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, 2005
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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
----- -----
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, 2005, 8,311,226 shares of the Registrant's shares of
beneficial interest, $0.10 par value, were outstanding.
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 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures 22
PART II
Item 1. Legal Proceedings 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits 23
SIGNATURES 24
See accompanying notes to condensed consolidated financial statements.
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,
2005 2004
------------- ------------
(Unaudited)
Cash and cash equivalents $ 16,959 $ 2,674
Investments
Debt securities 202,938 194,587
Mortgage loans, net 54,052 21,376
Notes receivable, net 13,725 23,111
Revenue bonds 6,559 6,672
ARCap preferred shares 20,240 20,240
Real estate owned - held and used, net 50,842 60,211
Real estate owned - held for sale 19,390 17,924
Accounts receivable 25,757 1,925
Other assets 1,599 313
--------- ---------
Total assets $ 412,061 $ 349,033
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Repurchase facilities payable $ 214,645 $ 157,633
Warehouse facility payable 4,070 3,827
Mortgages payable on real estate owned 40,618 56,993
Preferred shares of subsidiary (subject to mandatory repurchase) 25,000 --
Line of credit - due to related party -- 4,600
Accounts payable and accrued expenses 1,622 1,344
Due to Advisor and affiliates 2,429 770
Distributions payable 3,324 3,334
--------- ---------
Total liabilities 291,708 228,501
--------- ---------
Commitments and contingencies
Shareholders' equity:
Shares of beneficial interest; $.10 par value; 25,000 shares authorized;
8,717 issued and 8,311 outstanding in 2005 and 8,716 issued and 8,337
outstanding in 2004 872 871
Treasury shares of beneficial interest at par; 406 shares in 2005 and 379
shares in 2004 (41) (38)
Additional paid-in capital 126,414 126,800
Share - based compensation -- (16)
Distributions in excess of net income (13,979) (17,202)
Accumulated other comprehensive income 7,087 10,117
--------- ---------
Total shareholders' equity 120,353 120,532
--------- ---------
Total liabilities and shareholders' equity $ 412,061 $ 349,033
========= =========
See accompanying notes to condensed consolidated financial statements.
3
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- --------
Revenues:
Interest income:
Debt securities $ 3,351 $ 2,426 $ 9,722 $ 7,169
Mortgage loans 1,734 394 3,497 1,189
Notes receivable 365 699 1,222 1,965
Revenue bonds 145 149 438 485
Temporary investments 48 12 132 32
Rental income of real estate owned - held and used 1,654 1,873 5,159 5,583
Fees related to prepayment of investments 5,314 173 5,314 173
Other revenues 155 39 883 87
------- ------- ------- -------
Total revenues 12,766 5,765 26,367 16,683
------- ------- ------- -------
Expenses:
Interest 1,937 1,053 4,854 2,781
Interest - distributions to preferred shareholders of
subsidiary (subject to mandatory repurchase) 461 -- 961 --
Mortgage interest for real estate owned - held and used 601 -- 1,808 --
Property operations of real estate owned - held and used 794 959 2,420 2,356
General and administrative 608 372 1,513 1,015
Fees to Advisor 1,906 618 3,280 1,782
Depreciation 336 59 1,038 367
Amortization and other 68 55 292 258
------- ------- ------- -------
Total expenses 6,711 3,116 16,166 8,559
------- ------- ------- -------
Other income:
Equity in earnings of ARCap 600 600 1,800 1,800
Income from real estate owned - held for sale 403 -- 1,024 --
Net gain on repayment of debt securities 254 -- 183 --
------- ------- ------- -------
Total other income 1,257 600 3,007 1,800
------- ------- ------- -------
Net income $ 7,312 $ 3,249 $13,208 $ 9,924
======= ======= ======= =======
Net income per share (basic and diluted) $ 0.88 $ 0.39 $ 1.59 $ 1.19
======= ======= ======= =======
Dividends per share $ 0.40 $ 0.40 $ 1.20 $ 1.20
======= ======= ======= =======
Weighted average shares outstanding:
Basic 8,311 8,336 8,320 8,337
======= ======= ======= =======
Diluted 8,314 8,336 8,323 8,341
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
4
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------
2005 2004
-------- --------
Cash flows from operating activities:
Net income $ 13,208 $ 9,924
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 1,038 367
