
l) Financial Risk Management and Interest Rate Derivatives
Our primary objective for holding interest rate swaps is to manage interest rate
and certain equity market risks. We account for our interest rate swap
agreements under SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES ("SFAS No. 133"), as amended and interpreted. We enter into interest
rate swaps, which are designated, at inception, as cash flow hedges with the
hedged item being the interest payments on our variable-rate repurchase
facilities. We record these swaps at fair value, and record changes in fair
value in other comprehensive income to the extent they are effective. If deemed
ineffective, we record the amount considered ineffective in the consolidated
statement of operations if the ineffectiveness is within the limits allowable by
SFAS 133. If the ineffectiveness exceeds the allowable limit, we would record
the entire fair value (and subsequent changes) in our consolidated statements of
operations. When we terminate a derivative that we have accounted for as a hedge
(or determine that the hedged transaction is no longer likely to occur), we
reclassify any unrealized gain or loss in accumulated other comprehensive income
and recognize it in our consolidated statements of operations.
We have determined that we will not apply hedge accounting to free-standing
derivatives and we also may write fair value derivatives. Any change in the fair
value of these derivatives is included in current period net income.
m) Fair Value of Financial Instruments
As described above, our available-for-sale securities, interest rate derivatives
and certain of our mortgage loans are carried at estimated fair values. We have
determined that the fair value of our remaining financial instruments, including
our remaining mortgage loans, cash and cash equivalents, and secured borrowings
approximate their carrying values at December 31, 2007 and 2006. The fair value
of investments in mortgage loans and available-for-sale securities are based on
actual market price quotes, broker quotes or by determining the present value of
the projected future cash flows using appropriate discount rates, credit losses
and prepayment assumptions. Other financial instruments carry interest rates
which are deemed to approximate market rates.
n) Income Taxes
We have qualified as a REIT under the Internal Revenue Code (the "Code"). A REIT
is generally not subject to federal income tax on that portion of its REIT
taxable income ("Taxable Income") which is distributed to its shareholders
provided that at least 90% of Taxable Income is distributed and provided that
such income meets certain other conditions. Accordingly, no provision for
federal income taxes is required. We may be subject to state taxes in certain
jurisdictions.
o) New Accounting Pronouncements
2007 ADOPTIONS
- --------------
On January 1, 2007, we adopted FASB Interpretation No. 48, ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES, AN INTERPRETATION OF FASB STATEMENT NO. 109 ("FIN
48"). FIN 48 established new evaluation and measurement processes for all income
tax positions taken and requires expanded disclosures of income tax matters. The
adoption of this interpretation had no impact on our consolidated financial
statements.
PENDING ADOPTION
- ----------------
In September 2006, the FASB issued SFAS No. 157, FAIR VALUE MEASUREMENTS ("SFAS
157"). SFAS 157 define fair value, establishes a framework for measuring fair
value with respect to GAAP and expands disclosures about fair value
measurements. SFAS 157 is effective for our financial assets and liabilities on
January 1, 2008. The FASB has deferred the provisions of SFAS 157 relating to
nonfinancial assets and liabilities to January 1, 2009. Due to the requirement
to consider nonperformance factors with respect to the determination of fair
value for liabilities and based on our evaluation to date, we expect the
adoption of SFAS 157 to result in a reduction in our swap liability in the
amount of $1.4 million.
In February 2007, the FASB issued SFAS 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
44
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recognized in earnings as those changes occur. We did not elect the fair value
option for any of our existing financial statements on the effective date and
have not determined whether or not we will elect this option for any eligible
financial instruments we acquire in the future.
In December 2007, FASB issued SFAS No. 160, NON-CONTROLLING INTERESTS IN
CONSOLIDATED FINANCIAL STATEMENTS - AN AMENDMENT OF ARB NO. 51 ("SFAS 160").
SFAS 160 requires that a noncontrolling interest in a subsidiary be reported as
equity and the amount of consolidated net income specifically attributable to
the noncontrolling interest be identified in the consolidated financial
statements. It also calls for consistency in the manner of reporting changes in
the parent's ownership interest and requires fair value measurement of any
noncontrolling equity investment retained in a deconsolidation. SFAS 160 is
effective for us on January 1, 2009. We do not expect the adoption of SFAS 160
to have a material effect on our financial condition, results of operations and
cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), BUSINESS
COMBINATIONS ("SFAS 141(R)"). SFAS 141(R) broadens the guidance of SFAS 141,
extending its applicability to all transactions and other events in which one
entity obtains control over one or more other businesses. It broadens the fair
value measurement and recognition of assets acquired, liabilities assumed and
interests transferred as a result of business combinations. SFAS 141(R) expands
on required disclosures to improve the statement users' abilities to evaluate
the nature and financial effects of business combinations. SFAS 141(R) is
effective for us on January 1, 2009. We do not expect the adoption of SFAS
141(R) to have a material effect on our financial condition, results of
operations or cash flows.
NOTE 2 - MARKET CONDITIONS AND LIQUIDITY
During 2007, developments in the market for many types of mortgage products
(including mortgage backed securities) have resulted in reduced liquidity for
these assets. Declining interest rates coupled with widening credit spreads have
led to reduced values and the inability to find adequate financing for these
assets. This has resulted in an overall reduction in liquidity across the credit
spectrum of mortgage products, presenting us with financing challenges. As the
credit markets declined, so did the commercial real estate CDO market and we
decided to temporarily suspend investment activity and not pursue a second CDO
securitization. As a result, we terminated the repurchase facility with
Citigroup that we had used to finance our investment activity and entered into
an agreement to repay the entire amount of the facility by selling or
refinancing the collateral assets by May 31, 2008. We recorded a charge to
general and administrative expense of $0.5 million in 2007 for costs incurred
through December 31, 2007, that we would have paid at the closing of the CDO.
Through December 31, 2007, we have repaid $209.0 million of the Citigroup
facility by transferring assets to a new repurchase facility with Bear Stearns
(see Note 11) and selling other assets. The asset sales resulted in net losses
of $14.8 million. Subsequent to December 31, 2007, we have repaid an additional
$44.3 million of the Citigroup facility from asset sales, resulting in $3.1
million of net losses. It is our intent to sell or refinance the remaining
assets before the expiration date of our agreement with Citigroup. Prior to the
termination of the facility, we paid interest on outstanding borrowings at rates
that ranged from LIBOR plus 0.40% to LIBOR plus 1.25%. As we continue to have
borrowings under the Citigroup facility after January 1, 2008 and to the extent
we have borrowings under the facility through May 31, 2008, interest on the
borrowings will be increased as follows:
Period Interest rate range
- -------------------------- ----------------------------------------
January 1 - January 31 LIBOR plus 0.75% to LIBOR Plus 1.40%
February 1 - February 29 LIBOR plus 0.95% to LIBOR Plus 1.60%
March 1 - April 30 LIBOR plus 2.00%
May 1 - May 31 LIBOR plus 2.50%
In connection with terminating the Citigroup facility, we will also terminate
all associated interest rate swaps derivatives. See Note 16 for a detailed
explanation of termination costs we paid (or expect to pay) to terminate these
derivatives.
As market conditions continue to fluctuate, we are evaluating strategies that
may require us to sell additional assets and extinguish any related debt
obligations that are secured by these assets. By repaying most of our debt
obligations, we believe we will regain adequate financing when market conditions
improve to actively pursue our investment strategy and begin growing our company
for the future. However, aspects outside of our control, such as the continuing
uncertainty of the credit markets could further restrict our liquidity.
45
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2007, as a result of the market conditions and our liquidity issues
referred to above, we reclassified certain unrealized losses resulting from
declines in market values on our CMBS investments previously recorded in
accumulated other comprehensive income to a reduction of earnings on our
statement of operations (see Note 4).
Following is a summary of our investment assets as of December 31, 2007,
illustrating the amount of leverage and the amounts of hedged debt:
Interest
Carrying Amount rate
amount Amount securing Associated hedges on
Carrying pledged as securing repurchase repurchase associated
(IN THOUSANDS) amount collateral CDO debt(1) debt(2) debt(2) debt
- ---------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Mortgage loans receivable:
First mortgages $ 352,524 $ 352,524 $ 352,524 $ -- $ -- $ --
Fixed rate bridge loans 18,381 18,381 -- 18,381 16,545 17,694
Variable rate bridge loans 7,595 -- -- -- -- --
Fixed rate mezzanine loans 22,818 16,945 13,582 3,363 2,843 3,450
Variable rate mezzanine
loans 67,082 52,677 4,746 47,931 38,803 --
Subordinated notes 61,243 60,745 24,457 36,288 30,192 17,314
----------- ----------- ----------- ----------- ----------- -----------
Total mortgage loans
receivable 529,644 501,272 395,309 105,963 88,383 38,458
----------- ----------- ----------- ----------- ----------- -----------
69,269 69,269 -- 69,269 48,002 35,183
CMBS
Mortgage revenue bonds 4,879 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Totals $ 603,792 $ 570,541 $ 395,309 $ 175,232 $ 136,385 $ 73,641
=========== =========== =========== =========== =========== ===========
(1) Of the $362.0 million of CDO notes payable, we have hedged $346.3 million.
(2) Relate to assets pledged as collateral on the Citigroup and Bear Sterns
repurchase facilities.
Subsequent to December 31, 2007, we sold 11 first mortgage loans with an
aggregate carrying amount of $58.1 million, repaid $44.3 million of related
repurchase facility debt and incurred $3.1 million of realized losses relating
to these sales, which are recorded in 2007 as impairment charges on investments.
