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 JUNE 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 July 31, 2006, there were 8,305,878 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 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 23
PART II
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits 24
SIGNATURES 25
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
June 30, December 31,
2006 2005
----------- -----------
(Unaudited)
Cash and cash equivalents $ 3,692 $ 11,214
Investments
Debt securities at fair value 194,286 222,723
Mortgage loans receivable, net 199,762 51,981
Notes receivable, net 13,725 13,725
Revenue bonds 6,489 6,626
ARCap 22,278 20,678
Real estate owned - held and used, net 67,500 68,793
Accounts receivable 2,920 3,079
Other assets 6,498 1,904
--------- ---------
Total assets $ 517,150 $ 400,723
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Repurchase facilities payable $ 184,253 $ 209,101
CDO repurchase facility 127,644 --
Line of credit - related party 27,042 --
Warehouse facility payable -- 4,070
Mortgages payable on real estate owned 40,220 40,487
Preferred shares of subsidiary (subject to mandatory repurchase) 25,000 25,000
Accounts payable and accrued expenses 2,613 1,599
Due to Advisor and affiliates 1,891 2,961
Distributions payable 3,322 3,322
--------- ---------
Total liabilities 411,985 286,540
--------- ---------
Commitments and contingencies
Shareholders' equity:
Shares of beneficial interest; $.10 par value; 25,000 shares authorized;
8,719 issued and 8,304 outstanding in 2006 and 2005 871 871
Treasury shares of beneficial interest at par; 415 shares in 2006 and 2005 (42) (42)
Additional paid-in capital 126,427 126,357
Share-based compensation -- (20)
Accumulated deficit (17,027) (17,766)
Accumulated other comprehensive (loss) income (5,064) 4,783
--------- ---------
Total shareholders' equity 105,165 114,183
--------- ---------
Total liabilities and shareholders' equity $ 517,150 $ 400,723
========= =========
See accompanying notes to condensed financial statements.
3
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2006 2005 2006 2005
-------- -------- -------- --------
Revenues:
Interest income:
Debt securities $ 2,996 $ 3,339 $ 6,215 $ 6,371
Mortgage loans 3,687 1,148 5,675 1,763
Notes receivable 216 378 449 857
Revenue bonds 141 146 284 293
Temporary investments 52 67 135 84
Rental income of real estate owned -
held and used 2,338 2,283 4,731 4,467
Other revenues 157 499 162 728
-------- -------- -------- --------
Total revenues 9,587 7,860 17,651 14,563
-------- -------- -------- --------
Expenses:
Interest 4,227 1,735 6,586 2,917
Interest - distributions to preferred
shareholders of subsidiary (subject to
mandatory repurchase) 556 432 1,074 500
Mortgage interest for real estate owned
- held and used 595 603 1,192 1,208
Property operations of real estate owned
- held and used 1,185 1,046 2,650 1,966
General and administrative 490 468 978 905
Fees to Advisor 977 680 1,803 1,374
Depreciation 450 336 900 702
Amortization and other 15 91 30 224
-------- -------- -------- --------
Total expenses 8,495 5,391 15,213 9,796
-------- -------- -------- --------
Other income:
Equity in earnings of ARCap 2,397 600 3,076 1,200
Loss on repayment of debt securities (153) -- (153) (71)
Change in fair value of derivative instruments 1,879 -- 2,023 --
-------- -------- -------- --------
Total other income 4,123 600 4,946 1,129
-------- -------- -------- --------
Net income $ 5,215 $ 3,069 $ 7,384 $ 5,896
======== ======== ======== ========
Net income per share (basic and diluted) $ 0.63 $ 0.37 $ 0.89 $ 0.71
======== ======== ======== ========
Dividends per share $ 0.40 $ 0.40 $ 0.80 $ 0.80
======== ======== ======== ========
Weighted average shares outstanding:
Basic 8,304 8,311 8,304 8,324
======== ======== ======== ========
Diluted 8,304 8,311 8,305 8,327
======== ======== ======== ========
See accompanying notes to condensed financial statements.
