UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
Commission File Number 0-23972
AMERICAN MORTGAGE ACCEPTANCE COMPANY
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 13-6972380
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 MADISON AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 317-5700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Large Accelerated filer [ ] Accelerated filer [X] Non-accelerated
filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of October 31, 2006, there were 8,361,879 outstanding common shares of the
registrant's shares of beneficial interest, $0.10 par value.
TABLE OF CONTENTS
AMERICAN MORTGAGE ACCEPTANCE COMPANY
FORM 10-Q
PAGE
PART I
Item 1. Condensed Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
Item 4. Controls and Procedures 27
PART II
Item 1. Legal Proceedings 29
Item 1A. Risk Factors 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits 29
SIGNATURES 30
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
ASSETS
September 30, December 31,
2006 2005
------------ -----------
(Unaudited)
Cash and cash equivalents $ 12,243 $ 11,214
Restricted cash 5,580 --
Investments
Debt securities at fair value 157,982 222,723
Mortgage loans receivable, net 335,820 51,981
Notes receivable, net 9,213 13,725
Revenue bonds 4,972 6,626
ARCap -- 20,678
Real estate owned - held and used, net 48,988 50,345
Real estate owned - held for sale, net 18,004 18,448
Accounts receivable 5,228 3,079
Other assets 3,716 1,904
--------- ---------
Total assets $ 601,746 $ 400,723
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debt securities repurchase facilities $ 150,150 $ 209,101
Mortgage loan repurchase facility 258,492 --
Warehouse facility -- 4,070
Mortgages payable on real estate owned 40,083 40,487
Preferred shares of subsidiary (subject to mandatory repurchase) 25,000 25,000
Accounts payable and accrued expenses 12,575 1,599
Due to Advisor and affiliates 3,797 2,961
Distributions payable 3,322 3,322
--------- ---------
Total liabilities 493,419 286,540
--------- ---------
Commitments and contingencies
Shareholders' equity:
Shares of beneficial interest; $.10 par value; 25,000 shares authorized;
8,742 and 8,719 issued and 8,327 and 8,304 outstanding in 2006 and 2005,
respectively 874 871
Treasury shares of beneficial interest at par; 415 shares in 2006 and 2005 (42) (42)
Additional paid-in capital 126,738 126,357
Share-based compensation -- (20)
Accumulated deficit (19,115) (17,766)
Accumulated other comprehensive (loss) income (128) 4,783
--------- ---------
Total shareholders' equity 108,327 114,183
--------- ---------
Total liabilities and shareholders' equity $ 601,746 $ 400,723
========= =========
See accompanying notes to condensed condolidated financial statements.
3
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2006 2005 2006 2005
-------- -------- -------- --------
Revenues:
Interest income:
Debt securities $ 2,718 $ 3,351 $ 8,932 $ 9,722
Mortgage loans 5,522 1,734 11,197 3,497
Notes receivable 41 365 490 1,222
Revenue bonds 112 145 396 438
Temporary investments 94 48 229 132
Rental income of real estate owned -
held and used 1,702 1,654 5,194 5,017
Fees related to prepayment of investments -- 5,314 -- 5,314
Other revenues 24 155 185 883
-------- -------- -------- --------
Total revenues 10,213 12,766 26,623 26,225
-------- -------- -------- --------
Expenses:
Interest 5,669 1,937 12,255 4,854
Interest - distributions to preferred
shareholders of subsidiary (subject to
mandatory repurchase) 591 461 1,665 961
Mortgage interest for real estate owned
- held and used 593 601 1,785 1,808
Property operations of real estate owned
- held and used 852 794 2,636 2,357
General and administrative 1,272 608 2,245 1,513
Impairment loss on investments 4,632 -- 4,632 --
Fees to Advisor 3,092 1,906 4,895 3,280
Depreciation 336 336 1,008 1,009
Amortization and other 9 68 43 292
-------- -------- -------- --------
Total expenses 17,046 6,711 31,164 16,074
-------- -------- -------- --------
Other income:
Gain on sale of ARCap 19,223 -- 19,223 --
Change in fair value of derivative instruments (10,439) -- (8,416) --
Equity in earnings of ARCap (76) 600 3,000 1,800
Gain (loss) on repayment or sale of investments (755) 254 (908) 183
Income from discontinued operations 114 403 260 1,074
-------- -------- -------- --------
Total other income 8,067 1,257 13,159 3,057
-------- -------- -------- --------
Net income $ 1,234 $ 7,312 $ 8,618 $ 13,208
======== ======== ======== ========
Net income from continuing operations
per share (basic and diluted) $ 0.14 $ 0.83 $ 1.01 $ 1.46
======== ======== ======== ========
Net income from discontinued operations
per share (basic and diluted) $ 0.01 $ 0.05 $ 0.03 $ 0.13
======== ======== ======== ========
Net income per share (basic and diluted) $ 0.15 $ 0.88 $ 1.04 $ 1.59
======== ======== ======== ========
Dividends per share $ 0.40 $ 0.40 $ 1.20 $ 1.20
======== ======== ======== ========
Weighted average shares outstanding:
Basic 8,307 8,311 8,305 8,320
======== ======== ======== ========
Diluted 8,315 8,314 8,308 8,323
======== ======== ======== ========
See accompanying notes to condensed condolidated financial statements.
4
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------------
2006 2005
---------- ---------
Cash flows from operating activities:
Net income $ 8,618 $ 13,208
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense 1,334 1,038
Gain on sale of ARCap (19,223) --
Loss (gain) on impairment or disposal of assets 5,608 (183)
Change in fair value of derivative instruments 8,416 --
Equity in earnings of ARCap (3,000) (1,800)
Amortization and accretion (212) 121
Other non-cash expense 89 20
Distributions received from ARCap 4,037 1,800
Changes in operating assets and liabilities:
Accounts receivable (611) (923)
Other assets 126 (445)
Due to Advisor and affiliates 836 1,659
Accounts payable and accrued expenses 2,916 556
--------- ---------
Net cash provided by operating activities 8,934 15,051
--------- ---------
Cash flows from investing activities:
Funding and purchase of mortgage loans (294,902) (36,872)
Principal repayments of mortgage loans 6,871 2,874
Investment in debt securities -- (40,503)
Principal repayments of debt securities 56,785 6,872
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 37,181 --
Increase in restricted cash (5,580) --
Proceeds from sale of real estate owned -- 7,474
Principal repayment on real estate owned -- 480
Funding of notes receivable (74) (472)
Repayment of notes receivable 3,122 9,883
Principal repayment of revenue bonds 1,622 157
--------- ---------
Net cash used in investing activities (191,775) (67,257)
--------- ---------
continued
5
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------------
2006 2005
--------- ---------
Cash flows from financing activities:
Proceeds from mortgage loan repurchase facility 258,492 --
Proceeds from debt securities repurchase facilities 11,926 80,659
Repayments of debt securities repurchase facilities (70,875) (23,647)
Proceeds from line of credit - related party 123,442 14,761
Repayments of line of credit - related party (123,442) (19,361)
Proceeds from warehouse facility -- 243
Repayments of warehouse facility (4,070) --
Deferred financing costs (1,953) (802)
Distributions paid to shareholders (9,966) (9,994)
Treasury stock purchases -- (368)
Stock options exercised 316 --
Issuance of preferred shares of subsidiary -- 25,000
--------- ---------
Net cash provided by financing activities 183,870 66,491
--------- ---------
Net increase in cash and cash equivalents 1,029 14,285
Cash and cash equivalents at the beginning of the year 11,214 2,674
--------- ---------
Cash and cash equivalents at the end of the period $ 12,243 $ 16,959
========= =========
Non-cash investing activities:
Accounts receivable from repayment and sale of investments $ 1,683 $ 22,910
========= =========
See accompanying notes to condensed condolidated financial statements.