Net gain on repayment of debt securities (183) --
Amortization and accretion 121 76
Other non-cash expense 20 20
Changes in operating assets and liabilities:
Accounts receivable (923) 622
Other assets (445) (442)
Due to Advisor and affiliates 1,659 626
Accounts payable and accrued expenses 262 (333)
Accrued interest payable 294 (511)
-------- --------
Net cash provided by operating activities 15,051 10,349
-------- --------
Cash flows from investing activities:
Investment in debt securities (40,503) (14,221)
Principal repayments of debt securities 6,872 16,754
Purchase of mortgage on real estate owned (17,150) --
Proceeds from sale of real estate owned 7,474 --
Funding of notes receivable (472) (7,145)
Repayment of notes receivable 9,883 21,099
Principal payment on real estate owned - held and used 480 --
Principal repayments on revenue bonds 157 841
Funding of mortgage loans (36,872) (6,838)
Repayments of mortgage loans 2,874 1,306
-------- --------
Net cash (used in) provided by investing activities (67,257) 11,796
-------- --------
continued
5
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------
2005 2004
-------- --------
Cash flows from financing activities:
Proceeds from repurchase facilities $ 80,659 $ 13,322
Repayments of repurchase facilities (23,647) (18,246)
Proceeds from warehouse facility 243 943
Repayments of warehouse facility -- (13,061)
Proceeds from line of credit - due to related party 14,761 15,361
Repayment of line of credit - due to related party (19,361) --
Distribution paid to shareholders (9,994) (10,005)
Deferred financing costs (802) --
Treasury stock purchases (368) (52)
Issuance of preferred shares of subsidiary 25,000 --
-------- --------
Net cash provided by (used in) financing activities 66,491 (11,738)
-------- --------
Net increase in cash and cash equivalents 14,285 10,407
Cash and cash equivalents at the beginning of the year 2,674 2,028
-------- --------
Cash and cash equivalents at the end of the period $ 16,959 $ 12,435
======== ========
Non-cash investing activities:
Accounts receivable from repayment and sale of investments $ 22,910 $ --
======== ========
See accompanying notes to condensed consolidated financial statements.
6
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2005
(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 Related AMI Associates, Inc., which acts as our Advisor.
We operate in one business segment.
In March 2005, we formed AMAC Capital Financing I ("ACFI"), a wholly owned
trust, for the purpose of issuing trust preferred securities, which are subject
to mandatory repurchase in March 2035 and are callable in March 2010 (see Note
8).
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, 2005, 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, 2004.
Our annual report on Form 10-K for the year ended December 31, 2004, contains a
summary of our significant accounting policies. There have been no material
changes to these items since December 31, 2004; however, we have entered into a
transaction during 2005 which involves a new significant accounting policy (see
Note 8).
The preparation of the 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 have been reclassified to conform to the current year
presentation, in particular, the reclassification of results of operations of
our real estate owned - held and used portfolio.
NOTE 2 - INVESTMENTS IN DEBT SECURITIES - AVAILABLE FOR SALE
During the nine months ended September 30, 2005, we purchased seven Fannie Mae
("FNMA") certificates with principal amounts totaling approximately $38.2
million. The certificates were purchased at premiums totaling approximately
$119,000 with a weighted average maturity date of February 2014 and bear
interest at a weighted average rate of 5.56%.
During the nine months ended September 30, 2005, we funded approximately $2.2
million on debt securities originated prior to December 31, 2004.
During the nine months ended September 30, 2005, three Ginnie Mae ("GNMA") and
FNMA certificates were repaid, one prior to the maturity date. We received
approximately $10.8 million in proceeds, of which, $5.2 million related to
penalties and fees resulting from the prepayment, which are classified as "fees
related to prepayment of investments" on the condensed consolidated statement of
income. The principal balance on the prepaid GNMA certificate (approximately
$21.4 million) was received in October 2005, and is classified in accounts
receivable on the condensed consolidated balance sheet of September 30, 2005.