NOTE 3 - INVESTMENTS IN MORTGAGE LOANS RECEIVABLE, NET
Mortgage loans receivable, net, consisted of two classifications of mortgages as
follows:
2007 2006
----------- -----------
Mortgage loans held for investment $ 467,734 $ 545,898
Mortgage loans held for sale 61,910 --
----------- -----------
Total $ 529,644 $ 545,898
=========== ===========
During 2007, we reclassified 14 of our mortgage loans held for investment to
mortgage loans held for sale due to the modifications made to our business
strategy (see Note 2). We realized impairments of $3.5 million on these assets
to reflect fair value at December 31, 2007.
In January and February 2008, we sold 11 of these mortgage loans to an affiliate
of our Advisor (see Notes 20 and 23).
46
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information relating to our investments in mortgage loans as
December 31, 2007 is as follows:
(DOLLARS IN THOUSANDS)
Final
Maturity
Property Description Date Call Date (A) Interest Rate
- ------------------------------------ ----------- ----------- ------------- -------------
MORTGAGE LOANS RECEIVABLE, NET -
- --------------------------------
HELD FOR INVESTMENT
- -------------------
First Mortgage Loans:
The Victor (D)(E)
Camden, NJ Mixed Use 12/14 12/14 6.17%
Washington Heights (D)(E)
Worcester, MA Multifamily 5/16 12/15 6.85%
Robert Plan (D)
Bethpage, NY Office 4/16 04/16 6.77%
Sage at Cupertino (D)(E)
Cupertino, CA Multifamily 5/16 05/16 5.99%
The Pines (D)
Las Vegas, NV Multifamily 5/16 11/15 5.84%
Forest Pointe (D)
Lake Bluff, IL Multifamily 6/11 12/07 5.92%
Harbour Pointe (D)
Mukilteo, WA Retail 6/11 12/07 5.92%
1800 Walt Whitman (D)
Melville, NY Office 6/16 06/16 6.24%
Ellington Plaza (D)
Washington, DC Multifamily 9/16 09/09 5.82%
Stone Cliff Heights (D)
Aurora, CO Multifamily 8/16 02/16 6.08%
Citrus Grove (D)
Elk Grove, CA Multifamily 9/16 03/16 6.01%
Courtyard Apartments (D)
Albuquerque, NM Multifamily 8/11 08/09 5.93%
The Crossroads at Chapel Hills (D)
Colorado Springs, CO Multifamily 9/16 03/16 6.05%
Arbors Apartments (D)
Albuquerque, NM Multifamily 8/11 10/09 5.93%
Westpointe Apartments (D)
Stockton, CA Multifamily 9/13 02/16 6.28%
Islip Terrace (D)
Islip Terrace, NY Retail 8/11 07/09 6.12%
236 W. 16th Street (D)
New York, NY Multifamily 9/16 09/09 6.13%
253 Elizabeth Street (D)
New York, NY Multifamily 9/16 09/09 6.13%
515 E. 5th Street (D)
New York, NY Multifamily 9/16 09/09 6.13%
Valley Village (D)
Bakersfield, CA Retail 9/16 03/16 5.78%
Rite Aid (D)
Arroyo Grande, CA Retail 10/16 04/16 5.57%
Periodic Outstanding
Payment Face Amount of Impairment
Property Terms Pior Liens Mortgages (B) Charges
- ------------------------------------ ----------- ----------- -------------- -----------
MORTGAGE LOANS RECEIVABLE, NET -
- --------------------------------
HELD FOR INVESTMENT
- -------------------
First Mortgage Loans:
The Victor (D)(E)
Camden, NJ (F) $ -- $ 31,000 $ --
Washington Heights (D)(E)
Worcester, MA (F) -- 27,000 --
Robert Plan (D)
Bethpage, NY (G) -- 20,000 --
Sage at Cupertino (D)(E)
Cupertino, CA (G) -- 22,000 --
The Pines (D)
Las Vegas, NV (F) -- 13,000 --
Forest Pointe (D)
Lake Bluff, IL (F) -- 11,000 --
Harbour Pointe (D)
Mukilteo, WA (F) -- 11,000 --
1800 Walt Whitman (D)
Melville, NY (G) -- 7,000 --
Ellington Plaza (D)
Washington, DC (G) -- 13,500 --
Stone Cliff Heights (D)
Aurora, CO (F) -- 26,500 --
Citrus Grove (D)
Elk Grove, CA (G) -- 21,000 --
Courtyard Apartments (D)
Albuquerque, NM (G) -- 8,500 --
The Crossroads at Chapel Hills (D)
Colorado Springs, CO (F) -- 8,050 --
Arbors Apartments (D)
Albuquerque, NM (G) -- 7,500 --
Westpointe Apartments (D)
Stockton, CA (F) -- 6,500 --
Islip Terrace (D)
Islip Terrace, NY (H) -- 5,910 --
236 W. 16th Street (D)
New York, NY (G) -- 5,348 --
253 Elizabeth Street (D)
New York, NY (G) -- 5,236 --
515 E. 5th Street (D)
New York, NY (G) -- 3,416 --
Valley Village (D)
Bakersfield, CA (H) -- 2,952 --
Rite Aid (D)
Arroyo Grande, CA (H) -- 2,461 --
Carrying Interest
Unamortized Amount of Income in
Property Costs and Fees Mortgages (C) 2007
- ------------------------------------ -------------- ------------- ---------
MORTGAGE LOANS RECEIVABLE, NET -
- --------------------------------
HELD FOR INVESTMENT
- -------------------
First Mortgage Loans:
The Victor (D)(E)
Camden, NJ $ (646) $ 30,354 $ 1,940
Washington Heights (D)(E)
Worcester, MA -- 27,000 1,880
Robert Plan (D)
Bethpage, NY -- 20,000 1,373
Sage at Cupertino (D)(E)
Cupertino, CA -- 22,000 1,337
The Pines (D)
Las Vegas, NV -- 13,000 770
Forest Pointe (D)
Lake Bluff, IL -- 11,000 660
Harbour Pointe (D)
Mukilteo, WA -- 11,000 660
1800 Walt Whitman (D)
Melville, NY -- 7,000 443
Ellington Plaza (D)
Washington, DC (1,172) 12,328 928
Stone Cliff Heights (D)
Aurora, CO -- 26,500 1,610
Citrus Grove (D)
Elk Grove, CA -- 21,000 1,262
Courtyard Apartments (D)
Albuquerque, NM -- 8,500 510
The Crossroads at Chapel Hills (D)
Colorado Springs, CO -- 8,050 493
Arbors Apartments (D)
Albuquerque, NM -- 7,500 450
Westpointe Apartments (D)
Stockton, CA -- 6,500 414
Islip Terrace (D)
Islip Terrace, NY -- 5,910 367
236 W. 16th Street (D)
New York, NY -- 5,348 332
253 Elizabeth Street (D)
New York, NY -- 5,236 325
515 E. 5th Street (D)
New York, NY -- 3,416 212
Valley Village (D)
Bakersfield, CA -- 2,952 172
Rite Aid (D)
Arroyo Grande, CA -- 2,461 138
(CONTINUED)
47
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Final
Maturity
Property Description Date Call Date (A) Interest Rate
- ------------------------------------ ----------- ----------- ------------- -------------
Garden Lakes (D)
Phoenix, AZ Office 10/16 07/16 6.06%
Highland Square II (D)
Greenville, SC Multifamily 10/16 10/09 6.04%
Wasilla Portfolio (D)
Wasilla, AK Multifamily 7/16 12/15 6.05%
Manhattan Beach (D)
Manhattan Beach, CA Other 11/16 05/16 6.22%
Alvin Center (D)
San Jose, CA Office 11/16 05/16 5.79%
Davidson Building (D)
Fife, WA Office 11/16 05/16 6.26%
Equinox (D)(E)
Great Neck, NY Retail 11/16 05/16 5.68%
Tiburon at Buckhead (D)
Atlanta, GA Multifamily 11/16 11/08 5.90%
Camden Village (D)
Fremont, CA Multifamily 11/09 11/08 6.53%
Talega Corporate Center (D)
San Clemente, CA Office 12/11 12/10 5.94%
Tennyson Retail Center (D)
Hayward, CA Retail 1/17 07/16 5.80%
Subtotal First Mortgage Loans
Mezzanine Loans:
Club at Brazos (K)(L)(M)
Rosenberg, TX Multifamily 5/43 06/08 10.00%(R)
Del Mar Villas (O)(P)
Dallas, TX Multifamily 5/06 N/A LIBOR+4.625%
Oaks of Baytown (O)
Baytown, TX Multifamily 7/08 N/A LIBOR + 4.50%
Quay Point (Q)
Houston, TX Multifamily 7/08 N/A LIBOR + 3.60%
Sawmill Plaza (D)(M)
Columbus, OH Retail 10/14 09/14 13.50%
Champaign Offices (D)(M)
Champaign, IL Office 10/11 05/11 10.67%
Atlantic - Hearthstone (M)(O)
Hillsborough, NJ Multifamily 4/07 04/07 20%
South Burnswick (M)
South Brunswick, NJ Retail 6/15 06/15 10.25%
Marbella (M)(P)
Clearwater, FL Multifamily 9/06 N/A 12.50%
Pasadena (M)(O)
Pasadena, FL Multifamily 12/07 N/A LIBOR + 12.75%
Bayfront Villas (M)(O)
Gulfport, FL Multifamily 8/07 N/A LIBOR + 12.75%
Hotel QT (D) (M)
New York, NY Hotel 10/08 10/07 8.03%
Periodic Outstanding
Payment Face Amount of Impairment
Property Terms Pior Liens Mortgages (B) Charges
- ------------------------------------ ----------- ----------- -------------- -----------
Garden Lakes (D)
Phoenix, AZ (F) -- 2,300 --
Highland Square II (D)
Greenville, SC (F) -- 4,700 --
Wasilla Portfolio (D)
Wasilla, AK (H) -- 9,052 --
Manhattan Beach (D)
Manhattan Beach, CA (H) -- 1,551 --
Alvin Center (D)
San Jose, CA (H) -- 2,810 --
Davidson Building (D)
Fife, WA (F) -- 6,500 --
Equinox (D)(E)
Great Neck, NY (F) -- 12,680 --
Tiburon at Buckhead (D)
Atlanta, GA (G) -- 21,500 --
Camden Village (D)
Fremont, CA (F) -- 23,400 --
Talega Corporate Center (D)
San Clemente, CA (F) -- 8,700 --
Tennyson Retail Center (D)
Hayward, CA (H) -- 2,275 --
-------------- -----------
Subtotal First Mortgage Loans 354,341 --
-------------- -----------
Mezzanine Loans:
Club at Brazos (K) (L) (M)
Rosenberg, TX (F) 14,384 1,962 --