6
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2006
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of American
Mortgage Acceptance Company and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation. Unless
otherwise indicated, we herein refer to American Mortgage Acceptance Company and
its subsidiaries as "AMAC", "we", "us", "our", and "our Company". We are
externally managed by CharterMac AMI Associates, Inc., (the "Advisor"), a
subsidiary of CharterMac, a publicly traded company. We operate in one business
segment, which focuses on investing in mortgage loans secured by multifamily and
commercial property throughout the United States.
In March 2006, we formed our AMAC CDO Funding I ("AMAC CDO") subsidiary to
accumulate assets for the purposes of executing our first collateralized debt
obligation ("CDO") securitization (see Note 6). In April 2006, we dissolved a
subsidiary that we had formed for the purposes of managing a repurchase
facility, which expired in March 2004.
The condensed consolidated financial statements have been prepared without
audit. In the opinion of management, the financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly our financial position as of September 30, 2006, and the results
of our operations and our cash flows for the periods then ended. However, the
operating results for interim periods may not be indicative of the results for
the full year.
Certain information and footnote disclosures normally included in annual
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") have been
condensed or omitted. It is suggested that these financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in our annual report on Form 10-K for the year ended December 31, 2005.
Our annual report on Form 10-K for the year ended December 31, 2005, contains a
summary of our significant accounting policies. There have been no material
changes to these items since December 31, 2005, except as noted below.
The preparation of the condensed consolidated financial statements in conformity
with GAAP requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities as of the date of the financial statements as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
We have reclassified certain prior year amounts to conform to the current year
presentation, in particular the reclassification of results of operations of our
real estate owned - held for sale portfolio to discontinued operations (see Note
12).
UPDATE TO SIGNIFICANT ACCOUNTING POLICIES
As previously disclosed, prior to December 2005, our investment in ARCap
Investors, L.L.C. ("ARCap") consisted of preferred membership interests. In
December 2005, we converted a portion of our preferred interests to common
interests. While we continued to account 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.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement No. 157, FAIR VALUE MEASUREMENTS,
which established a framework for calculating the fair value of assets and
liabilities as required by numerous other accounting pronouncements, and expands
7
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2006
(Unaudited)
disclosure requirements of the fair values of certain assets and liabilities.
The statement is effective as of our 2008 fiscal year. We are currently
evaluating the impact, if any, that the adoption of this statement will have on
our financial statements.
During the first quarter of 2006, we adopted Statement of Financial Accounting
Standards No. 123(R), SHARE-BASED PAYMENT ("SFAS No. 123(R)") which replaces
Statement of Financial Accounting Statements No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS No. 123"). Among other things, SFAS No. 123(R) requires that
companies record the value of stock option grants as compensation expense, while
SFAS No. 123 allowed disclosure of the impact instead of recording the expense.
As we had been accounting for share-based payments as an expense following the
fair value provisions of SFAS No. 123, the impact of adopting SFAS No. 123(R)
was not material to us. See also Note 10.
In June 2006, the FASB issued Interpretation 48, ACCOUNTING FOR UNCERTAINTY IN
INCOME TAXES. The Interpretation sets a standard for recognizing tax benefits in
a company's income statement based on a determination whether it is likely or
not that the position would withstand audit, without regard for the likelihood
of an audit taking place. Assuming a position meets the "more-likely-than-not"
threshold, the Interpretation also prescribes measurement standards requiring
determination of how much of the tax position would ultimately be allowed if
challenged. The Interpretation will be effective in the first quarter of 2007.
We are currently determining the impact of the Interpretation on our financial
statements.
In November 2005, the FASB issued Staff Position 115 / 124 - 1, THE MEANING OF
OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS. The
Staff Position clarified, among other matters, the determination as to when an
unrealized loss on debt securities should be reflected in the income statement
as opposed to accumulated other comprehensive income and was effective as of the
first quarter of 2006. Initial application of the Staff Position had no material
impact on our results of operations.
NOTE 2 - INVESTMENTS IN DEBT SECURITIES - AVAILABLE FOR PLACECITYSALE
Information regarding our investments in debt securities is as follows:
(In thousands)
September 30, December 31,
2006 2005
------------ ------------
Amortized cost $ 161,616 $ 218,891
--------- ---------
Unrealized gains 483 5,707
Unrealized losses (1,134) (1,875)
--------- ---------
Net unrealized (loss) gain (651) 3,832
--------- ---------
Impairment losses (2,224) --
Net realized losses (759) --
--------- ---------
Fair value $ 157,982 $ 222,723
========= =========
8
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2006
(Unaudited)
The fair value and gross unrealized losses of our investments in debt securities
aggregated by length of time that these individual debt securities have been in
a continuous unrealized loss position at September 30, 2006, and December 31,
2005, is summarized in the table below:
(Dollars in thousands)
September 30, 2006 December 31, 2005
------------------------------ -------------------------------
Less than 12 Months Less than 12 Months
12 Months or More Total 12 Months or More Total
--------- --------- --------- --------- --------- ---------
Number of securities 6 3 9 8 16 24
Fair value $29,456 $17,951 $47,407 $25,905 $56,281 $82,186
Gross unrealized
loss $ 414 $ 720 $ 1,134 $ 197 $ 1,678 $ 1,875
Subsequent to September 30, 2006, our board of trustees approved a plan to sell
22 securities with a total carrying amount of approximately $82.1 million.
Twenty of these securities were sold in November 2006 and we are currently
pursuing the sale of the two remaining debt securities. As we no longer intend
to hold these securities, we have concluded that unrealized losses associated
with these assets were other-than temporary and we have recognized impairment
losses of approximately $2.2 million in the third quarter of 2006 and accrued
the loss on sale associated with the write off of unamortized premiums related
to the securities, which was approximately $759,000. The data in the table
immediately above as of September 30, 2006, does not include the securities for
which we recognized a charge for other-than-temporary impairment as there were
no longer unrealized losses associated with them. The unrealized losses shown
above are as a result of increases in interest rates subsequent to the
acquisition of the securities. All of the debt securities are performing
according to their terms. Furthermore, we have the intent and ability to hold
these securities to maturity, or at least until interest rates change such that
the fair value is no longer less than book value. Accordingly, we have concluded
that these declines in value are temporary.
During April 2006, we sold a debt security and a related mortgage loan (see Note
3).
During September 2006, we refinanced a loan with an existing borrower. The
refinancing resulted in the payoff of an existing debt security and the funding
of a first mortgage and subordinated note (see Note 3).
At September 30, 2006, all of our debt securities were pledged as collateral
under our repurchase facilities.
NOTE 3 - MORTGAGE LOANS AND NOTES RECEIVABLE
During April 2006, we purchased a first mortgage loan from CharterMac, the
parent of our Advisor, at approximately its $26.0 million face value (see Note
13). This note, along with an existing $5.0 million subordinated participation
we already owned, were assigned to AMAC CDO and pledged as collateral under the
mortgage loan repurchase facility.