These pay-downs also resulted in write-offs of unamortized discounts and
premiums of approximately $183,000, which are classified as a net gain on
7
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2005
(Unaudited)
repayment of debt securities on our condensed consolidated statement of income
(see also Note 3 regarding the prepayment of an associated mezzanine loan).
In July 2005, we received an executed letter of intent to purchase a defaulted
GNMA certificate and mezzanine loan at par plus any accrued interest through the
date of the letter. As such, we have recognized approximately $201,000 in
previously unrecorded, unpaid interest relating to the mezzanine loan. We are
currently in negotiations to finalize this sale.
Information regarding our investments in debt securities is as follows:
(In thousands)
September 30, December 31,
2005 2004
------------- ------------
Amortized cost $ 196,591 $ 184,576
Unrealized gains 7,201 11,370
Unrealized losses (854) (1,359)
--------- ---------
Net unrealized gain 6,347 10,011
--------- ---------
Fair value $ 202,938 $ 194,587
========= =========
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 September 30, 2005, and December 31, 2004, is
summarized in the table below:
(Dollars in thousands)
September 30, 2005 December 31, 2004
---------------------------------- ---------------------------------
Fewer than 12 Months Fewer than 12 Months
12 Months or More Total 12 Months or More Total
---------- --------- --------- ---------- --------- ---------
Number of securities 7 5 12 11 7 18
Fair value $35,746 $11,873 $47,619 $46,055 $16,832 $62,887
Gross unrealized loss $ 208 $ 646 $ 854 $ 515 $ 844 $ 1,359
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 impairments are temporary.
At September 30, 2005, all of our debt securities were partially or wholly
pledged as collateral under our repurchase facilities. At September 30, 2005, we
had no availability to borrow against partially or unpledged debt securities.
8
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2005
(Unaudited)
NOTE 3 - INVESTMENTS IN MORTGAGE LOANS
During May 2005, we were called upon to fund a $7.5 million first mortgage in
connection with a loan stabilization guarantee (see Note 12). The loan, which we
expect to be repaid when permanent financing is arranged, bears interest at a
rate of 10.82% per year.
During 2005, we originated the following mezzanine loans:
(In thousands)
Amount
funded
through Minimum
Amount September 30, interest Maturity
Month committed 2005 Secured by Rate rate date
------------ --------- ------------ ----------------- ---------------- -------- ----------
May $ 7,300 $ 3,604 Land parcel 20% N/A Apr 2007
May 8,350 8,350 Multi-family housing LIBOR + 12.75% 16% Dec 2007
June 3,250 3,250 Shopping center 10.25% N/A Jun 2015
July 7,500 6,460 Multi-family housing LIBOR + 11.50% 15% Aug 2007
July 2,800 2,329 Multi-family housing LIBOR + 12.75% 16% Aug 2007
September 5,800 5,000 Land parcel LIBOR + 12.50% 16% Sept 2006
--------- ---------
Totals $ 35,000 $ 28,993
========= =========
During 2005, we also funded approximately $379,000 on existing loans originated
prior to December 31, 2004.
During September 2005, one mezzanine loan paid off prior to the maturity date.
We received approximately $3.0 million, which includes approximately $144,000 in
prepayment penalties and fees (see also Note 2 regarding the prepayment of an
associated debt security).
During September 2005, we sold a mortgage loan to CharterMac, a related party.
During October 2005, we received approximately $1.6 million, representing the
par value plus unpaid accrued interest up to the date of the sale. This total
amount is classified in accounts receivable on the September 30, 2005, condensed
consolidated balance sheet.
NOTE 4 - NOTES RECEIVABLE
During the nine months ended September 30, 2005, several notes receivable have
partially or fully repaid. We have received a total of approximately $9.9
million in proceeds relating to repayments of these notes with no gains or
losses realized.