Del Mar Villas (O) (P)
Dallas, TX (F) -- 6,319 (3,119)
Oaks of Baytown (O)
Baytown, TX -- -- 3,806 (850)
Quay Point (Q)
Houston, TX -- -- 1,439 --
Sawmill Plaza (D)(M)
Columbus, OH (H) 15,637 1,980 --
Champaign Offices (D)(M)
Champaign, IL (H) 25,633 1,873 --
Atlantic - Hearthstone (M)(O)
Hillsborough, NJ (F) 2,242 4,809 (806)
South Burnswick (M)
South Brunswick, NJ (F) 36,750 3,250 --
Marbella (M)(P)
Clearwater, FL (F) 19,492 5,800 (3,750)
Pasadena (M)(O)
Pasadena, FL (F) 34,559 8,350 (8,350)
Bayfront Villas (M)(O)
Gulfport, FL (F) 15,773 2,800 (2,800)
Hotel QT (D) (M)
New York, NY (F) 27,000 6,500 --
Carrying Interest
Unamortized Amount of Income in
Property Costs and Fees Mortgages (C) 2007
- ------------------------------------ -------------- ------------- ---------
Garden Lakes (D)
Phoenix, AZ -- 2,300 141
Highland Square II (D)
Greenville, SC -- 4,700 287
Wasilla Portfolio (D)
Wasilla, AK -- 9,052 558
Manhattan Beach (D)
Manhattan Beach, CA -- 1,551 98
Alvin Center (D)
San Jose, CA -- 2,810 166
Davidson Building (D)
Fife, WA -- 6,500 412
Equinox (D)(E)
Great Neck, NY -- 12,680 720
Tiburon at Buckhead (D)
Atlanta, GA -- 21,500 1,286
Camden Village (D)
Fremont, CA -- 23,400 1,577
Talega Corporate Center (D)
San Clemente, CA -- 8,700 524
Tennyson Retail Center (D)
Hayward, CA -- 2,275 134
-------------- ------------- ---------
Subtotal First Mortgage Loans (1,818) 352,523 22,179
-------------- ------------- ---------
Mezzanine Loans:
Club at Brazos (K)(L)(M)
Rosenberg, TX (68) 1,894 198
Del Mar Villas (O)(P)
Dallas, TX -- 3,200 --
Oaks of Baytown (O)
Baytown, TX -- 2,956 --
Quay Point (Q)
Houston, TX -- 1,439 --
Sawmill Plaza (D)(M)
Columbus, OH -- 1,980 271
Champaign Offices (D)(M)
Champaign, IL (22) 1,851 210
Atlantic - Hearthstone (M)(O)
Hillsborough, NJ (24) 3,979 --
South Burnswick (M)
South Brunswick, NJ -- 3,250 338
Marbella (M)(P)
Clearwater, FL -- 2,050 874
Pasadena (M)(O)
Pasadena, FL -- -- --
Bayfront Villas (M)(O)
Gulfport, FL -- -- --
Hotel QT (D) (M)
New York, NY -- 6,500 552
(CONTINUED)
48
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Final
Maturity
Property Description Date Call Date (A) Interest Rate
- ------------------------------------ ----------- ----------- ------------- -------------
Snowmass Village (E)(I)
Snowmass Village, CO Mixed Use 4/11 N/A LIBOR + 5.25%
City North (E)(I)
Phoenix, AZ Mixed Use 5/10 N/A LIBOR + 5.5%
Subtotal Mezzanine Loans
Subordinated Notes
Pierre Laclede Center (D)(M)
Clayton, MO Office 9/11 04/08 7.44%
Intech (D)(M)
Indianapolis, IN Office 10/15 07/15 9.05%
Ellington (D)(N)
Washington, DC Multifamily 9/16 09/09 10.00%
Hyatt Place (M)
Austin, TX Hotel 4/10 4/08 LIBOR +3.50%
Sage at Cupertino - B Note (N)
Cupertino, CA Multifamily 5/16 2/16 6.19%
Connecticut Village Apartments (N)
Gaffney, SC Multifamily 12/16 12/09 6.08%
Oakland Apartments (N)
Abbeville, SC Multifamily 12/16 12/09 6.08%
Westwood Apartments (N)
Manning, SC Multifamily 12/16 12/09 6.08%
Lincoln Apartments (N)
Walterboro, SC Multifamily 12/16 12/09 6.08%
Raymonis Apartments (N)
Vidalia, GA Multifamily 12/16 12/09 6.08%
Westlake Apartments (N)
Savannah, GA Multifamily 12/16 12/09 6.08%
Subtotal Subordinated Notes
Total interest income from loans
sold or repaid during 2007
2007 Total Mortgage Loans, Net -
Held for Investment
2006 Total Mortgage Loans, Net -
Held for Investment (S)
MORTGAGE LOANS RECEIVABLE, NET -
- --------------------------------
HELD FOR SALE
- -------------
Bridge Loans:
Running Brook Apartment (I)(J)(P)
Arlington, TX Multifamily 5/06 N/A 6.57%
La Sierra Vista Apartments (I)(J)(P)
Riverside, CA Multifamily 12/09 05/09 6.36%
Aberdeen Apartments (I)(J)(P)
Houston, TX Multifamily 12/09 05/09 6.52%
Subtotal Bridge Loans
Mezzanine Loans:
980 Madison Avenue (I)(P)
New York, NY Office 10/08 4/07 LIBOR + 3.00%
Periodic Outstanding
Payment Face Amount of Impairment
Property Terms Pior Liens Mortgages (B) Charges
- ------------------------------------ ----------- ----------- -------------- -----------
Snowmass Village (E)(I)
Snowmass Village, CO (F) 186,019 32,500 --
City North (E)(I)
Phoenix, AZ (F) 68,000 18,154 --
-------------- -----------
Subtotal Mezzanine Loans 99,542 (19,675)
-------------- -----------
Subordinated Notes
Pierre Laclede Center (D)(M)
Clayton, MO (F) 56,250 3,375 --
Intech (D)(M)
Indianapolis, IN (H) 44,500 5,500 --
Ellington (D)(N)
Washington, DC (F) 40,800 17,189 --
Hyatt Place (M)
Austin, TX (F) 27,000 5,500 --
Sage at Cupertino - B Note (N)
Cupertino, CA (G) 22,000 5,000 --
Connecticut Village Apartments (N)
Gaffney, SC (G) 2,584 136 --
Oakland Apartments (N)
Abbeville, SC (G) 343 18 --
Westwood Apartments (N)
Manning, SC (G) 755 40 --
Lincoln Apartments (N)
Walterboro, SC (G) 1,373 72 --
Raymonis Apartments (N)
Vidalia, GA (G) 1,373 72 --
Westlake Apartments (N)
Savannah, GA (F) 3,072 162 --
-------------- -----------
Subtotal Subordinated Notes 37,064 --
-------------- -----------
Total interest income from loans
sold or repaid during 2007 -- --
-------------- -----------
2007 Total Mortgage Loans, Net -
Held for Investment $ 490,947 $ (19,675)
============== ===========
2006 Total Mortgage Loans, Net -
Held for Investment (S) $ 544,668 $ (14,219)
============== ===========
MORTGAGE LOANS RECEIVABLE, NET -
- --------------------------------
HELD FOR SALE
- -------------
Bridge Loans:
Running Brook Apartment (I)(J)(P)
Arlington, TX (F) -- 5,600 (298)
La Sierra Vista Apartments (I)(J)(P)
Riverside, CA (F) -- 3,200 (171)
Aberdeen Apartments (I)(J)(P)
Houston, TX (F) -- 10,615 (566)
-------------- -----------
Subtotal Bridge Loans 19,415 (1,035)
-------------- -----------
Mezzanine Loans:
980 Madison Avenue (I)(P)
New York, NY (F) 80,000 10,750 (573)
Carrying Interest
Unamortized Amount of Income in
Property Costs and Fees Mortgages (C) 2007
- ------------------------------------ -------------- ------------- ---------
Snowmass Village (E)(I)
Snowmass Village, CO -- 32,500 2,893
City North (E)(I)
Phoenix, AZ -- 18,154 1,371
-------------- ------------- ---------
Subtotal Mezzanine Loans (114) 79,753 6,707
-------------- ------------- ---------
Subordinated Notes
Pierre Laclede Center (D)(M)
Clayton, MO -- 3,375 252
Intech (D)(M)
Indianapolis, IN (175) 5,325 527
Ellington (D)(N)
Washington, DC (1,431) 15,758 1,872
Hyatt Place (M)
Austin, TX -- 5,500 250
Sage at Cupertino - B Note (N)
Cupertino, CA -- 5,000 47
Connecticut Village Apartments (N)
Gaffney, SC -- 136 --
Oakland Apartments (N)
Abbeville, SC -- 18 --
Westwood Apartments (N)
Manning, SC -- 40 --
Lincoln Apartments (N)
Walterboro, SC -- 72 --
Raymonis Apartments (N)
Vidalia, GA -- 72 --
Westlake Apartments (N)
Savannah, GA -- 162 --
-------------- ------------- ---------
Subtotal Subordinated Notes (1,606) 35,458 2,948
-------------- ------------- ---------
Total interest income from loans
sold or repaid during 2007 -- -- 12,242
-------------- ------------- ---------
2007 Total Mortgage Loans, Net -
Held for Investment $ (3,538) $ 467,734 $ 44,076
============== ============= =========
2006 Total Mortgage Loans, Net -
Held for Investment (S) $ (4,226) $ 545,898 $ 20,024
============== ============= =========
MORTGAGE LOANS RECEIVABLE, NET -
- --------------------------------
HELD FOR SALE
- -------------
Bridge Loans:
Running Brook Apartment (I)(J)(P)
Arlington, TX -- 5,302 356
La Sierra Vista Apartments (I)(J)(P)
Riverside, CA -- 3,029 182
Aberdeen Apartments (I)(J)(P)
Houston, TX -- 10,049 600
-------------- ------------- ---------
Subtotal Bridge Loans -- 18,380 1,138
-------------- ------------- ---------
Mezzanine Loans:
980 Madison Avenue (I)(P)
New York, NY -- 10,177 874
(CONTINUED)
49
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Final
Maturity
Property Description Date Call Date (A) Interest Rate
- ------------------------------------ ----------- ----------- ------------- -------------
Lakes Edge at Waldon (I)(P)
Miami, FL Multifamily 3/17 8/13 7.64%
122 Greenwich Avenue
New York, NY Mixed Use 11/09 N/A LIBOR +4.25%