Including the first mortgage loan purchased from CharterMac, we partially or
fully funded 26 first mortgage loans and subordinated notes, totaling
approximately $292.3 million in 2006. The loans bear interest at a weighted
average fixed interest rate of 6.43%.
During April 2006, we sold a debt security and a mortgage loan, both pertaining
to one property, for approximately $15.5 million. As a result of the sale, we
recognized a loss of approximately $138,000 due to the write-off of an
unamortized premium on the debt security. We also recognized income of
approximately $131,000 due to the accelerated amortization of a loan origination
fee on the mortgage loan, which is included in other revenues on our condensed
consolidated statements of income for the three-and nine-month periods ended
September 30, 2006.
9
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2006
(Unaudited)
During September 2006, we refinanced a loan with an existing borrower, resulting
in the early payoff of one debt security certificate in the amount of
approximately $37.2 million, and the funding of a first mortgage loan in the
amount of approximately $13.5 million, and a subordinated loan in the amount of
approximately $16.5 million. A remaining first mortgage loan was made by a
subsidiary of CharterMac in the amount of approximately $27.3 million (see Note
13). The early payoff of the debt security resulted in the receipt of a
prepayment penalty in the amount of $3.2 million, which was deferred, net of
unamortized costs and fees, and is being amortized over the life of the new
loan.
During 2006, three of our mortgage loans and notes receivable defaulted, which
caused us to stop accruing interest on these loans. In the third quarter of
2006, as information regarding these loans materialized, we recognized two of
the three loans as impaired due to deteriorating operating performance of the
underlying properties and recorded a charge of $2.4 million. We determined the
impairment amounts by analyzing the real estate markets in the locations of the
properties and determining a fair value based on the types of the properties. As
a result, the carrying amounts have been written down to reflect these fair
values.
At September 30, 2006, approximately $290.3 million of our mortgage loans were
pledged as collateral under our mortgage loan repurchase facility (see Note 6).
NOTE 4 - INVESTMENT IN ARCAP
During August 2006, we sold our membership interests in ARCap to CharterMac (see
also Note 13). 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.
We expect to receive an additional $1.7 million of proceeds in September 2007
which is included in the gain recognized and is recorded in accounts receivable
in the condensed consolidated balance sheet. Contingent upon future events, we
may receive an additional $791,000 of proceeds in 2007 and 2008 which would
result in additional gain when received.
10
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2006
(Unaudited)
NOTE 5 - REAL ESTATE OWNED
Real estate owned consisted of the following:
(Dollars in thousands)
Carrying Carrying
Value Value
as of as of
Number of September 30, December 31,
Units Location 2006 2005
--------- --------------- ------------ -----------
Real Estate Owned - Held and Used, net
--------------------------------------
Concord Portfolio 852 Houston, TX $ 53,059 $ 53,407
=====
Less: accumulated depreciation (4,071) (3,062)
-------- --------
Total $ 48,988 $ 50,345
======== ========
Mortgages Payable on Real Estate Owned
--------------------------------------
Concord Portfolio $ 40,083 $ 40,487
======== ========
Real Estate Owned - Held for Sale, net (1)
-------------------------------------------
Reserve at Autumn Creek 212 Friendswood, TX $ 19,344, $ 19,462
=====
Less: accumulated depreciation (1,340) (1,014)
-------- --------
Total $ 18,004 $ 18,448
======== ========
(1) During September 2006, we entered into a contract to sell the Autumn Creek
property in October 2006. As such, the carrying amount of the property has been
reclassified as "Held for Sale" property and we stopped depreciating the asset.
We have also reclassified results of property operations as income from
discontinued operations on our consolidated statements of income. Income from
discontinued operations in the 2006 period includes an accrued loss of
approximately $98,000 related to the sale.
NOTE 6 - MORTGAGE LOAN REPURCHASE FACILITY
In addition to our existing repurchase facilities, we executed a new repurchase
agreement during March 2006 with Bank of America ("BOA"). The purpose of this
facility is to fund investments that are to be placed into our first CDO
securitization. Advance rates on the borrowings from this facility, ranging from
50% to 95% of collateral value, are determined on a loan-by-loan basis. Interest
on the borrowings, which range from LIBOR plus 0.50% to LIBOR plus 2.25%, are
also determined on a loan-by-loan basis. The repurchase facility expires upon
inception of the CDO securitization, or six months after the inception of the
repurchase facility, whichever comes first. During September 2006, we amended
the agreement with BOA, extending the funding limit of this facility from $250.0
million to $350.0 million and extending the term to November 30, 2006. At
September 30, 2006, we had approximately $258.5 million of borrowings
outstanding under this facility, at a weighted average interest rate of 6.39%.
In connection with the CDO securitization, we have prepaid approximately $1.8
million of a 1% fee of the expected securitization amount, due in full when the
CDO is securitized. These fees, which are non-refundable, have been deferred and
will be amortized over the life of the CDO securitization.
We are expecting to utilize CDO securitizations as a financing tool to lower our
cost of capital and thereby enhance our investment capabilities and
opportunities. Tapping these securitization markets should enable us to compete
for lending opportunities which we have not competed effectively in the past and
to originate a wide variety of debt products, including floating- or fixed-rate
assets, first mortgages, subordinate participations in first mortgages, bridge
11
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2006
(Unaudited)
loans, mezzanine loans, etc. We intend for the assets to be aggregated on our
balance sheet and later securitized. We have originated and purchased
approximately $297.3 million in first mortgage loans and subordinated notes
through September 30, 2006, that we are using as collateral for our first CDO
securitization. Subsequent to September 30, 2006, we originated approximately
$111.8 million in additional first mortgages, of which $77.2 million will be
used as collateral in our first CDO transaction and the remainder will be used
as collateral in future CDO transactions. We priced our first CDO transaction in
October 2006 and plan to close this transaction in the fourth quarter of 2006
(see Note 15). This proposed offering was priced at approximately $362.0 million
aggregate principal of non-recourse CDO notes. AMAC CDO will issue the notes
secured by a portfolio consisting of approximately $400.0 million of multifamily
and commercial real estate assets.
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
September 30, December 31,
(In thousands) 2006 2005
------------ -----------
Interest rate derivatives (see Note 8) $ 8,099 $ 39
CDO - related loan fees (1) 1,379 --
Preferred distribution payable 591 --
Accrued interest payable 229 385
Other 2,277 1,175
------- -------
$12,575 $ 1,599
======= =======
(1) Includes refundable deposits collected during the due diligence period of a
loan transaction which are payable to other parties.
NOTE 8 - DERIVATIVE INSTRUMENTS
CASH FLOW HEDGE OF DEBT
As of September 30, 2006, we had eight interest rate swaps with a notional
amount of $81.2 million, which are designated as cash flow hedges with the
hedged item being the interest payments on our variable-rate repurchase
facilities. These swaps are recorded at fair value, with changes in fair value
recorded in comprehensive income to the extent the hedge is effective in
achieving offsetting cash flows. There was no ineffectiveness in the hedging
relationships during the periods reported. Amounts in accumulated other
comprehensive income 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.
We expect that the swaps will be highly effective in achieving offsetting
changes in cash flows throughout its term.
FREE-STANDING DERIVATIVES RELATED TO INVESTMENTS
We also have 31 interest rate swaps with an aggregate notional amount of
approximately $322.2 million that are hedging changes in the fair value of
certain investments. We did not elect to apply hedge accounting to these swaps
and, therefore, the changes in the fair value of these swaps are included in net
income.