9
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2005
(Unaudited)
NOTE 5 - REAL ESTATE OWNED
Our real estate owned at September 30, 2005, and December 31, 2004, consisted of
the following:
(Dollars in thousands)
Carrying Carrying
Value Value
as of as of
Number of September 30, December 31,
Units Location 2005 2004
----------- --------------- ------------- -------------
Real Estate Owned - Held and Used
Plaza at San Jacinto (1) -- La Porte, TX $ -- $ 7,929
Less: accumulated depreciation -- -- (425)
----------- ----------- ----------
Total Plaza at San Jacinto, net -- -- 7,504
----------- ----------
Concord Portfolio 852 Houston, TX 53,568 54,425
Less: accumulated depreciation -- (2,726) (1,718)
----------- ----------- ----------
Total Concord Portfolio, net 852 50,842 52,707
----------- ----------- ----------
Total Real Estate Owned - Held and Used,
net 852 $ 50,842 $ 60,211
=========== =========== ==========
Real Estate Owned - Held for Sale
Reserve at Autumn Creek (2) 212 Friendswood, TX $ 19,390 $ 17,924
=========== =========== ==========
Mortgages Payable on Real Estate Owned
Concord Portfolio $ 40,618 $ 41,000
Reserve at Autumn Creek (2) -- 15,993
----------- ----------
Total Mortgages Payable on Real Estate
Owned $ 40,618 $ 56,993
=========== ==========
(1) During February 2005, the Plaza at San Jacinto property was sold to an
unaffiliated third party. We received approximately $7.4 million in
proceeds from the sale, which approximated the property's carrying value.
Accordingly, no gain or loss was recorded.
(2) During February 2005, we purchased the first mortgage on the Reserve at
Autumn Creek property at a foreclosure auction for approximately $17.2
million.
10
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2005
(Unaudited)
NOTE 6 - ACCOUNTS RECEIVABLE
Accounts receivable consisted of:
(In thousands)
September 30, December 31,
2005 2004
------------ -----------
GNMA prepayment proceeds (see Note 2) $21,431 $ --
Interest and other 2,847 1,925
Sale proceeds due from related party (see Note 3) (1) 1,479 --
------- -------
$25,757 $ 1,925
======= =======
(1) Excludes interest and other costs receivable of approximately $75,000, which
is included in "interest and other".
NOTE 7 - REPURCHASE FACILITIES
During June 2005, we executed a new repurchase agreement with UBS Financial
Services, which offers us an advance rate of 97% and a borrowing rate set at
30-day LIBOR. The borrowings are subject to 30-day settlement terms. We
transferred ten FNMA and GNMA certificates previously held as collateral on our
RBC repurchase facility to this facility, and the amount outstanding under this
facility at September 30, 2005, was approximately $50.8 million with a weighted
average interest rate of 3.79%.
NOTE 8 - SUBSIDIARY EQUITY
During March 2005, ACFI issued 25,000 Floating Rate Preferred Securities, having
a stated liquidation amount of $1,000 per security. We received approximately
$24.2 million in proceeds, net of closing costs, which are deferred and will be
amortized ratably over a 30-year period to the redemption date. The securities
are callable in March 2010 and bear interest, re-set quarterly, equal to 30-day
LIBOR plus 3.75%. At September 30, 2005, the rate was 7.24%.
SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS
OF BOTH LIABILITIES AND EQUITY, requires that mandatorily redeemable financial
instruments be classified as liabilities in the consolidated financial
statements and the payments or accruals of dividends and other amounts to be
paid to the holders of these securities be reported as interest costs. Due to
the mandatory redemption feature, we have classified these securities as
liabilities and recorded and carry them at fair value.
11
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2005
(Unaudited)
NOTE 9 - RELATED PARTY TRANSACTIONS
The costs paid or payable to our Advisor for the three and nine months ended
September 30, 2005 and 2004, were as follows:
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- --------
Shared services expenses $ 235 $ 199 $ 691 $ 555
Asset management fees 433 324 1,143 942
Incentive management fee* 1,238 95 1,446 285
------ ------ ------ ------
$1,906 $ 618 $3,280 $1,782
====== ====== ====== ======
* Accrual based on proportion of actual earnings as compared to our estimates of
full-year results.