Bridgeport Portfolio (I)(P)
Bridgeport, CT Multifamily 8/17 7/10 9.74%
Subtotal mezzanine loans
Subordinated Notes:
Twelve Atlantic Station (I)(N)(J)(P)
Atlantic, GA Hotel 11/09 11/08 8.08%
Highland Crest Apartments (I)(N)(P)
Seattle, WA Multifamily 12/09 05/09 8.63%
Queen Vista Apartments (I)(N)(P)
Seattle, WA Multifamily 12/09 05/09 8.63%
Summit East Apartments (I)(N)(P)
Seattle, WA Multifamily 12/09 05/09 8.63%
RidgeCrest Apartments (I)(M)(P)
Lake Forest, CA Multifamily 5/14 N/A 6.73%
Simply Self Storage Portfolio (I)(M)(P)
Sanford, FL Retail 5/09 11/07 LIBOR +3.5%
Jefferson at City Gates (I)(M)(P)
Denver, CO Multifamily 7/08 N/A 6.98%
Subtotal subordinated notes
2007 total mortgage loans, net - Held for Sale
Periodic Outstanding
Payment Face Amount of Impairment
Property Terms Pior Liens Mortgages (B) Charges
- ------------------------------------ ----------- ----------- -------------- -----------
Lakes Edge at Waldon (I)(P)
Miami, FL (F) 14,850 2,443 (130)
122 Greenwich Avenue
New York, NY (F) 8,100 4,520 (241)
Bridgeport Portfolio (I)(P)
Bridgeport, CT (G) 8,136 1,110 (59)
-------------- -----------
Subtotal mezzanine loans 18,823 (1,003)
-------------- -----------
Subordinated Notes:
Twelve Atlantic Station (I)(N)(J)(P)
Atlantic, GA (F) 17,000 2,500 (133)
Highland Crest Apartments (I)(N)(P)
Seattle, WA (F) 3,891 730 (39)
Queen Vista Apartments (I)(N)(P)
Seattle, WA (F) 10,764 2,018 (108)
Summit East Apartments (I)(N)(P)
Seattle, WA (F) 5,345 1,002 (53)
RidgeCrest Apartments (I)(M)
Lake Forest, CA (F) 36,120 3,880 (207)
Simply Self Storage Portfolio (I)(M)(P)
Sanford, FL (F) 34,263 14,000 (746)
Jefferson at City Gates (I)(M)(P)
Denver, CO (H) 21,590 3,110 (166)
-------------- -----------
Subtotal subordinated notes 27,240 (1,452)
-------------- -----------
2007 total mortgage loans, net - Held for Sale $ 65,478 $ (3,490)
============== ===========
Carrying Interest
Unamortized Amount of Income in
Property Costs and Fees Mortgages (C) 2007
- ------------------------------------ -------------- ------------- ---------
Lakes Edge at Waldon (I)(P)
Miami, FL -- 2,313 160
122 Greenwich Avenue
New York, NY (78) 4,201 159
Bridgeport Portfolio (I)(P)
Bridgeport, CT -- 1,051 50
-------------- ------------- ---------
Subtotal mezzanine loans (78) 17,742 1,243
-------------- ------------- ---------
Subordinated Notes:
Twelve Atlantic Station (I)(N)(J)(P)
Atlantic, GA -- 2,367 205
Highland Crest Apartments (I)(N)(P)
Seattle, WA -- 691 63
Queen Vista Apartments (I)(N)(P)
Seattle, WA -- 1,910 176
Summit East Apartments (I)(N)(P)
Seattle, WA -- 949 87
RidgeCrest Apartments (I)(M)(P)
Lake Forest, CA -- 3,673 179
Simply Self Storage Portfolio (I)(M)(P)
Sanford, FL -- 13,254 635
Jefferson at City Gates (I)(M)(P)
Denver, CO -- 2,944 168
-------------- ------------- ---------
Subtotal subordinated notes -- 25,788 1,513
-------------- ------------- ---------
2007 total mortgage loans, net -
Held for Sale $ (78) $ 61,910 $ 3,894
============== ============= =========
(CONTINUED)
50
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) Call date means the date the loan can either be called by us or paid off by
borrower, which may result in prepayment penalties.
(B) As of December 31, 2007, all interest payments on the mortgage loans are
current, except as noted.
(C) Carrying amounts of the loans are net of unamortized origination costs and
fees and loan discounts.
(D) Loans are pledged as collateral on $362.0 million of Series I CRE notes
issued during 2006 (see Note 10).
(E) Borrower is a related party (see Note 20).
(F) Interest only payments due monthly, with loan balance due at maturity.
(G) Currently interest only payments due monthly, followed by principal and
interest payments due at various future dates.
(H) Principal and interest payments due monthly.
(I) At December 31, 2007, loans are pledged as collateral under the mortgage
loan repurchase facility with Citigroup (see Note 10).
(J) Subsequent to December 31, 2007, loans were sold (see Note 23).
(K) The Club at Brazos loan is a participating mezzanine loan with a maximum
annual return of 14%. We can share 50% of excess operating cash flows, as
well as 25% of excess sale or refinancing proceeds on this loan.
(L) The principal balance of the mezzanine loan is secured by the partnership
interests of the entity that owns the underlying property and a third
mortgage deed of trust. Interest payments on the mezzanine loan are secured
by a second mortgage deed of trust and are guaranteed for the first 36
months after construction completion by an entity related to the general
partner of the entity that owns the underlying property.
(M) We do not have an interest in the first lien position relating to this
loan.
(N) At December 31, 2007, we had an interest in the first lien position
relating to this loan.
(O) During 2006, these mezzanine loans did not make required interest payments,
causing them to be in default. We recognized impairment charges of $14.2
million for these loans due to construction and sales issues relating to
the underlying properties. We have determined the impairment amounts by
analyzing the cash flows of the respective projects upon completion of
construction at the property level and determining a fair value of the
properties. As a result the carrying amounts have been written down to
reflect these values.
(P) During 2007, we recorded impairment charges of $10.2 million on these
bridge and mezzanine loans and subordinated notes, which includes $1.1
million for assets sold during the year. We determined the impairment
amounts by obtaining fair market prices for these assets, as well as by
analyzing the cash flows of the project upon completion of construction at
the property level. As a result, carrying amounts have been written down to
reflect these market prices.
(Q) During 2006, this mezzanine loan did not make required interest payments,
causing it to be in default. We are currently in the process of determining
the necessary steps we need to take to protect our investment. We have done
an internal analysis for the property underlying the mortgage and the
analysis indicates that the value of the property exceeds the carrying
amount of our investment. Accordingly, we have not recorded an allowance
for probable losses on this investment.
(R) Interest on the mezzanine loan is based on a fixed percentage of the unpaid
principal balance of the related first mortgage loan. The amount shown is
the approximate effective rate earned on the balance of the mezzanine loan.
The mezzanine loan also provides for payments of additional interest based
on a percentage of cash flow remaining after debt service and participation
in sale or refinancing proceeds and certain provisions that cap our total
yield, including additional interest and participations, over the term of
the loan.
(S) The weighted average interest rate on the portfolio at December 31, 2006,
was 7.20%.
51
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Further information relating to investments in mortgage loans is as follows:
(IN THOUSANDS) 2007 2006
----------- -----------
Balance at beginning of year $ 545,898 $ 65,706
Advances made 253,266 509,191
Loan origination fees (net of acquisition expenses) (100) --
Sales or repayments (256,083) (11,490)
Loss on sales or repayments (4,447) --
Amortization of costs and fees 710 507
Impairment losses (10,120) (14,219)
Prepayment penalty from debt security refinancing, net of
unamortized loan origination fees -- (3,005)
Discount on swap -- (792)
Capitalized interest 520 --
----------- -----------
Balance at end of year $ 529,644 $ 545,898
=========== ===========
NOTE 4 - AVAILABLE-FOR-SALE INVESTMENTS, AT FAIR VALUE
At December 31, 2007, we had the following investments classified as
available-for-sale:
o commercial mortgage-backed securities ("CMBS");
o mortgage revenue bonds.
We also held investments in debt securities and CDO securities, all of which we
have now sold.