We are required to maintain a minimum balance of collateral with BOA in
connection with these interest rate swaps. From time to time, as market rates
fluctuate, we may be called upon to post additional cash collateral with BOA to
maintain the fair value of the swaps. These payments are held as deposits with
BOA and will be used to settle the swap at termination date if market rates fall
below the fixed rates on the swaps. At September 30, 2006, we had approximately
12
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2006
(Unaudited)
$5.6 million in deposits held by BOA, which we classified as restricted cash on
our condensed consolidated balance sheets.
We will terminate these swaps when we issue the CDO, which we anticipate will
occur in the fourth quarter of 2006 (see Note 15). When we terminate these
swaps, we will enter into a total return swap, which we anticipate will convert
the variable cash flows from the CDO to fixed cash flows.
FINANCIAL STATEMENT IMPACT
Interest rate swaps for which we were in a net settlement liability position are
recorded in accounts payable and accrued expenses and those for which we are in
a net settlement asset position are recorded in other assets. The amounts
recorded were as follows:
(In thousands) September 30, December 31,
2006 2005
------------ -----------
Net asset position $ 863 $ 808
Net liability position $8,099 $ 39
Interest expense included the following related to our free standing derivatives
and interest rate hedges:
Three months ended Nine months ended
(In thousands) September 30, September 30,
------------------ -------------------
2006 2005 2006 2005
------ ------ ------ ------
Interest income $(187) $ -- $(378) $ --
Interest expense 32 -- 87 107
----- ----- ----- -----
Net $(155) $ -- $(291) $ 107
===== ===== ===== =====
The decrease in the fair value of our free-standing derivatives for the nine
months ended September 30, 2006, was $8.4 million and is recorded as a reduction
of other income on our condensed consolidated statements of income.
We estimate that approximately all of the net unrealized gains included in
accumulated other comprehensive income will decrease interest expense within the
next 12 months.
NOTE 9 - COMPREHENSIVE INCOME
Comprehensive income for the nine months ended September 30, 2006 and 2005, was
as follows:
(In thousands) Nine months ended
September 30,
---------------------
2006 2005
-------- --------
Net income $ 8,618 $ 13,208
Net unrealized (loss) gain on derivative instruments (382) 589
Net unrealized holding loss on investments (6,753) (483)
Reclassification adjustment for realized loss (gain) on investments 2,224 (3,137)
-------- --------
Comprehensive income $ 3,707 $ 10,177
======== ========
13
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2006
(Unaudited)
NOTE 10 - SHARE-BASED COMPENSATION
In accordance with our Amended and Restated Incentive Share Option Plan (the
"Plan"), our board of trustees can award share options to trustees, officers,
and employees of AMAC and employees of our Advisor and its affiliates. As of
September 30, 2006, a maximum of 666,636 options can be granted, with annual
limits based upon formulas specified in the Plan. Option terms and vesting
requirements are determined at the time of grant, provided that the term is no
longer than ten years.
On January 1, 2006, we adopted SFAS No. 123(R) under the modified prospective
method. Since we previously accounted for our share-based compensation as
expense under the fair value provisions of SFAS No. 123, our adoption did not
significantly impact our financial position or our results of operations.
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.
As of September 30, 2006, all of our share options were fully amortized, and
there was no unrecognized compensation cost related to non-vested share-based
compensation grants.
The following table summarizes share option activity in the Plan for the nine
months ended September 30, 2006:
Weighted
Average
Weighted Remaining
Average Contractual Aggregate
Exercise Term (in Intrinsic
Options Price years) Value
----------------------------------------------
Outstanding at beginning of year 187,052 $15.78 4.91
Granted -- -- --
Forfeited/expired -- -- --
Exercised (21,000) 15.03 --
---------------------------------------------
Outstanding at end of period 166,052 $15.88 3.90 $356,993
=============================================
Exercisable at end of period 166,052 $15.88 3.90 $356,993
=============================================
Compensation cost recorded $ 59,000
=========
The aggregate intrinsic value at September 30, 2006, represents the difference
between our closing share price on the last trading day of the third quarter and
the exercise prices of the outstanding options. This amount will change based on
the fair market value of our shares.
14
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2006
(Unaudited)
NOTE 11 - EARNINGS PER SHARE
Diluted net income per share is calculated using the weighted average number of
shares outstanding during the period plus the additional dilutive effect of
common share equivalents. The dilutive effect of outstanding share options is
calculated using the treasury stock method.
(In thousands, except per share amounts)
Three Months Ended September 30, 2006: Income Shares Per Share
-------- -------- ---------
Basic EPS $ 1,234 8,307 $ 0.15
Effect of dilutive securities -- 8 --
------- ------- ------
Diluted EPS $ 1,234 8,315 $ 0.15
======= ======= ======
Three Months Ended September 30, 2005:
Basic EPS $ 7,312 8,311 $ 0.88
Effect of dilutive securities -- 3 --
------- ------- ------
Diluted EPS $ 7,312 8,314 $ 0.88
======= ======= ======
Nine Months Ended September 30, 2006:
Basic EPS $ 8,618 8,305 $ 1.04
Effect of dilutive securities -- 3 --
------- ------- ------
Diluted EPS $ 8,618 8,308 $ 1.04
======= ======= ======
Nine Months Ended September 30, 2005:
Basic EPS $13,208 8,320 $ 1.59
Effect of dilutive securities -- 3 --
------- ------- ------
Diluted EPS $13,208 8,323 $ 1.59
======= ======= ======
NOTE 12 - DISCONTINUED OPERATIONS
Income from discontinued operations included the following related to the
Reserve at Autumn Creek (which we sold from our Real Estate Owned portfolio
subsequent to September 30, 2006) and the Plaza at San Jacinto (which we sold
from our Real Estate Owned portfolio in 2005):
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- ------------------------------
2006 2005 2006 2005
------ ------ ------ ------
Revenues $ 601 $ 587 $1,840 $1,688
====== ====== ====== ======
Net income $ 114 $ 403 $ 260 $1,074
====== ====== ====== ======
15
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2006
(Unaudited)
NOTE 13 - RELATED PARTY TRANSACTIONS
The costs paid or payable to our Advisor were as follows:
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2006 2005 2006 2005
------ ------ ------ ------
Shared services expenses $ 450 $ 235 $1,149 $ 691
Asset management fees 486 433 1,402 1,143
Incentive management fee (1) 2,156 1,238 2,344 1,446
------ ------ ------ ------
$3,092 $1,906 $4,895 $3,280
====== ====== ====== ======
Interest paid on related party line of credit $ 360 $ -- $1,105 $ 11
====== ====== ====== ======
((1)) Accrual based on the proportion of actual earnings as compared to our
estimates of full-year results. Due to an amendment to our Amended and
Restated Advisory Services Agreement in 2006, the calculation of the annual
incentive management fee payable to our Advisor excludes any gains or
losses resulting from the change in fair value of our derivative
instruments.
During April 2006, we purchased a first mortgage loan from CharterMac (see Note
3). Including this loan, during 2006 we partially or fully funded 26 first
mortgage loans and subordinated notes, totaling approximately $292.3 million,
originated by CharterMac Mortgage Capital Corporation ("CMC"), an affiliate of
our Advisor. CMC received approximately $1.4 million in loan origination fees
related to these originations, all of which were paid by the borrowers.
Additionally, CharterMac subsidiaries may act as a broker on our behalf from
time to time in origination transactions.