In June 2004, we entered into a revolving credit facility (the "Revolving
Facility") with CharterMac, an affiliated company and parent of our Advisor. The
Revolving Facility, which is unsecured, provides up to $20.0 million in
borrowings to purchase new investments. As of September 30, 2005, we had no
outstanding borrowings on this facility. At December 31, 2004, we had $4.6
million in borrowings outstanding on this facility at an interest rate of 5.42%.
This facility expires in June 2006, pursuant to a one year extension.
In September 2005, we sold one mortgage loan, at par, to CharterMac (see Notes 3
and 6).
NOTE 10 - COMPREHENSIVE INCOME
Comprehensive income for the nine months ended September 30, 2005 and 2004, was
as follows:
(In thousands)
Nine Months Ended
September 30,
----------------------
2005 2004
-------- --------
Net income $ 13,208 $ 9,924
Net unrealized gain on interest rate derivatives arising during the period 589 142
Unrealized holding (loss) gain on investments arising during the period (483) 624
Less: reclassification adjustment (3,137) --
-------- --------
Total comprehensive income $ 10,177 $ 10,690
======== ========
12
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2005
(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, 2005: Income Shares Per Share
--------- -------- ---------
Basic EPS $ 7,312 8,311 $ 0.88
Effect of dilutive securities -- 3 --
------- ------- --------
Diluted EPS $ 7,312 8,314 $ 0.88
======= ======= ========
Three Months Ended September 30, 2004:
Basic EPS $ 3,249 8,336 $ 0.39
Effect of dilutive securities -- -- --
------- ------- --------
Diluted EPS $ 3,249 8,336 $ 0.39
======= ======= ========
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
======= ======= ========
Nine Months Ended September 30, 2004:
Basic EPS $ 9,924 8,337 $ 1.19
Effect of dilutive securities -- 4 --
------- ------- --------
Diluted EPS $ 9,924 8,341 $ 1.19
======= ======= ========
NOTE 12 - 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 partnership and was not for a legitimate partnership 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 discovery phase of this
suit has been completed. A summary judgment was filed by us, but was denied on
July 25, 2005. It is not known when the case will be called to trial.
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.
13
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2005
(Unaudited)
b) Guarantees
In June and October of 2000, we originated two loans totaling $3.3 million under
an agreement with Fannie Mae that provided for our guaranteeing a first-loss
position on the loans. In September 2003, we transferred and assigned all of our
obligations with respect to the two loans we originated under this program to
CharterMac Mortgage Capital Corporation ("CMC"), a subsidiary of CharterMac,
both of which are affiliates of our Advisor. Pursuant to the agreement with CMC,
CharterMac guaranteed CMC's obligations under the loans, and we agreed to
indemnify both CMC and CharterMac for any losses incurred in exchange for
retaining all fees which we were otherwise entitled to receive under the
program. While provisions of this agreement could potentially result in exposure
of up to $7.5 million, the maximum exposure at September 30, 2005, was $3.2
million, and 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.
Standby and Forward Loan Commitments
------------------------------------
We issued the following standby and forward bridge and permanent loan
commitments for the purpose of funding construction/rehabilitation of certain
multifamily apartment complexes in various locations.
STANDBY AND FORWARD LOAN COMMITMENTS
-----------------------------------------------------------
(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 1,500 1,500 --
July-05 222 Pearson Chicago, IL 219 1,200 600 600
July-05 Bayfront Villas Gulfport, FL 120 500 500 --
Sept-05 Marbella Clearwater, FL -- 800 800 --
------------------------------------------------------
TOTAL STANDBY AND FORWARD LOAN COMMITMENTS 938 $ 4,428 $ 3,828 $ 600
======================================================
Mezzanine Loan/Preferred Stock Commitment
-----------------------------------------
In November 2004, we provided a commitment to fund up to $74.5 million in
connection with the borrower's financing of an acquisition. The commitment
expired unused in April 2005, and we recognized a commitment fee of
approximately $412,000, net of related legal expenses, upon the expiration.