Information regarding our available-for-sale investments is as follows:
(IN THOUSANDS) Mortgage
December 31, 2007 CMBS revenue bonds Total
- ----------------- ------------- ------------- -------------
Amortized cost $ 69,269 $ 4,668 $ 102,112
Unrealized gains -- 211 211
------------- ------------- -------------
Fair value $ 69,269 $ 4,879 $ 74,148
============= ============= =============
Debt Mortgage
December 31, 2006 securities revenue bonds Total
- ----------------- ------------- ------------- -------------
Amortized cost $ 83,497 $ 4,846 $ 88,343
Unrealized gains 359 121 480
Unrealized losses (1,274) -- (1,274)
------------- ------------- -------------
Net unrealized gain (loss) (915) 121 (794)
------------- ------------- -------------
Fair value $ 82,582 $ 4,967 $ 87,549
============= ============= =============
a) CMBS
During 2007, we purchased $135.3 million of CMBS for a net cost of $123.1
million and discounts aggregating $12.2 million. These securities bear interest
at a weighted average interest rate of 5.92% and mature on dates ranging from
52
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 2022 through June 2049. During December of 2007, we sold two of these
investments for $15.6 million and realized a loss on the sale of $10.3 million
(see Note 2).
CMBS investments we hold were comprised of the following as of December 31,
2007:
Face Percentage of
(DOLLARS IN THOUSANDS) amount Accreted cost Fair value fair value
--------------- --------------- --------------- ---------------
Security rating:
BBB+ $ 4,750 $ 3,716 $ 3,716 5.4%
BBB 51,128 33,736 33,736 48.7
BBB- 50,991 31,817 31,817 45.9
--------------- --------------- --------------- ---------------
$ 106,869 $ 69,269 $ 69,269 100.0%
=============== =============== =============== ===============
During 2007, we recognized impairment losses of $28.2 million on our CMBS
investments that were previously recorded as unrealized losses in accumulated
other comprehensive income (see below).
b) Mortgage Revenue Bonds
These investments represent taxable revenue bonds that were purchased from
Centerline in 2003. Each revenue bond is secured by a first mortgage position,
held by Centerline, on a multifamily property.
c) Debt Securities and CDO Equity
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") which earned interest at a weighted average interest rate of
9.00%. During December 2007, we sold these securities to an affiliate of our
Advisor for $7.9 million, of which $1.7 million was used to repay a repurchase
facility that collateralized these debt securities (see Note 20). We realized a
loss on the sale of $2.1 million
During November of 2007, we sold our remaining portfolio of debt securities. As
a result of the sale, we received total proceeds of $71.2 million, of which
$67.5 million was used to repay a repurchase facility that collateralized these
debt securities. We realized a loss on the sale of $2.2 million.
d) Unrealized Losses
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 December 31, 2007 and 2006, is summarized
in the table below:
December 31, 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 -- -- -- 3 9 12
----------- ----------- ----------- ----------- ----------- -----------
Total -- -- -- 3 9 12
Fair value $ -- $ -- $ -- $ 35,799 $ 37,579 $ 73,378
Gross unrealized losses $ -- $ -- $ -- $ 246 $ 1,027 $ 1,273
During 2007, as a result of market conditions and our liquidity issues referred
to Note 2, we recognized certain unrealized losses resulting from fluctuations
in interest rates and interest rate spreads subsequent to the acquisition of
certain CMBS investments. While it is still our intention 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,
current market conditions could impede our ability to hold these investments to
maturity or recovery as further deterioration in market conditions could force
us to sell these assets. As such, we have recorded a $28.2 million impairment
charge resulting from these declines in market values as impairment charges in
our 2007 statement of operations.
At December 31, 2007, all of our CMBS were pledged as collateral under our
repurchase facilities (see Note 11).
53
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENT IN ARCAP
We owned 485,000 units of Series A Convertible Preferred Membership Interests in
ARCap as well as 315,000 common units, which we acquired upon converting an
equal number of preferred units in December 2005. The initial cost of all units
was $25 each.
During August 2006, we sold our membership interests and common units in ARCap
to Centerline (see also Note 20). In connection with the sale, we received
proceeds of $38.8 million, consisting of $24.5 million for the purchase of the
interests and $14.3 million of special distributions for income earned prior to
consummation of the sale. Of the distributions, we recorded approximately $12.6
million as a return of capital and the sales proceeds yielded a gain of
approximately $19.2 million. During 2007, we received an additional $0.3 million
due to the release of a cash escrow that was held back at the closing of the
sale and was pending release upon the expiration of a certain event. We recorded
this receipt as additional gain on the consolidated statements of operations.
Contingent upon future events, we may receive an additional $0.5 million of
proceeds in 2008 which would result in additional gain when received.
NOTE 6 - 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, 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.
Year ended December 31,
---------------------------------------
2007 2006 2005
----------- ----------- -----------
Revenues $ 1,815 $ 663 $ 2,280
=========== =========== ===========
Gain on sale of real estate owned $ 3,611 $ -- $ --
=========== =========== ===========
Net income $ 3,531 $ 569 $ 434
=========== =========== ===========
Prior to the 2007 sale of the Concord portfolio, we recorded a $41.0 million
amortizing mortgage resulting from a refinancing at the property level that was
no-recourse to us. At December 31, 2006, the mortgage liability was $39.9
million. Upon sale of the properties in 2007, we de-recognized the liability
along with the assets.
NOTE 7 - ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
Year ended December 31,
-------------------------
(IN THOUSANDS) 2007 2006
----------- -----------
Escrow receivable(1) $ 24,287 $ --
Interest receivable 5,737 7,596
Other 42 74
----------- -----------
$ 30,066 $ 7,670
=========== ===========
(1) Escrow balances are being held with Citigroup as additional collateral, to
be released as a percentage of sales, when an asset that collateralizes the
facility is sold.
54
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEFERRED CHARGES AND OTHER ASSETS, NET
Detail of deferred charges and other assets, net is provided in the table below:
Year ended December 31,
-------------------------
(IN THOUSANDS) 2007 2006
----------- -----------
Deferred financing charges, net of accumulated
amortization of $1,030 in 2007 and $151 in 2006 $ 6,867 $ 7,467
Interest rate derivatives (see Note 16) -- 1,143
Other assets 47 61
----------- -----------
Total $ 6,914 $ 8,671
=========== ===========
NOTE 9 - CONCENTRATION
As of December 31, 2007, 19.7%, 15.1% and 13.1% of our investment portfolio
(excluding CMBS) were secured by properties in California, New York and
Colorado, respectively, and 11.9% consisted of first mortgage loans made to one
borrower who is an affiliate of our Advisor.
CMBS investments are secured by a pool of mortgage loans for which the
underlying properties are located throughout the United States.
NOTE 10 - CDO NOTES PAYABLE
During 2006, we issued approximately $400.0 million of notes and preferred
shares for our first CDO securitization through a wholly owned subsidiary, AMAC
CDO Funding I ("AMAC CDO"). We have issued a full and unconditional guarantee of
these securities issued in AMAC CDO, which no other subsidiary of ours
guarantees. The CDO consists of $362.0 million Series I CRE notes and $12.0
million of non-investment grade notes and $26.0 million of preferred shares, of
which we retained the latter two. The Series I CRE notes have an absolute
maturity of November 2050 and carry a combined weighted average rate of 5.27%.
We incurred approximately $6.9 million of costs related to our first CDO
securitization, which are being amortized on a straight-line basis over the
average life of the CDO (which is nine years).
We retained all of the non-investment grade securities and the preferred shares
in a wholly owned subsidiary, AMAC CDO I Equity, LLC ("AMAC Equity"). AMAC CDO
holds the assets, consisting primarily of first mortgage loans, subordinate
interests in first mortgage loans, mezzanine loans and bridge loans, which serve
as collateral for the CDO (see Note 3). As of December 31, 2007, these assets
totaled $395.3 million and the remainder of the proceeds are held in escrow to
fund additional assets.
The CDO may be replenished, pursuant to certain rating agency guidelines
relating to credit quality and diversification and substitute collateral, for
loans that are repaid during the first five years of the CDO. Thereafter, the
CDO securities will be retired in sequential order from senior-most to
junior-most as loans are repaid. The financial statements of both wholly owned
subsidiaries are consolidated in our financial statements. The Series I CRE
notes are treated as a secured financing, and are non-recourse to us. Proceeds
from the issuance of these notes were used to repay all of the debt outstanding
under one of our repurchase facilities at the time this transaction closed (see
Note 11) and to fund additional investments.
55
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - REPURCHASE FACILITIES
Our repurchase facilities consisted of financing collateralized by investments
in mortgage loans, CMBS, bridge notes, mezzanine loans and subordinated notes.
They are categorized in the table below by lending institution:
Year Ended December 31,
-------------------------
(IN THOUSANDS) 2007 2006
----------- -----------
Citigroup $ 81,345 $ 84,149
Bear Stearns 55,040 --
UBS -- 48,928
RBC -- 30,499
----------- -----------
Total $ 136,385 $ 163,576
=========== ===========
Citigroup Facility
- ------------------
During 2006, we executed a repurchase facility with Citigroup for the purpose of
funding investment activity for a planned CDO securitization. Borrowings on this
facility had interest rates of 6.18% at December 31, 2007, as compared to 6.13%
at December 31, 2006.
During 2007, we entered into an agreement to terminate this facility (see Note
2).
Bear Stearns Facility
- ---------------------
During 2007, we executed a repurchase facility with Bear Stearns International
Limited ("Bear Stearns") for the purposes of financing investment activity. We
used this facility to refinance our debt securities portfolio and CMBS
investments previously financed through other facilities. This facility had
borrowings at a weighted average interest rate of 6.26% at December 31, 2007.
The borrowings are subject to 30-day settlement terms.
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 2007, we obtained new financing for the entire outstanding
balance on our RBC repurchase facility and our UBS repurchase facility utilizing
our Bear Stearns facility described above. At December 31, 2006, borrowings on
our UBS repurchase facility had an interest rate of 5.39%. The borrowings were
subject to 30-day settlement terms. Borrowings on our RBC repurchase facility
had an interest rate of 5.45% at December 31, 2006. Both of these facilities
have been terminated and are no longer available.