During April 2006, we amended our loan agreement with CharterMac to increase our
borrowing capacity to $50.0 million and extend the maturity date of the facility
to June 2007.
During 2006, we funded:
o two first mortgage loans aggregating $39.7 million (including one
funded subsequent to September 30 - see Note 15) to properties
developed by a company controlled by the chairman of CharterMac;
o a first mortgage loan ($31.0 million) to a property of which a fund
managed by a subsidiary of CharterMac is the 99.98% limited partner of
the borrower; and
o a first mortgage loan ($22.0 million) to a property that has a
preferred equity interest in it made by CharterMac Urban Capital Fund
I LLC, a fund managed by a subsidiary of CharterMac.
In the opinion of management, the terms of these transactions are consistent
with those transactions with independent third parties.
During September 2006, a subsidiary of CharterMac funded a first mortgage note
in the amount of approximately $27.3 million as part of a refinancing of one of
our loans (see Note 3).
During August 2006, we entered into a co-investment agreement with ARCap Real
Estate Special Situations Mortgage Fund, L.L.C. ("ARESS"); a fund managed by a
subsidiary of CharterMac, whereby we and ARESS will participate equally in
investment opportunities that are originated by affiliates and which meet the
investment criteria of both companies.
16
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2006
(Unaudited)
During August 2006, we sold our membership interests in ARCap to CharterMac (see
Note 4).
NOTE 14 - 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 basic claim of this
suit was for $1.5 million. 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 income.
See Note 15 regarding an additional lawsuit which arose subsequent to
September 30, 2006.
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, which could have
potentially resulted in an aggregate exposure of $7.5 million. 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, a subsidiary of CharterMac, both of
which are affiliates of the Advisor. Pursuant to the agreement with CMC,
CharterMac guaranteed CMC's obligations, and we agreed to indemnify both CMC and
CharterMac for any losses incurred in exchange for retaining all fees which we
were otherwise entitled to receive from Fannie Mae under the program. The
maximum exposure at September 30, 2006, was $3.2 million, although we expect
that we will not be called upon to fund these guarantees.
In the first quarter of 2003, we discontinued our loan program with Fannie Mae
and will issue no further guarantees pursuant to such program.
For these guarantees, 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.
(c) Future Funding Commitments
We are committed to additionally fund the following first mortgage and mezzanine
loans at September 30, 2006:
(In thousands)
MAXIMUM AMOUNT OF COMMITMENT
-------------------------------
NO. OF APT. LESS THAN 1
ISSUE DATE PROJECT LOCATION UNITS TOTAL YEAR 1-3 YEARS
---------- -------------------- ---------------- ----------- ------- ----------- ---------
Apr-05 Atlantic Hearthstone Hillsborough, NJ 198 $ 757 $ 757 --
Sept-06 Tiburon at Buckhead Atlanta, GA -- 21,500 21,500 --
------- ------- ------- -------
TOTAL FUTURE FUNDING COMMITMENTS 198 $22,257 $22,257 $ --
======= ======= ======= =======
17
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2006
(Unaudited)
NOTE 15 - SUBSEQUENT EVENTS
During October 2006, we funded a $12.7 million first mortgage loan to a property
developed by a company controlled by the chairman of CharterMac (see Note 13).
In the opinion of management, the terms of the transaction are consistent with
those of transactions with independent third parties.
During October 2006, we were named as a party in a lawsuit involving the
foreclosure upon a property which serves as secondary collateral for a mezzanine
loan investment. As the loan is currently performing in accordance with its
terms, we do not consider such foreclosure to reflect an impairment of our
investment and expect no loss with regard to this action.
In October 2006, we entered into a forward-starting swap agreement in
conjunction with the pricing of our planned CDO transaction. The interest rate
swap will become effective on November 16, 2006 and will terminate on September
18, 2016. As determined by the swap agreement, we will receive interest at a
fixed rate of 5.425% on variable rate debt of approximately $333.4 million. As
described in Note 8, the swap will serve to hedge our debt obligations in the
CDO.
In October 2006, we completed the sale of the Autumn Creek property from our
real estate owned portfolio (see Note 5).
In October 2006, we priced our first CDO transaction, which we plan to close in
the fourth quarter of 2006 (see Note 3).
In November 2006, we completed the sale of 20 debt securities with a September
30, 2006, carrying amount of $74.2 million (see Note 2).
In November 2006, our Board of Trustees approved the nomination of George P.
Jahn as an independent trustee and James L. Duggins as a non-independent trustee
for election to the Board of Trustees for a one year term.
During November 2006, our Board of Trustees approved a special distribution of
$1.40 per share to common shareholders of record at November 30, 2006.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
--------------------------
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended.
Such forward-looking statements include statements regarding the intent, belief
or current expectations of us and our management (which includes our Advisor)
and involve known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. These factors, which are outlined in detail in
our annual report on Form 10-K for the year ended December 31, 2005, include the
following:
o Risks of investing in uninsured and non-investment grade mortgage
assets and subordinated commercial mortgage-backed securities
("CMBS");
o Competition in acquiring desirable investments;
o Interest rate fluctuations;
o Risks associated with hedging transactions, which can limit gains and
increase exposure to loss;
o Risks associated with investments in real estate generally and the
properties which secure many of our investments;
o General economic conditions, particularly as they affect the value of
our assets and the credit status of our borrowers;
o Dependence on our external Advisor for all services necessary for our
operations;
o Conflicts which may arise among us and other entities affiliated with
our Advisor which have similar investment policies to ours;
o Risks associated with the repurchase agreements we utilize to finance
our investments and the availability of financing generally; and
o Risks associated with our contemplated CDO transactions, which
include, but are not limited to:
o The inability to acquire eligible investments for a CDO issuance;
o Interest rate fluctuations on variable-rate swaps entered into to
hedge fixed-rate loans;
o The inability to find suitable replacement investments within
reinvestment periods; and
o The negative impact on our cash flow that may result from the use
of CDO financings with over-collateralization and interest
coverage requirements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this quarterly report.
Factors Affecting Comparability
-------------------------------
During 2006, we 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 income.
19
During August 2006, we sold our membership interests in 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.
During September 2005, the GNMA certificate and mezzanine loan investments
relating to one property were paid off prior to the maturity date. This payoff
resulted in significantly higher levels of fees earned and a gain on redemption.
There were no such fees recognized in subsequent comparable periods.
During the third quarter of 2006, we recognized impairment losses on two
mortgage loans and notes receivable. As a result, these charges have been
recorded in impairment loss on investments on our consolidated statements of
income. There were no such losses recognized in the 2005 periods.
Results of Operations
The following is a summary of our operations for the three and nine months ended
September 30, 2006 and 2005:
(In thousands)
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- ------------------------------
2006 2005 Change 2006 2005 Change
------- ------- -------- ------- ------- --------
Total revenues $10,213 $12,766 (20.0)% $26,623 $26,225 1.5 %
Total expenses 17,046 6,711 154.0 31,164 16,074 93.9
Total other income 8,067 1,257 541.8 13,159 3,057 330.5
------- ------- ----- ------- ------- -----
Net income $ 1,234 $ 7,312 (83.1)% $ 8,618 $13,208 (34.8)%
======= ======= ===== ======= ======= =====
During the three and nine month periods ended September 30, 2006, as compared to
the same periods in 2005, revenues have fluctuated mainly due to a significant
non-recurring prepayment fee recognized in the third quarter of 2005 (as noted
above) and the shifting of investing activities from debt securities toward
mortgage loans coupled with a sharply higher level of origination activity in
2006. Expenses have increased for both the three and nine month periods in 2006
primarily due to higher financing costs, advisory costs, property level costs
for real estate owned and impairment losses. In addition, other income in 2006
includes a gain on the sale of our ARCap investment and a significant unrealized
loss related to interest rate swaps.