4
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------
2006 2005
--------- ---------
Cash flows from operating activities:
Net income $ 7,384 $ 5,896
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation expense 900 702
Change in fair value of derivative instruments (2,023) --
Equity in earnings of ARCap (3,076) (1,200)
Net loss on sale or repayment of assets 153 71
Amortization and accretion (144) 176
Other non-cash expense 89 20
Distributions received from equity investee 1,716 1,200
Changes in operating assets and liabilities:
Accounts receivable 159 (461)
Other assets 223 (250)
Due to Advisor and affiliates (1,070) 462
Accounts payable and accrued expenses 921 (41)
--------- ---------
Net cash provided by operating activities 5,232 6,575
--------- ---------
Cash flows from investing activities:
Funding and purchase of mortgage loans (153,759) (21,178)
Principal repayments of mortgage loans 5,450 --
Investment in debt securities -- (40,443)
Principal repayments of debt securities 17,945 6,313
Purchase of mortgage loans on real estate owned -- (17,150)
Proceeds from sale of real estate owned -- 7,474
Principal repayment on real estate owned -- 480
Funding of notes receivable -- (472)
Repayment of notes receivable -- 8,177
Principal repayment of revenue bonds 90 104
Additions to real estate owned -- (14)
--------- ---------
Net cash used in investing activities (130,274) (56,709)
--------- ---------
continued
5
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------
2006 2005
--------- ---------
Cash flows from financing activities:
Proceeds from CDO repurchase facility 127,644 --
Proceeds from repurchase facilities 7,368 63,548
Repayments of repurchase facilities (32,216) (20,041)
Proceeds from warehouse facility -- 243
Repayments of warehouse facility (4,070) --
Proceeds from line of credit - related party 67,542 14,761
Repayments of line of credit - related party (40,500) (19,361)
Deferred financing costs (1,604) (802)
Distributions paid to shareholders (6,644) (6,671)
Treasury stock purchases -- (368)
Issuance of preferred shares of subsidiary -- 25,000
--------- ---------
Net cash provided by financing activities 117,520 56,309
--------- ---------
Net (decrease) increase in cash and cash equivalents (7,522) 6,175
Cash and cash equivalents at the beginning of the year 11,214 2,674
--------- ---------
Cash and cash equivalents at the end of the period $ 3,692 $ 8,849
========= =========
See accompanying notes to condensed financial statements.
6
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 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.
Effective April 2006, we dissolved one subsidiary that was formed for the
purposes of managing a repurchase facility, which expired in March 2004.
In March 2006, we formed AMAC CDO Funding I ("AMAC CDO"), a wholly owned
subsidiary, for the purposes of managing our first Collateralized Debt
Obligation ("CDO") Securitization (see Note 5).
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 June 30, 2006, and the results of
our operations and our cash flows. 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 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. As
previously disclosed, we converted a portion of our preferred investment in
ARCap Investors, LLC ("ARCap") to common units. While we continue to account for
this investment under the equity method, a portion of the equity income recorded
is based on the preferred dividend, while the balance is based on our
proportionate share of common units outstanding.
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.
Certain prior year amounts, in particular the reclassification of results of
operations of our real estate owned - held and used portfolio, have been
reclassified to conform to the current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
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
SFAS 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 this standard was not material to us. See also
Note 8.
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
7
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2006
(Unaudited)
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. Application of the Staff Position had no material impact
on our results of operations.
NOTE 2 - INVESTMENTS IN DEBT SECURITIES - AVAILABLE FOR SALE
Information regarding our investments in debt securities is as follows:
(In thousands)
June 30, December 31,
2006 2005
--------- -----------
Amortized cost $ 200,698 $ 218,891
--------- ---------
Unrealized gains 1,988 5,707
Unrealized losses (8,400) (1,875)
--------- ---------
Net unrealized (loss) gain (6,412) 3,832
--------- ---------
Fair value $ 194,286 $ 222,723
========= =========
The fair value and gross unrealized losses of our debt securities aggregated by
length of time that these individual debt securities have been in a continuous
unrealized loss position at June 30, 2006, and December 31, 2005, is summarized
in the table below:
(Dollars in thousands)
June 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 29 5 34 8 16 24
Fair value $137,697 $ 10,900 $148,597 $ 25,905 $ 56,281 $ 82,186
Gross unrealized
loss $ 6,936 $ 1,464 $ 8,400 $ 197 $ 1,678 $ 1,875
These unrealized losses are as a result of increases in interest rates
subsequent to the acquisition of the securities. All of the debt securities are
performing according to their terms. Furthermore, 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. As such, no impairment
charges have been recorded.
At June 30, 2006, all of our debt securities were pledged as collateral under
our repurchase facilities. At June 30, 2006, we had no availability to borrow
against these debt securities.
During April 2006, we sold a debt security and a related mortgage loan (see Note
3).
NOTE 3 - MORTGAGE LOANS
During April 2006, AMAC CDO purchased a first mortgage loan from CharterMac, the
parent of our Advisor, at approximately its $26.0 million face value. 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 CDO repurchase
facility, in exchange for $29.2 million in funds.