Loan Stabilization Guarantees
-----------------------------
In accordance with an agreement entered into in 2002 with Wachovia Bank
("Wachovia") to provide stabilization guarantees for new construction of
multifamily properties, we were called upon to fund the last guarantee made
under the program. In May 2005, we funded a $7.5 million loan secured by
multifamily housing (see Note 3).
14
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2005
(Unaudited)
NOTE 13 - SUBSEQUENT EVENTS
During October 2005, we borrowed $8.0 million from our line of credit with
CharterMac to repay a portion of our repurchase facility. This repayment
resulted from a GNMA certificate that was repaid in September 2005 (see Note 2).
Subsequently, we received the principal proceeds from the GNMA repayment and
repaid the full amount outstanding on our line of credit with CharterMac.
On November 8, 2005, Stuart J. Boesky, announced that he will step down from his
positions as Chairman of the Board of Trustees, Chief Executive Officer and
President, effective November 15, 2005. Mr. Boesky will serve as a consultant to
CharterMac, the parent of our Advisor, for a period of one year, and his
consulting contract may be terminated by either party. In the interim, the Board
of Trustees has appointed Jeff T. Blau, a trustee of CharterMac, as interim
Chairman and Chief Executive Officer. The Board has also appointed Marc D.
Schnitzer, the President of CharterMac, as our President.
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, 2004, include the
following:
o Risks of investing in uninsured and non-investment grade mortgage assets
and subordinated CMBS;
o Competition in acquiring desirable investments;
o Interest rate fluctuations and changes in prepayment rates which may affect
the value of our assets;
o Risks associated with investments in real estate generally and the
properties which secure many of our investments;
o General economic conditions, particularly as they affect the value of our
assets and the credit status of our borrowers;
o Dependence on our external Advisor for all services vital to our
operations;
o Conflicts which may arise among us and other entities affiliated with our
Advisor which have similar investment policies to ours; and
o Risks associated with the repurchase agreements we utilize to finance our
investments and the availability of financing generally.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this quarterly report.
Factors Affecting Comparability
-------------------------------
During 2004, we owned several properties through foreclosure, classified as Real
Estate Owned - Held and Used, -Subject to Sales Contracts and - Held for Sale.
As a result of certain circumstances during 2004, we reclassified some of these
assets from Held for Sale to Held and Used, resulting in greater depreciation
expenses and recognition of property level mortgage interest in the current year
(see "Real Estate Owned" below).
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). There were no such
interest costs in prior, comparable periods.
During September 2005, the GNMA certificate and mezzanine loan investments
relating to one property were paid off prior to the maturity date. This pay off
resulted in significantly higher levels of fees earned and gain on redemption.
As a large portion of these proceeds were retained by GNMA until the normal
clearing date in October 2005, we also had higher levels of accounts receivable
at September 30, 2005.
16
Results of Operations
---------------------
The following is a summary of our operations for the three and nine months ended
September 30, 2005 and 2004:
(In thousands)
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- --------------------------------
2005 2004 Change 2005 2004 Change
-------- -------- -------- -------- -------- --------
Total revenues $ 12,766 $ 5,765 121.4% $ 26,367 $ 16,683 58.0%
Total expenses 6,711 3,116 115.4 16,166 8,559 88.9
Total other income 1,257 600 109.5 3,007 1,800 67.1
-------- -------- ----- -------- -------- ----
Net income $ 7,312 $ 3,249 125.1% $ 13,208 $ 9,924 33.1%
======== ======== ===== ======== ======== ====
In both the three and nine month periods ended September 30, 2005, as compared
to the same periods in 2004, revenues increased mainly due to fees received as a
result of early pay-off of investments, the purchases of new FNMA certificates
and the funding of several new mezzanine loans. Expenses have also increased for
these periods due to the recognition of mortgage interest costs for Real Estate
Owned, financing costs (particularly due to higher interest rates), and advisory
costs due to expected profits. Other income has increased due to the recognition
of income relating to Real Estate Owned - Held For Sale, as well as the
recognition of a gain resulting from the early paydown of a GNMA certificate.