REVENUES
Three Months Ended
----------------------------
% Change % of 2006 % of 2005
September 30, September 30, from prior Total Total
(In thousands) 2006 2005 Period Revenues Revenues
------------ ------------ ---------- --------- ---------
Interest income:
Debt securities $ 2,718 $ 3,351 (18.9)% 26.6 % 26.2 %
Mortgage loans 5,522 1,734 218.5 54.1 13.6
Notes receivable 41 365 (88.8) 0.4 2.9
Revenue bonds 112 145 (22.8) 1.1 1.1
Temporary investments 94 48 95.8 0.9 0.4
Other revenues 24 155 (84.5) 0.2 1.2
------- ------- ------ ----- -----
Subtotal 8,511 5,798 46.8 83.3 45.4
Fees related to the
prepayment of assets -- 5,314 (100.0) -- 41.6
Rental income 1,702 1,654 2.9 16.7 13.0
------- ------- ------ ----- -----
Total revenues $10,213 $12,766 (20.0)% 100.0 % 100.0 %
======= ======= ====== ===== =====
20
Nine Months Ended
----------------------------
% Change % of 2006 % of 2005
September 30, September 30, from prior Total Total
(In thousands) 2006 2005 Period Revenues Revenues
------------ ------------ ---------- --------- ---------
Interest income:
Debt securities $ 8,932 $ 9,722 (8.1)% 33.5% 37.1%
Mortgage loans 11,197 3,497 220.2 42.1 13.3
Notes receivable 490 1,222 (59.9) 1.8 4.6
Revenue bonds 396 438 (9.6) 1.5 1.7
Temporary investments 229 132 73.5 0.9 0.5
Other revenues 185 883 (79.0) 0.7 3.4
------- ------- ------ ----- -----
Subtotal 21,429 15,894 34.8 80.5 60.6
Fees related to the
prepayment of assets -- 5,314 (100.0) -- 20.3
Rental income 5,194 5,017 3.5 19.5 19.1
------- ------- ------ ----- -----
Total revenues $26,623 $26,225 1.5 % 100.0% 100.0%
======= ======= ====== ===== =====
Revenues were generated by the following investments (exclusive of Real Estate
Owned and ARCap):
(In thousands)
As of As of
September 30, 2006 September 30, 2005
---------------------------------- ----------------------------------
Weighted Weighted
Carrying % of Average Carrying % of Average
Amount Total Interest Rate Amount Total Interest Rate
---------------------------------------------------------------------
Debt securities $157,982 31.1% 6.02% $202,938 73.2% 6.16%
Mortgage loans 335,820 66.1 7.65 54,052 19.5 14.46
Notes receivable 9,213 1.8 9.67 13,725 4.9 9.49
Revenue bonds 4,972 1.0 8.70 6,559 2.4 8.69
-------- ------ ---- -------- ------ -----
$507,987 100.0% 7.19% $277,274 100.0% 7.63%
======== ====== ==== ======== ====== =====
Interest income from debt securities decreased for the three and nine months
ended September 30, 2006 primarily due to the payoff of four debt securities
during 2006 and the second half of 2005, offset by the funding of four lower
yielding debt securities in 2006.
Interest income from mortgage loans increased for the 2006 periods as compared
to 2005, primarily due to the funding of 26 first mortgage loans and
subordinated notes and the partial funding of several existing mezzanine loans
during 2006. The decrease in the weighted average interest rates on mortgage
loans as of September 30, 2006, as compared to September 30, 2005, was primarily
due to the funding of a greater amount of fixed-rate first mortgage loans, as
opposed to variable-rate mezzanine loans as we had done in the past.
Interest income from notes receivable decreased in 2006 as compared to
comparable 2005 periods, primarily due to the payoff of several notes during
2005 and 2006, as well as three loans which defaulted in 2006, whereupon we
discontinued accruing interest.
Interest income from revenue bonds for the three and nine months ended September
30, 2006, was lower than the comparable prior year periods, primarily due to the
payoff of two of the six revenue bonds we had held in the third quarter of 2006.
21
Interest income from temporary investments increased for the 2006 periods, as
compared to 2005, primarily due to the investment of excess cash on hand
resulting from the payoff of several mortgage loans and debt securities, as well
as the funds received from the sale of our investment in ARCap in August 2006.
Fees related to the prepayment of assets in 2005 represent fees relating to an
early payoff of a debt security and a mezzanine loan. There were no such fees
recognized in 2006 as the prepayment fee on a comparable transaction was
deferred and will be recognized over the life of a refinanced loan we
originated.
Other revenues decreased for the nine months ended September 30, 2006, primarily
due to the 2005 recognition of income from a commitment fee for which the
commitment had expired unused, and a non-refundable due diligence fee resulting
from a non-executed deal. There were no comparable transactions in 2006.
EXPENSES
Three Months Ended
----------------------------
% Change % of 2006 % of 2005
September 30, September 30, from prior Total Total
(In thousands) 2006 2005 Period Revenues Revenues
------------ ------------ ---------- --------- ---------
Interest $ 5,669 $ 1,937 192.7 % 55.5 % 15.2 %
Interest-preferred shares 591 461 28.2 5.8 3.6
General and administrative 1,272 608 109.2 12.4 4.8
Impairment loss on investments 4,632 -- 100.0 45.4 --
Fees to Advisor 3,092 1,906 62.2 30.3 14.9
Amortization and other 9 68 (86.8) 0.1 0.5
------- ------- ----- ----- ----
Subtotal 15,265 4,980 206.5 149.5 39.0
Property operations 852 794 7.3 8.3 6.2
Depreciation 336 336 0.0 3.3 2.7
Mortgage interest on real
estate owned 593 601 (1.3) 5.8 4.7
------- ------- ----- ----- ----
Total expenses $17,046 $ 6,711 154.0 % 166.9 % 52.6 %
======= ======= ===== ===== ====
Nine Months Ended
----------------------------
% Change % of 2006 % of 2005
September 30, September 30, from prior Total Total
(In thousands) 2006 2005 Period Revenues Revenues
------------ ------------ ---------- --------- ---------
Interest $12,255 $ 4,854 152.5 % 46.0 % 18.5 %
Interest-preferred shares 1,665 961 73.3 6.2 3.7
General and administrative 2,245 1,513 48.4 8.4 5.8
Impairment loss on investments 4,632 -- 100.0 17.4 --
Fees to Advisor 4,895 3,280 49.2 18.4 12.5
Amortization and other 43 292 (85.3) 0.2 1.1
------- ------- ----- ----- ----
Subtotal 25,735 10,900 136.1 96.6 41.6
Property operations 2,636 2,357 11.8 9.9 9.0
Depreciation 1,008 1,009 (0.1) 3.8 3.8
Mortgage interest on real
estate owned 1,785 1,808 (1.3) 6.7 6.9
------- ------- ----- ----- ----
Total expenses 31,164 $16,074 93.9 % 117.0 % 61.3 %
======= ======= ===== ===== ====
At September 30, 2006, excluding the non-recourse mortgage on real estate owned,
we had total debt of approximately $433.6 million with a weighted average
interest rate of 6.05% per year, including the effect of our swap agreements. At
September 30, 2005, we had a comparable balance of approximately $243.7 million
22
with a weighted average interest rate of 4.14% per year. The increase in the
weighted average interest rate is due to steady increases in market interest
rates during 2005 and 2006.