8
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2006
(Unaudited)
Including the first mortgage loan purchased from CharterMac, we partially or
fully funded ten first mortgage loans and subordinated notes, totaling
approximately $151.7 million, for the CDO securitization. The loans bear
interest at a weighted average interest rate of 6.37%.
During April 2006, we sold a debt security and a mortgage loan, both pertaining
to one property, for approximately $15.5 million. We received $14.6 million of
the sale proceeds, of which $14.2 was used to repay funds we had borrowed from
our repurchase facilities. During July 2006, we received the final payment of
sale proceeds. 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 mezzanine loan, which is included
in other revenues on our condensed consolidated statements of income for the
three and six month period ended June 30, 2006.
NOTE 4 - REAL ESTATE OWNED
Real estate owned consisted of the following:
(Dollars in thousands)
Carrying Carrying
Value Value
as of as of
Number of June 30, December 31,
Units Location 2006 2005
--------- --------------- --------- -----------
Real Estate Owned - Held and Used, net
Concord Portfolio 852 Houston, TX $ 53,127 $ 53,407
Less: accumulated depreciation (3,735) (3,062)
--------- ---------
Subtotal 49,392 50,345
--------- ---------
Reserve at Autumn Creek 212 Friendswood, TX 19,349 19,462
---------
Less: accumulated depreciation (1,241) (1,014)
--------- ---------
Subtotal 18,108 18,448
--------- ---------
Total Real Estate Owned - Held and Used, net 1,064 $ 67,500 $ 68,793
========= ========= =========
Mortgages Payable on Real Estate Owned
Concord Portfolio $ 40,220 $ 40,487
========= =========
NOTE 5 - CDO 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 up to $250.0 million of 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, will be 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. At
June 30, 2006, we had approximately $127.6 million of borrowings outstanding
under this facility, at a weighted average interest rate of 6.27%. In connection
with the CDO securitization, we have prepaid approximately $1.5 million of a 1%
fee 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.
9
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2006
(Unaudited)
NOTE 6 - DERIVATIVE INSTRUMENTS
CASH FLOW HEDGE OF DEBT
As of June 30, 2006, we had one interest rate swap with a notional amount of
$30.0 million, which is designated as a cash flow hedge with the hedged item
being the interest payments on our variable-rate repurchase facilities. This
swap is recorded at fair value, with changes in fair value recorded in
accumulated other comprehensive income to the extent the hedge is effective in
achieving offsetting cash flows. There was no ineffectiveness in the hedging
relationship 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 swap will be highly effective in achieving offsetting changes
in cash flows throughout its term.
FREE STANDING DERIVATIVES RELATED TO INVESTMENTS
We also have sixteen interest rate swaps with an aggregate notional amount of
$185.0 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.
FINACIAL STATEMENT IMPACT
Interest rate swaps for which we were in a net settlement liability position are
recorded in accounts payable, accrued expenses and other liabilities and those
for which we are in a net settlement asset position are recorded in other
assets. The amounts recorded at June 30 were as follows:
(In thousands) 2006 2005
------ ------
Net asset position $3,920 $ 366
Net liability position $ 131 $ --
Interest expense included the following related to our swaps:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2006 2005 2006 2005
------ ------ ------ ------
Interest income $(127) $ -- $(202) $ --
Interest expense 61 36 66 107
----- ----- ----- -----
Net $ (66) $ 36 $(136) $ 107
===== ===== ===== =====
The change in the fair value of our free standing derivatives for the six months
ended June 30, 2006 was $2.0 million and is recorded in other income on our
condensed consolidated statements of income.
We estimate that approximately $267,000 of the net unrealized gain included in
accumulated other comprehensive income will reduce interest expense within the
next twelve months.
10
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2006
(Unaudited)
NOTE 7 - SHAREHOLDERS' EQUITY
Comprehensive income for the six months ended June 30, 2006 and 2005, was as
follows:
(In thousands) Six months ended
June 30,
----------------------
2006 2005
-------- --------
Net income $ 7,384 $ 5,896
Net unrealized gain on derivative instruments 205 237
Net unrealized holding (loss) gain on investments (10,293) 1,824
Comprehensive income of equity investments 240 --
-------- --------
Comprehensive (loss) income $ (2,464) $ 7,957
======== ========
NOTE 8 - 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 June
30, 2006, a maximum of 643,536 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 June 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 six
months ended June 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 -- -- -- --
-----------------------------------------------------
Outstanding at end of period 187,052 $15.78 4.66 --
=====================================================
Exercisable at end of period 187,052 $15.78 4.66 --
=====================================================
Compensation cost recorded $ 59,000
=============
11
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2006
(Unaudited)
The options outstanding had no intrinsic value at June 30, 2006, as the
Company's closing stock price on the last trading day of the second quarter was
less than the exercise prices. This amount will change based on the fair market
value of the Company's stock.