Banc of America Facility
- ------------------------
During 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
December 31, 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.
$103.5 million of our mortgage loans and all of our CMBS are pledged as
collateral in connection with the Citigroup and Bear Sterns repurchase
facilities (see Notes 3 and 4).
NOTE 12 - LINE OF CREDIT - RELATED PARTY
We have a revolving credit facility (the "Revolving Facility") with Centerline.
The Revolving Facility, which is unsecured, provides up to $80.0 million in
borrowings to be used to purchase new investments and for general purposes, and
bears interest at 30-day LIBOR plus 3.00%. The Revolving Facility expires in
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 December 31, 2007, we had approximately $77.7 in
borrowings outstanding, bearing interest at a rate of 7.60% , compared to $15.0
million at a rate of 8.35% at December 31, 2006.
56
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We have covenant compliance requirements on our related party line of credit.
These covenants include:
o minimum adjusted net worth;
o liquidity;
o debt service coverage;
o recourse debt to adjusted net worth; and
o minimum adjusted AFFO.
At December 31, 2007, we failed to meet the minimum adjusted net worth, the
minimum adjusted FFO and the debt service coverage requirements, causing us to
be in default of the loan agreement. While we have not been called upon to repay
this facility, there can be no assurance that we will not be, nor whether we
will be able to extend the facility upon expiration.
NOTE 13 - 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.
NOTE 14 - SUBSIDIARY EQUITY
During March 2005, AMAC Capital Financing I, a wholly owned subsidiary, issued
25,000 Floating Rate Preferred Securities with a stated liquidation amount of
$1,000 per security. We received approximately $24.2 million in proceeds, net of
closing costs. The securities are callable in March 2010 and bear interest,
re-set quarterly, equal to 30-day LIBOR plus 3.75%. At December 31, 2007, the
rate was 8.98%. There are no covenants related to these securities.
NOTE 15 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
Year Ended December 31,
-------------------------
(IN THOUSANDS) 2007 2006
----------- -----------
Interest rate derivatives (see Note 16) $ 26,631 $ 8,673
Refundable deposits (1) 161 1,161
Accrued interest payable 14,446 3,078
Other 1,686 754
----------- -----------
$ 42,924 $ 13,666
=========== ===========
(1) Includes refundable deposits collected during the due diligence period of a
loan transaction which are payable to other parties.
57
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - 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
consolidated balance sheets, 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 such ineffectiveness in our consolidated statements of
operations. With respect to the free-standing derivatives, we include the change
in their fair value in our consolidated statements of operations.
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 December 31, 2007, including the above mentioned swap, we had 20 interest
rate swaps with an aggregate notional amount of $432.7 million, which will
expire on dates ranging from November 2008 through February 2022 and are
designated as cash flow hedges, with the hedged item being the variable-rate
interest payments on our 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 consolidated statements of
operations. With the exception of five, all of our swaps have been effective,
and we expect they will continue to be effective in the future. We have recorded
a reduction in interest expense of $0.2 million related to ineffectiveness on
these swaps. One of these swaps 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.
During 2007, we terminated 31 of these swaps in connection with the disposition
and refinancing of certain assets (see Note 2), and paid $7.9 million in costs
relating to the termination. Of these costs, $6.5 million has been recorded as a
reduction of other income due to changes in cash flows of forecasted
transactions and $1.4 million remain in accumulated other comprehensive income
and will be amortized over the remaining lives of the terminated derivative
agreements, as long as there is a high probability that there will be interest
payments made on variable rate debt throughout this term.
During 2008, we terminated another 15 of these swaps that were hedging variable
rate interest payments on the Citigroup facility. We paid termination costs of
$5.1 million, of which, $3.4 million was recorded as a reduction of other income
in 2007 due to changes in cash flows of forecasted transactions and $0.1 million
remain in accumulated other comprehensive income and will be amortized over the
remaining lives of the terminated derivative agreements, as long as it is
probable that there will be interest payments made on variable rate debt
throughout this term. The remaining $1.7 million in termination costs represent
a further decline in value from December 31, 2007 through the termination date
and will be charged to expense in 2008.
For swap agreements that we do not plan to terminate, we estimate that $9.7
million of the net unrealized losses included in accumulated other comprehensive
loss will be reclassified into interest expense within the next 12 months.
58
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FREE-STANDING DERIVATIVES RELATED TO INVESTMENTS
We had three interest rate swaps with an aggregate notional amount of $20.1
million that hedged changes in the fair value of certain investments. We did not
elect to apply hedge accounting to these swaps. During 2007, we terminated these
swaps in connection with the disposition and refinancing of certain assets (see
Note 2), and paid $1.5 million in costs relating to the termination, all of
which were recorded as a reduction of other income.
During 2007, we entered into two new swap agreements to which we elected not to
apply hedge accounting. These swaps, which hedged changes in the fair value of
certain investments, had an aggregate notional amount of $31.9 million and were
due to expire on May 2016 and February 2022.
During 2008, we terminated these two swaps, incurring termination costs of $2.4
million of which, $1.3 million was recorded as a reduction of other income in
2007. The remaining $1.1 million in termination costs represent a further
decline in value from December 31, 2007 through the termination date and will be
charged to expense in 2008.
We are required to maintain a minimum balance of collateral with Banc of America
and Bear Stearns 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. These payments are held as deposits with Bank of America and Bear
Stearns and will be used to settle the swap at termination date if market rates
fall below the fixed rates on the swaps. At December 31, 2007, we had $1.7
million of deposits held by Banc of America and Bear Stearns.
FINANCIAL STATEMENT IMPACT
Interest rate swaps in a net liability position are recorded in accounts payable
and accrued expenses (see Note 15) and those in a net asset position are
recorded in deferred charges and other assets (see Note 8). The amounts recorded
are provided in the table below:
December 31, December 31,
(IN THOUSANDS) 2007 2006 Dollar Change % Change
-------------- -------------- -------------- --------------
Net asset position $ -- $ 1,143 $ (1,143) (100)%
Net liability position $ (26,631) $ (8,673) $ (17,958) (207.1)%
-------------- -------------- -------------- --------------
Net $ (26,631) $ (7,530) $ (19,101) (253.7)%
============== ============== ============== ==============
Net (loss) income included the following related to our freestanding derivatives
and interest rate hedges:
Year Ended December 31,
-----------------------------------------
(IN THOUSANDS) 2007 2006 2005
----------- ----------- -----------
Included in interest expense:
Interest receipts $ 1,510 $ 588 $ 47
Interest payments (891) (132) (115)
Ineffectiveness 159 (148) --
----------- ----------- -----------
Subtotal 778 308 (68)
----------- ----------- -----------
Included in other income (loss):
Loss on termination included in other income (10,208) -- --
Change in fair value included in other income (1,373) (5,299) --
----------- ----------- -----------
Subtotal (11,581) (5,299) --
----------- ----------- -----------
Net $ (10,803) $ (4,991) $ (68)
=========== =========== ===========
59
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - SHAREHOLDERS' EQUITY
Preferred Shares
- ----------------
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 $15.9
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 of these shares (see Note 20).
Common Shares
- -------------
Our independent trustees receive a portion of their annual compensation in
common shares. The number of shares issued and the expense related to those
shares are provided in the table below:
Number of
(DOLLARS IN THOUSANDS) Shares Expense
------------- ------------
2007 33,539 $ 120
============= ============
2006 2,040 $ 30
============= ============
2005 3,036 $ 45
============= ============
Share Repurchase Program
- ------------------------
We have a share repurchase plan that enables us to repurchase, from time to
time, up to 1,000,000 common shares. The repurchases will be made in the open
market, and the timing will be dependent on the availability of shares and other
market conditions. This program has no expiration date. In 2005, we repurchased
a total of 40,000 shares at a cost of $547,000. We made no such repurchases
during 2007 and 2006.
Accumulated Other Comprehensive (Loss) Income
- ---------------------------------------------
Changes in accumulated other comprehensive (loss) income consisted of the
following:
Net unrealized
Net unrealized (loss) gain on
gain (loss) on interest rate
(IN THOUSANDS) investments derivatives Total
--------------- --------------- ---------------
Balance at January 1, 2005 $ 9,988 $ 129 $ 10,117
Period change (2,916) 679 (2,237)
Reclassification adjustment (3,097) -- (3,097)
--------------- --------------- ---------------
Balance at December 31, 2005 3,975 808 4,783
Period change (6,993) (3,642) (10,635)
Reclassification adjustment 2,224 -- 2,224
--------------- --------------- ---------------
Balance at December 31, 2006 (794) (2,834) (3,628)
Period change (41,746) (26,070) (67,816)
Reclassification adjustments 42,751 9,440 52,191
--------------- --------------- ---------------
Balance at December 31, 2007 $ 211 $ (19,464) $ (19,253)
=============== =============== ===============
NOTE 18 - INCENTIVE SHARE OPTION PLAN
In accordance with our Amended and Restated Incentive Share Option Plan (the
"Plan"), our Board of Trustees can award share options to trustees, officers and
employees of our Advisor and its affiliates. A maximum of 843,347 options can be
granted, with annual limits based upon 10% of the shares outstanding at year
end, as specified in the Plan. Option terms and vesting requirements are
determined at the time of grant, provided that the term is no longer than ten
years.
60
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our compensation committee granted the following options to employees of an
affiliate of our Advisor pursuant to the Plan:
Exercise Vesting
Year Number Price Term Period
- ------------- ------------- ------------ ------------ -------------
190,000 $ 15.03 10 years 3 years
2003
2005 65,062 $ 17.20 10 years 3 years
The weighted average assumptions used for valuing these options and the results
of the valuations were as follows:
2006 (1) 2005
------------ -----------
9.98% 10.95%
Dividend Yield
Estimated Volatility 25.00% 26.00%
Risk Free Interest Rate 4.73% 4.36%
Expected Lives (years) 4.9 8.0
(1) These weighted average assumptions are as of March 31, 2006, the last period
these options were re-valued, as both grants were vested shortly after this
date and fully amortized.