Interest expense increased for the three and nine months ended September 30,
2006, as compared to 2005, primarily due to the increased borrowings made during
2006 to fund loan originations and the increase in interest rates during 2005
and 2006, as mentioned above.
Due to specific accounting requirements, we classify distributions made on
preferred shares of our wholly owned subsidiary (issued in March 2005) as
interest expense. Distributions to preferred shareholders increased for the
three and nine months ended September 30, 2006, as compared to 2005 due to the
2006 period included nine months preferred distributions compared to six 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 for the three months ended
September 30, 2006, as compared to 2005, primarily due to increased accounting
and legal fees, excise taxes, insurance and a $150,000 legal settlement (see
Note 14 to the condensed consolidated financial statements). The nine-month
period in 2006 also includes higher share based compensation costs due to the
accelerated vesting of certain options in the first half of 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).
Impairment losses on assets relate to certain debt securities that no longer
meet our investment return criteria and which we contracted to sell in October
2006 (see Notes 2 and 15 to the condensed consolidated financial statements) and
impairments recognized on two mortgage loans due to deteriorating operating
performance (see Note 3 to the condensed consolidated financial statements). The
sale of many of the impaired debt securities was completed in November 2006.
Fees to Advisor increased for the 2006 periods, as compared to 2005, due to
higher shared services costs because of expansion of our business and a higher
incentive management fee accrual mainly due to the sale of the ARCap investment
in 2006. Incentive management fees are accrued based on projected earnings,
excluding non-cash gains or losses from changes in the fair value of our free
standing derivatives.
Amortization and other costs decreased for the 2006 periods, as compared to the
same periods in 2005, due to the deferred financing costs related to our
warehouse facility being fully amortized in August 2005.
Property operations represent all non-interest costs at the property level on
all of our Real Estate Owned - Held and Used properties. The increase for the
2006 periods, as compared to the prior year, was mainly due to higher property
tax costs.
OTHER INCOME
Other income increased for the three and nine months ended September 30, 2006,
as compared to 2005, primarily due to a gain resulting from the sale of our
ARCap membership interests offset by the lower amount of equity income
recognized due to the sale. The negative amount of equity income in the third
quarter of 2006 resulted from a correction to second quarter 2006 estimates
provided by ARCap which we had previously recorded.
In the third quarter of 2006, we recorded a substantial expense related to
changes in the fair value of certain interest rate swaps in 2006 to which we do
not apply hedge accounting. At September 30, 2006, we had 31 such swaps with an
aggregate notional amount of approximately $322.2 million used to manage the
fair value risk of loans we originated for the planned CDO execution, while we
had none in place in 2005. We expect that a portion of the unrealized losses on
these swaps will reverse in the fourth quarter of 2006 prior to their
termination.
Funds from Operations
---------------------
Funds from operations ("FFO"), represents net income or loss (computed in
accordance with GAAP), excluding gains or losses from sales of property,
excluding depreciation and amortization related to real property and including
funds from operations for unconsolidated joint ventures calculated on the same
basis. FFO is calculated in accordance with the National Association of Real
Estate Investment Trusts ("NAREIT") definition. FFO does not represent cash
generated from operating activities in accordance with GAAP and is not
necessarily indicative of cash available to fund cash needs. FFO should not be
considered as an alternative to net income as an indicator of our operating
23
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 fund other cash needs.
The following table reconciles net income to FFO for the three and nine months
ended September 30, 2006 and 2005:
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Net income $ 1,234 $ 7,312 $ 8,618 $ 13,208
Add back:
Depreciation of real property (1) 435 336 1,334 1,038
Accrued loss on sale (1) 98 -- 98 --
--------- --------- --------- ---------
FFO $ 1,767 $ 7,648 $ 10,050 $ 14,246
========= ========= ========= =========
Cash flows from:
Operating activities $ 3,702 $ 8,547 $ 8,934 $ 15,051
========= ========= ========= =========
Investing activities $ (61,501) $ (10,619) $(191,775) $ (67,257)
========= ========= ========= =========
Financing activities $ 66,350 $ 10,182 $ 183,870 $ 66,491
========= ========= ========= =========
Weighted average shares outstanding:
Basic 8,307 8,311 8,305 8,320
========= ========= ========= =========
Diluted 8,315 8,314 8,308 8,323
========= ========= ========= =========
(1) Includes a property classified as held for sale and included in discontinued
operations in our consolidated statements of income.
Since not all companies calculate FFO in a similar fashion, our calculation
presented above may not be comparable to similarly titled measures reported by
other companies.
Liquidity and Capital Resources
-------------------------------
SOURCES OF FUNDS
We expect that cash generated from our investments, as well as our borrowing
capacity, will meet our needs for short-term liquidity and will be sufficient to
pay all expenses and distributions to our shareholders in amounts sufficient to
retain our Real Estate Investment Trust ("REIT") status in the foreseeable
future. In order to qualify as a REIT under the Internal Revenue Code (the
"Code"), as amended, we must, among other things, distribute at least 90% of our
taxable income and 100% of any capital gain. We believe that we are in
compliance with the REIT-related provisions of the Code. As described below in
LIQUIDITY REQUIREMENTS AFTER SEPTEMBER 30, 2006, we expect that we will pay a
special distribution in association with the gain on the sale of our ARCap
investment, and may have additional capital gains to distribute in connection
with a property carried as Real Estate Owned at September 30, 2006, which we
sold in October 2006 which may both be offset by losses on debt securities that
we sold in November 2006.
We finance our investing activity primarily through borrowing from various
facilities at short-term rates. At September 30, 2006, we had approximately
$141.5 million available to borrow, contractually, under our debt facilities
without exceeding limits imposed by debt covenants and our by-laws. Subsequent
to September 30, 2006, we borrowed $61.7 million through our debt facilities.
24
From time to time, we may also issue common shares or other equity to fund
investing activity. During 2005, our subsidiary issued $25.0 million of
variable-rate preferred securities. The proceeds received were used to purchase
debt securities.
We have the capacity to raise approximately $170.0 million of additional funds
by issuing either common or preferred shares pursuant to a shelf registration
statement filed with the SEC. 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.
We are expecting to utilize CDO securitizations as a financing tool to lower our
cost of capital and thereby enhance our investment capabilities and
opportunities. Tapping these securitization markets should enable us to compete
for lending opportunities which we have not competed effectively in the past and
to originate a wide variety of debt products, including floating- or fixed-rate
assets, first mortgages, subordinate participations in first mortgages, bridge
loans, mezzanine loans, etc. We intend for the assets to be aggregated on our
balance sheet and later securitized. We have originated and purchased
approximately $297.3 million in first mortgage loans and subordinated notes
through September 30, 2006, that we are using as collateral for our first CDO
securitization. Subsequent to September 30, 2006, we originated approximately
$111.8 million in additional first mortgages, of which $77.2 million will be
used as collateral in our first CDO transaction and the remainder will be used
as collateral in future CDO transactions. We priced our first CDO transaction in
October 2006 and plan to close this transaction in the fourth quarter of 2006.