NOTE 9 - 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 June 30, 2006: Income Shares Per Share
------ ------ ---------
Basic EPS $5,215 8,304 $0.63
Effect of dilutive securities -- -- --
------ ------ -----
Diluted EPS $5,215 8,304 $0.63
====== ====== =====
Three Months Ended June 30, 2005:
Basic EPS $3,069 8,311 $0.37
Effect of dilutive securities -- -- --
------ ------ -----
Diluted EPS $3,069 8,311 $0.37
====== ====== =====
Six Months Ended June 30, 2006:
Basic EPS $7,384 8,304 $0.89
Effect of dilutive securities -- 1 --
------ ------ -----
Diluted EPS $7,384 8,305 $0.89
====== ====== =====
Six Months Ended June 30, 2005:
Basic EPS $5,896 8,324 $0.71
Effect of dilutive securities -- 3 --
------ ------ -----
Diluted EPS $5,896 8,327 $0.71
====== ====== =====
12
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2006
(Unaudited)
NOTE 10 - RELATED PARTY TRANSACTIONS
The costs paid or payable to our Advisor were as follows:
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2006 2005 2006 2005
-------- -------- ------ ------
Shared services expenses $ 497 $ 210 $ 699 $ 456
Asset management fees 480 382 916 710
Incentive management fee (1) -- 88 188 208
------ ------ ------ ------
$ 977 $ 680 $1,803 $1,374
====== ====== ====== ======
Interest paid on related party line of credit$ 745 $ -- $ 745 $ 11
====== ====== ====== ======
(1) Accrual based on 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, 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. As
such, no accrual was recorded for the three months ended June 30, 2006.
During April 2006, we purchased a first mortgage loan from CharterMac for the
CDO securitization (see Note 3). Including this loan, we partially or fully
funded ten first mortgage loans and subordinated notes, totaling approximately
$151.7 million, for the CDO securitization. All of these loans were originated
by CharterMac Mortgage Capital ("CMC"), an affiliate of our Advisor. CMC
received approximately $608,000 in loan origination fees related to these
originations, all of which were paid by the borrowers.
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 April 2006, we funded a $27.0 million first mortgage loan to a property
developed by a company controlled by the chairman of CharterMac. In the opinion
of management, the terms of the transaction are consistent with those of
transactions with independent third parties.
NOTE 11 - 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 alleges that the loan transaction was not properly
authorized by the borrower and was not for a legitimate borrower purpose. The
suit claims, 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 seeks, among other relief, actual,
consequential, and exemplary damages, and a declaration that the loan documents
are unenforceable and constitute a cloud on title. The basic claim of this suit
is for the amount of $1.5 million. The discovery phase of this suit has been
completed. A motion for summary judgment was filed by us, but was denied on July
25, 2005. It is expected that the case will be called to trial in September
2006. No reserve has been made at June 30, 2006.
13
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2006
(Unaudited)
We filed a countersuit on November 25, 2003, against Concord Gulfgate, Ltd., as
guarantor, seeking a deficiency on the loan and recovery of unpaid taxes and
certain property receipts. We are currently unable to determine the possible
outcome of the litigation.
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 June 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.
Future Funding Commitments
--------------------------
We are committed to additionally fund the following bridge and mezzanine loans
at June 30, 2006:
(In thousands)
MAXIMUM AMOUNT OF COMMITMENT
------------------------------------
NO. OF APT. LESS THAN 1
ISSUE DATE PROJECT LOCATION UNITS TOTAL YEAR 1-3 YEARS
---------------------------------------------------------------------------------------------------------
Jun-04 Woods of Mandarin Jacksonville, FL 401 $ 428 $ 428 $ --
Apr-05 Atlantic Hearthstone Hillsborough, NJ 198 1,847 1,847 --
May-05 Pasadena Pasadena, FL 198 198 198 --
Jul-05 222 Pearson Chicago, IL 219 217 217 --
Jul-05 Bayfront Villas Gulfport, FL 120 142 142 --
Sep-05 Marbella Clearwater, FL -- 154 154 --
-------------------------------------------------
TOTAL FUTURE FUNDING COMMITMENTS 1,136 $2,986 $2,986 $ --
=================================================
NOTE 12 - SUBSEQUENT EVENTS
In June 2006, CharterMac, an affiliate of our Advisor, announced its intent to
acquire all of the membership interests of ARCap, including those that we own.