The following table summarizes share option activity in our share option plans
for the years ended December 31:
2007 2006 2005
------------------------ ------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at Beginning of Year 93,000 $ 15.03 187,052 $ 15.78 130,000 $ 15.03
Granted -- -- -- -- 65,052 17.20
Forfeited -- -- -- -- (8,000) 15.03
Exercised -- -- (94,052) 16.53 -- --
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at End of Year 93,000 15.03 93,000 $ 15.03 187,052 $ 15.78
=========== =========== =========== =========== =========== ===========
Fair Value of options granted
during the year (at grant date) $ -- $ -- $ -- $ -- $ 64,000 $ 17.20
=========== =========== =========== =========== =========== ===========
Compensation cost recognized $ -- $ 59,000(1) $ --
=========== =========== ===========
(1) Includes accelerated vesting of 2005 grants upon the termination of the
optionee.
As of December 31, 2007
--------------------------------------------------------------------
Weighted
Average
Weighted Remaining
Average Contractual Aggregate
Exercise Term Intrinsic Value
Options Price (in years) (in thousands)
--------------- --------------- --------------- ---------------
Vested and expected to vest at end of
period 93,000 $ 15.03 5.3 $ --
=============== =============== =============== ===============
Exercisable at end of year 93,000 $ 15.03 5.3 $ --
=============== =============== =============== ===============
There was no aggregate intrinsic value at December 31, 2007, due to the exercise
prices of the outstanding options being greater than the closing share price on
the last trading day of the year. This value fluctuates based on the fair market
value of our shares.
61
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2007, the cost of all of our share options was fully
amortized, and there was no unrecognized compensation cost related to
share-based compensation grants. There were 685,295 shares available for
issuance as of December 31, 2007.
NOTE 19 - 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 year ended December 31,
2007, the effect of the assumed conversion of our preferred shares is not
included as the effect would be antidilutive.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Income Shares Per Share
----------- ----------- -----------
2007:
- ----
Loss from continuing operations $ (62,113)
Preferred dividends (527)
-----------
Loss from continuing operations available to shareholders
(Basic EPS) (62,640) 8,404 $ (7.45)
===========
Effect of dilutive securities -- --
----------- -----------
Diluted EPS from continuing operations $ (62,640) 8,404 $ (7.45)
=========== =========== ===========
2006:
- ----
Income from continuing operations $ 2,432
Preferred dividends --
-----------
Income from continuing operations available to shareholders
(Basic EPS) 2,432 8,323 $ 0.29
===========
Effect of dilutive securities -- 7
----------- -----------
Diluted EPS from continuing operations $ 2,432 8,330 $ 0.29
=========== =========== ===========
2005:
- ----
Income from continuing operations $ 15,035
Preferred dividends --
-----------
Income from continuing operations available to shareholders 15,035 8,316 $ 1.81
(Basic EPS)
===========
Effect of dilutive securities -- 1
----------- -----------
Diluted EPS from continuing operations $ 15,035 8,317 $ 1.81
=========== =========== ===========
62
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - RELATED PARTY TRANSACTIONS
The following summarizes all costs paid or payable to our Advisor and its
affiliates:
(IN THOUSANDS) Year Ended December 31,
---------------------------------------
2007 2006 2005
----------- ----------- -----------
Fees to Advisor and affiliates:
Shared services expenses $ 1,660 $ 1,672 $ 947
Asset management fees 1,570 1,810 1,545
Servicing fees 566 64 --
Incentive management fee -- -- 1,855
----------- ----------- -----------
Total fees to Advisor and affiliates $ 3,796 $ 3,546 $ 4,347
=========== =========== ===========
Other costs:
Interest paid on related party line of credit $ 2,970 $ 1,461 $ 24
=========== =========== ===========
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 a sset 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:
(a) 9.00%; and
(b) the Ten-Year U.S. Treasury Rate
plus 2.00% per annum
63
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 adminis-
tration, 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
- --------------------------------
GENERAL
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
December 31, 2007, and December 31, 2006, we had $77.7 million and $15.0
million, respectively, in borrowings outstanding, bearing interest at a rate of
7.60% and 8.35%, respectively.
During 2006 and 2007, we funded four mortgage loans and two mezzanine loans
aggregating $143.4 million to properties developed by a company partly owned by
the chairman of Centerline. These transactions were approved by the independent
members of our Board of Trustees and, in the opinion of management, the terms
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 December
31, 2007, it has purchased 580,000 common shares under this plan, amounting to
6.9% of our outstanding common shares at December 31, 2007. Centerline has also
64
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purchased 280,000 of our preferred shares that we issued in July 2007 (see Note
11), which amounts to an aggregate economic ownership percentage of over 10%,
assuming all preferred shares were converted to common shares.
TRANSACTIONS WITH CENTERLINE REAL ESTATE SPECIAL SITUATIONS MORTGAGE FUND LLC
("CRESS"), AN AFFILIATE OF OUR ADVISOR
During 2006, we entered into a co-investment agreement with 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.
During March 2007, we sold our economic interest in the Concord properties to
CRESS (see Note 6).
During December 2007, we sold our investment in CDO securities to CRESS (see
Note 4).
During January and February 2008, we sold 11 mortgage loans to CRESS (see Note
23).
TRANSACTIONS WITH CENTERLINE MORTGAGE CAPITAL INC. ("CMC"), AN AFFILIATE OF OUR
ADVISOR
During September 2006, CMC funded a first mortgage loan in the amount of $27.3
million as part of a refinancing of one of our loans (see Note 3).
During December 2007, we sold four mortgage loans to CMC (see Note 3).
During 2007, we partially or fully funded 22 first mortgage, bridge and
mezzanine loans and subordinated notes, totaling $255.1 million (see Note 3),
originated by CMC, 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 2006, we partially or fully funded 58 first mortgage,
bridge and mezzanine loans and subordinated notes, totaling $500.1 million. CMC
received $2.0 million in loan origination fees related to these originations.
65
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - SELECTED QUARTERLY FINANCIAL DATA
2007 Quarter Ended
(Unaudited)
---------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) March 31 June 30 September 30 December 31(1)
--------------- --------------- --------------- ---------------
Total revenues $ 12,501 $ 15,312 $ 16,948 $ 15,348
=============== =============== =============== ===============
Net income (loss) $ 5,164 $ 3,477 $ (187) $ (67,036)
=============== =============== =============== ===============
Net income (loss) from continuing operations per
share (basic and diluted) $ 0.19 $ 0.41 $ (0.05) $ (8.00)
=============== =============== =============== ===============
Net income from discontinued operations per
share (basic and diluted) $ 0.42 $ -- $ -- $ --
=============== =============== =============== ===============
Net income (loss) per share (basic and diluted) $ 0.61 $ 0.41 $ (0.05) $ (8.00)
=============== =============== =============== ===============
2006 Quarter Ended
(Unaudited)
---------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) March 31 June 30 September 30(2) December 31(3)
--------------- --------------- --------------- ---------------
Total revenues $ 5,671 $ 7,249 $ 8,509 $ 10,265
=============== =============== =============== ===============
Net income (loss) $ 2,169 $ 5,215 $ 1,234 $ (5,931)
=============== =============== =============== ===============
Net income (loss) from continuing operations per
share (basic and diluted) $ 0.27 $ 0.62 $ 0.14 $ (0.74)
=============== =============== =============== ===============
Net income (loss) from discontinued operations per share
(basic and diluted) $ (0.01) $ 0.01 $ 0.01 $ 0.02
=============== =============== =============== ===============
Net income (loss) per share (basic and diluted) $ 0.26 $ 0.63 $ 0.15 $ (0.72)
=============== =============== =============== ===============
(1) Includes realized losses incurred from the sale of twenty-four first
mortgage loans, two CMBS, and the remaining portfolio of debt securities
($19.1 million), as well as impairments recorded for certain of our
mortgage loans and CMBS ($38.3 million), losses incurred upon the
termination of certain interest rate swaps ($10.3 million) and related to
the changes in the fair value of certain interest rate swaps to which we do
not apply hedge accounting ($1.3 million).
(2) Includes a gain resulting from the sale of our ARCap membership interests
($19.2 million), an expense related to changes in the fair value of certain
interest rate swaps to which we do not apply hedge accounting ($8.4
million), losses relating to the sale of 20 FNMA securities ($3.0 million)
and impairment losses recorded on two notes receivable and one mezzanine
loan ($2.4 million).
(3) Includes impairment losses relating to three mezzanine loans ($12.9
million), and income recognized from increases in the fair value of certain
interest rate swaps ($2.9 million).
NOTE 22 - COMMITMENTS AND CONTINGENCIES
a) Legal
On October 27, 2003, prior to taking possession of the real estate collateral
supporting a loan investment, we were named in a lawsuit, Concord Gulfgate, Ltd.
vs. Robert Parker, Sunrise Housing Ltd., and American Mortgage Acceptance
Company, Cause No. 2003-59290 in the 133rd Judicial District Court of Harris
County, Texas. The suit alleged that the loan transaction was not properly
authorized by the borrower and was not for a legitimate borrower purpose. The
suit claimed, among other causes of action against the respective defendants,
wrongful foreclosure of the real estate collateral, tortious interference with
contract and civil conspiracy. The suit sought, among other relief, actual,
consequential, and exemplary damages, and a declaration that the loan documents
were unenforceable and constituted a cloud on title. The case went to trial in
September 2006 and was settled for $150,000. This amount is recognized in
general and administrative expenses in our consolidated statements of
operations.