This proposed offering was priced at approximately $362.0 million aggregate
principal of non-recourse CDO notes. AMAC CDO will issue the notes secured by a
portfolio consisting of approximately $400.0 million of multifamily and
commercial real estate assets. We expect to continue using CDO securitizations
on an ongoing basis.
SUMMARY OF CASH FLOWS
During the nine months ended September 30, 2006, as compared to the same period
in 2005, the net change in cash and cash equivalents decreased by approximately
$13.3 million.
Net income in 2006 included net non-cash income of approximately $4.0 million
(including gains and losses on the sale of assets, expense related to the change
in the fair value of derivatives, impairment losses, depreciation and
amortization) compared to net costs of approximately $1.0 million for similar
items in the 2005 period. Excluding these items, net income in 2006 declined by
approximately $9.6 million, leading to the decline in operating cash flows of
approximately $6.1 million. Partially offsetting the decline was a higher level
of ARCap distributions prior to the sale, as well as the timing of liability
payments.
An increase in net cash used in investing activities (approximately $124.5
million) was due to the increase in investments made during 2006 as compared to
2005, offset by the proceeds of selling our ARCap investment. The increased
origination activity was due to shifting our focus to originating loans for our
first CDO securitization. In addition, we were required to fund restricted
collateral deposits in the 2006 period due to the decline in the fair value of
our free standing derivatives.
The increase in net cash provided by financing activities (approximately $117.4
million) can be attributed to the higher level of investing activity during the
2006 period, offset by partial repayments made to the repurchase facilities and
the full repayment of the warehouse facility.
LIQUIDITY REQUIREMENTS AFTER SEPTEMBER 30, 2006
Subsequent to September 30, 2006, we closed approximately $111.8 million of
first mortgage loans of which $77.2 million will be used as collateral in our
first CDO. In addition to these loans, we anticipate approximately another $25.5
million in additional acquisition volume for the CDO securitization to close
during 2006. Financing for the anticipated acquisitions is expected to be made
through our mortgage loan repurchase facility with BOA (see Note 6 to our
condensed consolidated financial statements). Following the completion of our
planned CDO issuance, which we expect to occur in the fourth quarter of 2006, we
expect to enter into another repurchase facility to allow for a second CDO
program.
During November 2006, distributions of approximately $3.3 million ($0.40 per
share), which were declared in September 2006, will be paid to common
shareholders. Additionally, due to the proceeds received from the sale of our
25
ARCap investment, we declared a special distribution of $1.40 per share to
common shareholders of record at November 30, 2006. This special distribution
will be paid in December 2006.
OTHER MATTERS
We are not aware of any trends or events, commitments or uncertainties, which
have not otherwise been disclosed that will or are likely to impact liquidity in
a material way.
Dividends
---------
The following table outlines our total dividends and return of capital amounts,
determined in accordance with GAAP, for the nine months ended September 30:
(In thousands)
2006 2005
------ ------
Total dividends $9,966 $9,994
Return of capital:
Amount 1,348 --
Per share 0.16 --
Percent of total dividends 13.53% --
Commitments, Contingencies and Off-Balance Sheet Arrangements
-------------------------------------------------------------
See Note 14 to our condensed consolidated financial statements for a summary of
our guarantees and commitments and contingencies.
We have no unconsolidated subsidiaries, special purpose off-balance sheet
financing entities, or other off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
In conducting business, we enter into various contractual obligations. Details
of these obligations, including expected settlement periods as of
September 30, 2006, are contained below.
Payments Due by Period
(In thousands)
----------------------------------------------------------
Less than More than
Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years
-------- --------- ----------- ----------- ---------
Debt:
Debt securities repurchase facilities (1) $150,150 $150,150 $ -- $ -- $ --
Mortgage loan repurchase facility (1) 258,492 258,492 -- -- --
Mortgage loan on real estate owned (2) 40,083 471 1,230 1,383 36,999
Preferred shares of subsidiary
(subject to mandatory repurchase) (1) 25,000 -- -- -- 25,000
Funding Commitments:
Future funding loan commitments 22,257 22,257 -- -- --
-------- -------- -------- -------- --------
Total $495,982 $431,370 $ 1,230 $ 1,383 $ 61,999
======== ======== ======== ======== ========
(1) Includes principal amounts only. At September 30, 2006, the weighted
average interest rate on debt that was recourse to us was 6.04%.
(2) Represents a first mortgage on properties we report as Real Estate Owned -
Held and Used (Concord Portfolio) as a sale of the properties did not meet
the criteria for sale recognition in accordance with GAAP. The first
mortgage loan is non-recourse with respect to AMAC, the debt service is
paid from the cash flows of the properties, and we will not be required to
satisfy the obligation.
Recently Issued Accounting Standards
------------------------------------
See NEW ACCOUNTING PRONOUNCEMENTS in Note 1 to the condensed consolidated
financial statements.
26
Inflation
---------
Inflation did not have a material effect on our results for the periods
presented.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates and
equity prices. The primary market risk to which we are exposed is interest rate
risk, which is highly sensitive to many factors, including governmental monetary
and tax policies, domestic and international economic and political
considerations and other factors beyond our control.
INTEREST RATE RISK
Interest rate fluctuations can adversely affect our income in many ways and
present a variety of risks, including the risk of mismatch between asset yields
and borrowing rates.
Our operating results depend in large part on differences between the income
from our assets (net of credit losses) and our borrowing costs. Although we have
originated variable-rate loans, most of our assets generate fixed returns and
have terms in excess of five years. We fund the origination and acquisition of a
significant portion of our assets with borrowings which 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 repurchase facilities and our trust preferred securities 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 $145.2 million unhedged portion of the $433.6 million of borrowings
outstanding at September 30, 2006, a 1% change in LIBOR would impact our annual
net income and cash flows by approximately $1.5 million. However, as the
interest income from some of our loans is also based on LIBOR, a 1% change in
LIBOR would impact our annual net income and cash flows from such loans by
approximately $337,000. The net effect of a 1% change in LIBOR would therefore
result in a change of our annual net income by approximately $1.1 million. 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 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.
Upon the completion of our planned CDO transaction, substantially all of our
debt will be fixed through interest rate swaps on the CDO debt.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule
15a-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of the end of the period covered by this quarterly report. Based
on such evaluation, such officers have concluded that our disclosure
controls and procedures as of the end of the period covered by this
quarterly report were effective to ensure that information required to be
disclosed by 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.
27
(b) INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any
significant changes in our internal control over financial reporting during
the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 27, 2003, prior to taking possession of the real estate
collateral supporting a loan investment, we were named in a lawsuit,
Concord Gulfgate, Ltd. vs. Robert Parker, Sunrise Housing Ltd., and
American Mortgage Acceptance Company, Cause No. 2003-59290 in the
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 basic claim of this suit was for
$1.5 million. 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 income.
See Note 15 of our condensed consolidated financial statements
regarding an additional lawsuit which arose subsequent to September
30, 2006.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors as disclosed
in our annual report on Form 10-K for the year ended December 31,
2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS
31.1 Chief Executive Officer certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
31.2 Chief Financial Officer certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.*
* Filed herewith.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN MORTGAGE ACCEPTANCE COMPANY
(Registrant)
Date: November 8, 2006 By: /s/ James L. Duggins
--------------------
James L. Duggins
Chief Executive Officer
Date: November 8, 2006 By: /s/ Alan P. Hirmes
------------------
Alan P. Hirmes
Managing Trustee and Chief Financial Officer
30