The board of trustees of AMAC formed a special committee of the board
(consisting only of our independent trustees) to evaluate the offer. During July
2006, we received a purchase agreement from ARCap pursuant to which ARCap's
investors, including AMAC, would receive a price of approximately $35 per
membership unit, which amounts to approximately $28.0 million for our
investment. The special committee has recommended, and our entire board has
approved, our entering into the agreement to sell our membership interests.
Should the transaction occur, prior to closing we will also receive from ARCap a
special distribution which we expect to amount to approximately $12.0 million.
In total, these transactions would yield incremental net income of approximately
$13.5 million, after accounting for incentive management fees payable to our
Advisor. Assuming the transaction closes and we receive the amounts assumed
above, we expect that we will make a special distribution to our common
shareholders during 2006 in the range of $1.40 to $1.50 per share, subject to
board approval and an ability to achieve our business plan before the end of the
year. We expect the transaction to close in August 2006. Following the
completion of the transaction, we may also receive an additional special
14
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2006
(Unaudited)
distribution should ARCap's working capital at the acquisition date exceed that
required by the purchase agreement. There can be no assurance, however, that we
will receive any additional amount.
In addition to approving the sale of our ARCap investment, our board also
approved changes to the number of trustees on the board, appointments to the
board and other management changes, contingent upon the transactions described
above. Such changes will be disclosed upon the closing of the transactions.
15
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 The inability to find suitable replacement investments in
collateralized debt obligations with 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 March 2005, we issued $25.0 million of Floating-Rate Preferred Securities
through a subsidiary. Due to the mandatory redemption feature of these
securities, the payments or accruals of dividends and other amounts to be paid
to the holders of these securities are reported as interest costs. As a result,
these interest costs are classified as Interest - Distributions to Preferred
Shareholders of Subsidiary (Subject to Mandatory Repurchase) in our condensed
consolidated statements of income. During the first six months of 2006, we
recorded a full period of these costs, as compared to costs relating to three
and a half months in the comparable 2005 period.
16
Results of Operations
---------------------
The following is a summary of our operations for the three and six months ended
June 30, 2006 and 2005:
(In thousands)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ----------------------------
2006 2005 Change 2006 2005 Change
------- ------- ------ ------- ------- ------
Total revenues $ 9,587 $ 7,860 22.0% $17,651 $14,563 21.2%
Total expenses 8,495 5,391 57.6 15,213 9,796 55.3
Total other income 4,123 600 587.2 4,946 1,129 338.1
------- ------- ----- ------- ------- -----
Net income $ 5,215 $ 3,069 69.9% $ 7,384 $ 5,896 25.2%
======= ======= ===== ======= ======= =====
In both the three and six month period ended June 30, 2006, as compared to the
same periods in 2005, revenues increased mainly due to the funding of several
new first mortgage loans and subordinated notes during the second quarter of
2006. Expenses have also increased for these periods due to higher financing
costs (particularly due to increased borrowings used to finance an increased
level of investing and higher interest rates) and higher Advisory costs due to
increased allocations of overhead costs and management fees due to increased
levels of acquisition. For the six months ended June 30, 2006, expenses also
increased due to the recognition of certain property level costs for real estate
owned. Other income increased due to the conversion of ARCap shares from
preferred to common, earning higher equity income, and from an increase in the
fair value of interest rate swaps used to economically hedge the changes in the
fair value of certain investments.