66
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b) 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 December 31, 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 December 31, 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 $ 344 $ 344 $ --
Nov-06 12 Atlantic Station Hotel(1) Atlanta, GA 1,000 1,000 --
Feb-07 Aberdeen Apartments (1) Houston, TX 245 245 --
Jun-07 122 Greenwich Avenue(1) New York, NY 3,438 3,438 --
------------- ------------- ------------
Total Future Funding Commitments $ 5,027 $ 5,027 $ --
============= ============= ============
(1) Assets have been sold subsequent to December 31, 2007, extinguishing our
commitment to fund these loans in the future (see Note 23).
NOTE 23 - SUBSEQUENT EVENTS
In January 2008, we sold four mortgage loans to an affiliate of our Advisor (see
Note 20). This sale resulted in proceeds of $23.3 million, of which $16.5
million was used to repay a repurchase facility collateralized by these
investments. The sale resulted in a realized loss of $1.3 million, which is
included in impairment charges on investments at December 31, 2007.
In February 2008 we sold seven mortgage loans to an affiliate of our Advisor.
This sale resulted in proceeds of $31.7 million, of which $27.8 million was used
to repay a repurchase facility collateralized by these investments. The sale
resulted in a realized loss of $1.8 million, which is included in impairment
charges on investments at December 31, 2007.
In January 2008, we terminated 17 interest rate swaps that were hedging interest
payments on our variable-rate repurchase facilities. As a result, we paid $7.5
million in termination costs, of which, $3.7 million was recorded as expense in
2007.
As of March 14, 2008, the value of our CMBS has further declined from December
31, 2008 in the amount of $17.8 million.
67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. 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) under the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) as of the end of the period covered
by this annual 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 annual report were effective to ensure that
information required to be disclosed by the Company in the reports
that the Company files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified
in the SEC rules and forms, and to ensure that such information is
accumulated and communicated to the Company's management, including
the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
(b) MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.
There have not been any significant changes in our internal control
over financial reporting during the period to which this report
relates that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Refer to Management's Report on the Effectiveness of Internal Control
over Financial Reporting on page 32.
ITEM 9B. OTHER INFORMATION.
None.
68
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Incorporated by reference to the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Incorporated by reference to the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
Incorporated by reference to the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Incorporated by reference to the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Exchange Act.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Sequential
Page
----------
(a) 1. Financial Statements
--------------------
Report of Independent Registered Public Accounting Firm 35
Consolidated Balance Sheets as of December 31, 2007 and 2006 36
Consolidated Statements of Operations for the years ended
December 31, 2007, 2006 and 2005 37
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2007, 2006 and 2005 38
Consolidated Statements of Cash Flows for the years ended
December 31, 2007, 2006 and 2005 39
Notes to Consolidated Financial Statements 41
(a) 2. Financial Statement Schedules
All schedules have been omitted because they are not required or
because the required information is contained in the consolidated
financial statements or notes thereto.
(a) 3. Exhibits
3.1 Third Amended and Restated Declaration of Trust, dated June 8, 2005
(incorporated by reference to Appendix A to Proxy Statement filed with
the Commission on April 28, 2005).
3.2 Amended and Restated Bylaws of American Mortgage Acceptance Company, a
real estate investment trust (incorporated by reference to Exhibit to
Appendix B to Proxy Statement filed with the Commission on April 28,
2005).
69
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (CONTINUED).
3.3 Amendment to the Amended and Restated Bylaws of American Mortgage
Acceptance Company (incorporated by reference to Exhibit 10(a) to the
Company's December 31, 2005 Annual Report on Form 10-K).
3.4 Amendment No. 2 to the Amended and Restated Bylaws of American
Mortgage Acceptance Company, a real estate investment trust
(incorporated by reference to our Current Report on Form 8-K filed on
November 6, 2006).
3.5 Amendment No. 3 to the Amended and Restated Bylaws of American
Mortgage Acceptance Company, dated March 19, 2007 (incorporated by
reference to Exhibit 3.2 on our Current Report on Form 8-K filed on
March 23, 2007)
3.6 Amendment No. 4 to the Amended and Restated Bylaws of American
Mortgage Acceptance Company (incorporated by reference to Exhibit 3.1
on our Current Report on Form 8-K filed on February 1, 2008)
10(a) Form of Non-Qualified Share Option Award Agreement (incorporated by
reference to Exhibit 10(g) to the Company's December 31, 2005 Annual
Report of Form 10-K).
10(b) Amended and Restated Incentive Share Option Plan of the Company
(incorporated by reference to our Current Report on Form 8-K filed on
August 26, 2004).
10(c) First Amendment to the Amended and Restated Incentive Share Option
Plan of the Company, dated June 9, 2004 (incorporated by reference to
Exhibit 10(e) to the Company's June 30, 2004 Amended Quarterly Report
on Form 10-Q/A).
10(d) Master Repurchase Agreement, dated March 29, 2006, among AMAC CDO
Funding I, as seller and Bank of America, N.A. together with Banc of
America Securities LLC, as buyer (incorporated by reference to our
Current Report on Form 8-K filed on April 4, 2006).
10(e) Amendment No. 1 to Master Repurchase Agreement, dated September 14,
2006, by and among AMAC CDO Funding I, as seller and Bank of America,
N.A. together with Banc of America Securities LLC, as buyer
(incorporated by reference to our Current Report on Form 8-K filed on
September 19, 2006).
10(f) Custodial Agreement, dated March 29, 2006, by and among AMAC CDO
Funding I, a Cayman Islands exempted company, as seller, and Bank of
America, N.A., a national banking association organized under the laws
of the United States together with Banc of America Securities LLC, a
limited liability company organized under the laws of Delaware, as
buyer and Lasalle Bank National Association, as custodian
(incorporated by reference to our Current Report on Form 8-K filed on
April 4, 2006).
10(g) Guarantee, dated March 29, 2006, by American Mortgage Acceptance
Company, as guarantor, in favor of Bank of America, N.A. and Banc of
America Securities LLC, as buyer (incorporated by reference
(incorporated by reference to our Current Report on Form 8-K filed on
April 4, 2006).
10(h) Amended and Restated Credit Note, dated April 19, 2006, in favor of
CharterMac lender (incorporated by reference to our Current Report on
Form 8-K filed on April 26, 2006).
10(i) Securities Purchase Agreement, dated August 15, 2006, by and among
CharterMac, Charter Mac Corporation, CM ARCap Investors LLC, The
Common Members listed on Schedule I thereto, The Preferred Members
listed on Schedule I thereto, ARCap Investors, L.L.C., ARCap Reit,
Inc. and AI Sellers Representative, L.L.C. (incorporated by reference
to our Current Report on Form 8-K filed on August 21, 2006).
10(j) Pledge And Security Agreement, dated September 14, 2006, by American
Mortgage Acceptance Company, a Massachusetts business trust, as
pledgor for the benefit of Bank of America, N.A., a national banking
association and Banc of America Securities LLC, a limited liability
company organized under the laws of Delaware, as buyer (incorporated
by reference to our Current Report on Form 8-K filed on September 19,
2006).
10(k) Third Amendment to the Loan Agreement dated as of June 29, 2007,
between American Mortgage Acceptance Company and Centerline Holding
Company (incorporated by reference to our Current Report on Form 8-K
filed on July 5, 2007)
10(l) First Amended and Restated Loan Agreement, dated September 17, 2007,
between Centerline Holding Company and American Mortgage Acceptance
Company (incorporated by reference to our Current Report on Form 8-K
filed on September 21, 2007)
70
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (CONTINUED).
10(m) Master Repurchase Agreement, dated April 2, 2007 (incorporated by
reference to our Current Report on Form 8-K filed on April 9, 2007)
10(n) Third Amended and Restated Advisory Services Agreement, dated March
19, 2007 (incorporated by reference to our Current Report on Form 8-K
filed on March 23, 2007)
Sequential
Page
----------
12 Ratio of earnings to fixed charges and preferred dividends* 75
21 Subsidiaries of our Company* 76
23 Consent of Independent Registered Public Accounting Firm* 77
24.1 Power of Attorney (Included on signature page hereto)
31.1 Chief Executive Officer certification pursuant to Section
302 of the Sarbanes-Oxley Act of 2002* 78
31.2 Chief Financial Officer certification pursuant to Section
302 of the Sarbanes-Oxley Act of 2002* 79
32.1 Certification pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002* 80
99. Additional Exhibits
-------------------
* Filed herewith
71
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the registrant and in the capacities and dates indicated.
AMERICAN MORTGAGE ACCEPTANCE COMPANY
(Registrant)
Date: March 28, 2008 By: /s/ James L. Duggins
--------------------
James L. Duggins
Chief Executive Officer
(Principal Executive Officer)
Date: March 28, 2008 By: /s/ Robert L. Levy
------------------
Robert L. Levy
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
72
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints James
L. Duggins and Robert L. Levy, and each or either of them, his true and lawful
attorney-in-fact with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report, and to cause the same to be filed, with all
exhibits thereto and other documents in connection therewith, with the
Securities Exchange Commission, hereby granting to said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing whatsoever requisite or desirable to be done in and about
the premises, as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all acts and things that
said attorneys-in-fact and agents, or either of them, or their substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated:
Signature Title Date
- --------------------- ---------------- ----------------
/s/ Jeff T. Blau
- ----------------
Jeff T. Blau Managing Trustee March 28, 2008
/s/ James L. Duggins
- --------------------
James L. Duggins Managing Trustee March 28, 2008
/s/ George P. Jahn
- ------------------
George P. Jahn Managing Trustee March 28, 2008
/s/ Harry Levine
- ----------------
Harry Levine Managing Trustee March 28, 2008
/s/ Scott M. Mannes
- -------------------
Scott M. Mannes Managing Trustee March 28, 2008
/s/ Stanley R. Perla
- --------------------
Stanley R. Perla Managing Trustee March 28, 2008
/s/ Marc D. Schnitzer
- ---------------------
Marc D. Schnitzer Chairman March 28, 2008
73