REVENUES
Three Months Six Months
Ended June 30, 2006 Ended June 30, 2006
----------------------------------- ---------------------------------
% Change % of 2006 % of 2005 % Change % of 2006 % of 2005
from prior Total Total from Prior Total Total
Period Revenues Revenues Period Revenues Revenues
----------------------------------------------------------------------
Interest income:
Debt securities (10.3)% 31.3% 42.5% (2.4)% 35.2 % 43.7%
Mortgage loans 221.2 38.4 14.6 221.9 32.2 12.1
Notes receivable (42.9) 2.3 4.8 (47.6) 2.5 5.9
Revenue bonds (3.4) 1.5 1.9 (3.1) 1.6 2.0
Temporary investments (22.4) 0.5 0.9 60.7 0.8 0.6
Other revenues (68.5) 1.6 6.3 (77.7) 0.9 5.0
----- ----- ----- ----- ----- -----
Subtotal 30.0 75.6 71.0 28.0 73.2 69.3
Rental income 2.4 24.4 29.0 5.9 26.8 30.7
----- ----- ----- ----- ----- -----
Total revenues 22.0 % 100.0% 100.0% 21.2 % 100.0 % 100.0%
===== ===== ===== ===== ===== =====
17
Revenues were generated by the following investments (exclusive of Real Estate
Owned and ARCap):
(In thousands)
As of As of
June 30, 2006 June 30, 2005
------------------------------------- -------------------------------------
Weighted Weighted
Carrying % of Average Carrying % of Average
Amount Total InterestRate Amount Total Interest Rate
-----------------------------------------------------------------------------
Debt securities $194,286 46.9% 6.17% $230,308 78.1% 6.32%
Mortgage loans 199,762 48.2 8.67 42,458 14.4 12.90
Notes receivable 13,725 3.3 10.63 15,424 5.2 9.45
Revenue bonds 6,489 1.6 8.68 6,656 2.3 8.69
-------- ------ ----- -------- ------ -----
$414,262 100.0% 7.54% $294,846 100.0% 7.71%
======== ====== ===== ======== ====== =====
Interest income from debt securities decreased primarily due to the payoff of
four debt security certificates during 2006 and the second half of 2005, offset
by the funding of four lower yielding debt security certificates in 2006.
Interest income from mortgage loans increased for the three and six months ended
June 30, 2006, as compared to 2005, primarily due to the funding of ten CDO
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 June 30, 2006, as compared to June 30,
2005, was primarily due to the funding of a greater amount of fixed-rate first
mortgage loans for our CDO initiative, as opposed to variable-rate mezzanine
loans, as we have done in the past.
Interest income from notes receivable decreased for the three and six months
ended June 30, 2006, as compared to 2005, primarily due to the payoff of four
notes during 2005.
Interest income from temporary investments decreased for the three months ended
June 30, 2006, as compared to 2005, primarily due to the investment of excess
cash on hand resulting from the payoff of several loans and GNMA certificates
that occurred during 2005. We had less cash on hand in the second quarter of
2006, due to an increase in our first mortgage loan investment activity. The
balances increased for the six months ended June 30, 2006, as compared to 2005
due to the higher repayment activity and less investing activity in the first
quarter of 2006 as compared to 2005.
Other revenues decreased for the three and six months ended June 30, 2006,
primarily due to the 2005 recognition of income from a commitment fee for which
the commitment had expired unused. There were no comparable transactions in
2006.
18
EXPENSES
Three Months Ended Six Months Ended
June 30, 2006 June 30, 2006
------------------------------- -------------------------------
% Change % of 2006 % of 2005 % Change % of 2006 % of 2005
from prior Total Total from Prior Total Total
Period Revenues Revenues Period Revenues Revenues
---------------------------------------------------------------
Interest 143.6 % 44.1 % 22.1 % 125.8 % 37.3 % 20.0%
Distributions to preferred
shareholders 28.7 5.8 5.5 114.8 6.1 3.5
General and administrative 4.7 5.1 5.9 8.1 5.5 6.2
Fees to Advisor 43.7 10.2 8.6 31.2 10.2 9.4
Amortization and other (83.5) 0.1 1.2 (86.6) 0.2 1.6
----- ----- ----- ----- ----- -----
Subtotal 83.9 65.3 43.3 76.9 59.3 40.7
Property operations 13.3 12.4 13.3 34.8 15.0 13.5
Depreciation 33.9 4.7 4.3 28.2 5.1 4.8
Mortgage interest for real
estate owned - held and
used (1.3) 6.2 7.7 (1.3) 6.8 8.3
----- ----- ----- ----- ----- -----
Total expenses 57.6 % 88.6 % 68.6 % 55.3 % 86.2 % 67.3%
===== ===== ===== ===== ===== =====
At June 30, 2006, excluding the non-recourse mortgage on real estate owned, we
had total debt of approximately $363.9 million with a weighted average interest
rate of 5.95% per year, including the effect of our swap agreement. At June 30,
2005, we had a comparable balance of approximately $230.2 million with a
weighted average interest rate of 3.73% 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 six months ended June 30, 2006, as
compared to 2005, primarily due to the increased borrowings made during 2006 to
fund CDO loan originations and the increase in interest rates during 2005 and
2006.
Due to specific accounting requirements, we classify distributions made on our
preferred shares as interest expense. Distributions to preferred shareholders
increased for the three and six months ended June 30, 2006, as compared to 2005
due to the issuance of trust preferred securities in March 2005. The 2006 period
included six months preferred distributions compared to the three months in
2005. The increase is also due to the increase in interest rates during 2005 and
2006, as the distributions are payable at a variable rate of interest, based on
LIBOR.
General and administrative expenses increased for the three and six months ended
June 30, 2006, as compared to 2005, primarily due to increased accounting fees,
excise taxes, insurance and stock option costs (the last factor due to the
accelerated vesting of certain options in 2006). These increases were offset by
decreased legal expenses (from a high level of costs associated with
foreclosures in 2005) and decreased investor services expenses (due to costs in
2005 related to changes in our trust agreement for which we needed shareholder
approval), as compared to 2005.
Fees to Advisor increased for the three and six months ended June 30, 2006, as
compared to 2005, due to higher overhead costs because of expansion of our
business and higher management fees. While our management fees are now based on
equity instead of assets, fees for the first quarter of 2006 were incurred
following the asset-based formula. As our asset base is significantly higher
this year, fees incurred during the first quarter of 2006 are higher than those
incurred in the comparable 2005 period.
Amortization and other costs decreased for the three and six months ended June
30, 2006, as compared to 2005, due to the costs related to our warehouse
facility being fully amortized in August 2005.
19
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
three and six months ended June 30, 2006, as compared to 2005, was mainly due to
higher property tax costs.
Depreciation expense increased for the three and six months ended June 30, 2006,
as compared to 2005, due to a higher base of depreciable real estate owned in
2006 as compared to the 2005 period. In February 2005, we sold the Plaza at San
Jacinto property and, in 2006, included depreciation on the larger Autumn Creek
property.
OTHER INCOME
Other income increased for the three and six months ended June 30, 2006, as
compared to 2005, due to the conversion of 315,000 of our 800,000 ARCap
membership units from preferred to common at the end of 2005. Following this
conversion, we are earning a higher level of equity income from the common share
portion of the investment, which included our proportionate share of a large
resecuritization gain in 2006.
During 2006, we expect to receive a special distribution, and we plan to sell
our membership units to CharterMac, both of which would generate a significant
amount of income in the current year (see Note 12). No assurances can be made at
this time on the closing of the sale of our ARCap shares.
In addition, other income includes the changes in the fair value of certain
interest rate swaps in 2006 for which we do not apply hedge accounting. At June
30, 2006, we had sixteen interest rate swaps with an aggregate notional amount
of $185.0 million. There were no fair value swaps in place at June 30, 2005.
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 fund
other cash needs.
The following table reconciles net income to FFO for the three and six months
ended June 30, 2006 and 2005:
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Net income $ 5,215 $ 3,069 $ 7,384 $ 5,896
Add back: depreciation of real property $ 450 $ 336 $ 900 $ 702
--------- --------- --------- ---------
FFO $ 5,665 $ 3,405 $ 8,284 $ 6,598
========= ========= ========= =========
Cash flows from:
Operating activities $ 3,578 $ 2,843 $ 5,232 $ 6,575
========= ========= ========= =========
Investing activities $(130,507) $ (23,261) $(130,274) $ (56,709)
========= ========= ========= =========
Financing activities $ 129,943 $ 19,139 $ 117,520 $ 56,309
========= ========= ========= =========
Weighted average shares outstanding:
Basic 8,304 8,311 8,304 8,324
========= ========= ========= =========
Diluted 8,304 8,311 8,305 8,327
========= ========= ========= =========
20
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.
We finance our investing activity primarily through borrowing from various
facilities at short-term rates. At June 30, 2006, we had approximately $145.4
million available to borrow, contractually, under our debt facilities without
exceeding limits imposed by debt covenants and our by-laws. Subsequent to June
30, 2006, we borrowed $33.6 million through our debt facilities.
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 plan to sell our 800,000 preferred and common shares of ARCap to CharterMac,
however, there are no assurances that this sale will close. The planned sale
would generate approximately $28.0 million in proceeds in 2006 (see Note 12).
We have capacity to raise approximately $170.0 million of additional funds by
issuing either common or preferred shares pursuant to a shelf registration
statement filed with the SEC. 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 CDOs 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 in debt markets
in 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
$156.7 million in first mortgage loans and subordinated notes through June 30,
2006, that we expect to be used for our first CDO securitization. Subsequently,
we originated approximately $32.5 million in additional first mortgages. Our
goal is to complete our first CDO securitization by the end of 2006, although
there are no assurances that we will proceed with such a program.
SUMMARY OF CASH FLOWS
During the six months ended June 30, 2006, as compared to the six months ended
June 30, 2005, the net change in cash and cash equivalents decreased by
approximately $13.7 million. Despite higher net earnings, operating cash flows
decreased by approximately $1.3 million primarily due to the timing of the
receipt of our equity earnings, as well as the timing of collection of our
receivables and payments of our liabilities.
An increase in net cash used in investing activities (approximately $73.6
million) was due to the increase in investments made during the second quarter
of 2006, as compared to 2005. This was due to shifting our focus to originating
loans for our first CDO securitization. There was also an increase in net cash
provided by financing activities (approximately $61.2 million) that 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.
21
LIQUIDITY REQUIREMENTS AFTER JUNE 30, 2006
During July 2006, we closed approximately $32.0 million of first mortgage loans.
We plan to securitize these loans in our first CDO. In addition to these loans,
we anticipate approximately another $150.0-200.0 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 CDO related
repurchase facility with BOA (see Note 5 to our condensed consolidated financial
statements).
During August 2006, distributions of approximately $3.3 million ($0.40 per
share), which were declared in June 2006, will be paid to common shareholders.
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 six months ended June 30:
(In thousands)
2006 2005
------ ------
Total dividends $6,644 $6,671
Return of capital:
Amount -- $ 773
Per share -- $ 0.09
Percent of total dividends -- 11.60%
Commitments, Contingencies and Off-Balance Sheet Arrangements
-------------------------------------------------------------
See Note 11 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 June 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:
Repurchase facilities $ 184,253 $ 184,253 $ -- $ -- $ --
CDO repurchase facility 127,644 127,644 -- -- --
Line of credit-related party 27,042 27,042 -- -- --
Mortgage loan on real estate owned
(1) 40,220 512 1,218 1,370 37,120
Preferred shares of subsidiary
(subject to mandatory repurchase) 25,000 -- -- -- 25,000
Funding Commitments:
Standby and forward loan commitments 2,986 2,986 -- -- --
---------- ----------- ---------- ----------- -----------
Total $ 407,145 $ 342,437 $ 1,218 $ 1,370 $ 62,120
========== =========== ========== =========== ===========
(1) 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.
22
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 the Company is exposed is
interest rate risk, which is highly sensitive to many factors, including
governmental monetary and tax policies, domestic and international economic and
political considerations and other factors beyond the control of our Company.
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 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 rates 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 $206.3 million unhedged portion of the $363.9 million of borrowings
outstanding at June 30, 2006, a 1% change in LIBOR would impact our annual net
income and cash flows by approximately $2.1 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
$351,000. The net effect of a 1% change in LIBOR would therefore result in a
change of our annual net income by approximately $1.7 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.
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.
(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.
23
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
alleges that the loan transaction was not properly authorized by the
borrower and was not for a legitimate borrower purpose. The suit
claims, 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
seeks, among other relief, actual, consequential, and exemplary
damages, and a declaration that the loan documents are unenforceable
and constitute a cloud on title. The basic claim of this suit is for
the amount of $1.5 million. The discovery phase of this suit has been
completed. A motion for summary judgment was filed by us, but was
denied on July 25, 2005. It is expected that the case will be called
to trial in September 2006. No reserve has been made at June 30, 2006.
We filed a countersuit on November 25, 2003, against Concord Gulfgate,
Ltd., as guarantor, seeking a deficiency on the loan and recovery of
unpaid taxes and certain property receipts. We are currently unable to
determine the possible outcome of the litigation.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors as disclosed
in our filing 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
The company held its annual meeting of shareholders on June 14, 2006.
The shareholders elected Jeff T. Blau, Alan P. Hirmes, Scott M. Manes,
Stanley R. Perla, and Richard M. Rosan as trustees for one-year terms
which will expire in 2007. Common shares of beneficial interest were
voted as follows:
Trustee nominee For Abstain/withheld
---------------------- ------------- --------------------
Jeff T. Blau 7,845,879 158,400
Alan P. Hirmes 7,835,343 168,936
Scott M. Mannes 7,904,863 99,416
Stanley R. Perla 7,907,545 96,734
Richard M. Rosan 7,917,503 86,776
There were no votes "against" any of the nominees.
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.
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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: August 8, 2006 By: /s/ Jeff T. Blau
----------------
Jeff T. Blau
Chairman of the Board of Trustees
and Chief Executive Officer
Date: August 8, 2006 By: /s/ Alan P. Hirmes
------------------
Alan P. Hirmes
Managing Trustee and Chief Financial Officer
25