REVENUES
Three Months Nine Months
Ended Ended
September 30, 2005 September 30, 2005
% Change from % Change from
Prior Year Prior Year
--------------------------------------- ------------------ ------------------
Interest income:
Debt securities 38.1 % 35.6 %
Mortgage loans 340.1 194.1
Notes receivable (47.8) (37.8)
Revenue bonds (2.7) (9.7)
Temporary investments 300.0 312.5
Fees related to prepayment of assets 2,971.7 2,971.7
Other revenues 297.4 914.9
----------- -----------
Subtotal 185.5 91.1
Rental income (11.7) (7.6)
----------- -----------
Total revenues 121.4 % 58.0 %
=========== ===========
At September 30, 2005, and December 31, 2004, we had the following investments:
As of As of
September 30, 2005 December 31, 2004
---------------------------- ------------------------------
Weighted Weighted
Carrying Average Carrying Average
Amount Interest Rate Amount Interest Rate
----------- ------------- ----------- --------------
Debt securities $ 202,938 6.16% $ 194,587 6.47%
Mortgage loans $ 54,052 14.46% $ 21,376 11.68%
Notes receivable $ 13,725 9.49% $ 23,111 9.43%
Revenue bonds $ 6,559 8.69% $ 6,672 8.69%
17
Interest income from debt securities increased, primarily due to the continued
advances on an existing GNMA certificate and the purchase of eight new FNMA
certificates during the fourth quarter of 2004 and seven new FNMA certificates
during 2005, partially offset by the repayment of two GNMA certificates. The
decrease in the weighted average interest rate on debt securities as of
September 30, 2005, as compared to December 31, 2004, was primarily due to the
rising interest rates on mortgage loans; as mortgage interest rates rise,
interest rates on debt securities tend to decrease.
Interest income from mortgage loans increased for the three and nine months
ended September 30, 2005, as compared to 2004, primarily due to the funding of
three mezzanine loans during the second half of 2004 and the funding of six
mezzanine loans during the second and third quarters of 2005. We also funded a
loan pursuant to a guarantee during the second quarter of 2005 (see Note 12).
The increase in the weighted average interest rates on mortgage loans as of
September 30, 2005, as compared to December 31, 2004, was primarily due to the
increase in market interest rates.
Interest income from notes receivable decreased for the three and nine months
ended September 30, 2005, as compared to 2004, primarily due to the payoff of
several notes in 2004 and 2005, partially offset by the funding of a new note
receivable.
Fees related to prepayment of assets increased primarily due to the recognition
of fees relating to an early payoff of a GNMA certificate and a mezzanine loan
during the third quarter of 2005.
Other revenues increased for the three and nine months ended September 30, 2005,
as compared to 2004, primarily due to the recognition of a commitment fee and a
non-refundable due diligence fee during 2005. No such fees were recorded in
2004.
Rental income decreased for the three and nine months ended September 30, 2005,
as compared to 2004, due to the Plaza at San Jacinto sale in February 2005.
EXPENSES
Three Months Nine Months
Ended Ended
September 30, 2005 September 30, 2005
% Change from % Change from
Prior Year Prior Year
------------------------------------------------------- ------------------ ------------------
Interest 84.0% 74.5%
Distributions to preferred shareholders 100.0 100.0
General and administrative 63.4 49.1
Fees to Advisor 208.4 84.1
Amortization and other 23.6 13.2
---------- ---------
Subtotal 137.4 86.8
Property operations (17.2) 2.7
Depreciation 469.5 182.8
Mortgage interest for real estate owned - held and used 100.0 100.0
---------- ---------
Total expenses 115.4% 88.9%
========== =========
At September 30, 2005, excluding mortgages on real estate owned, we had total
debt of approximately $243.7 million with a weighted average interest rate of
4.14% per year, including the effect of our swap agreement. At September 30,
2004, we had a comparable balance of approximately $182.8 million with a
weighted average interest rate of 2.64% per year. The increase in the weighted
average interest rate is due to steady increases in market interest rates during
2004 and 2005.
Interest expense increased for the three and nine months ended September 30,
2005, as compared to 2004, primarily due to the increased borrowings on the
repurchase facilities stemming from an increased investment base and the
increase in interest rates during 2004 and 2005.
18
Distributions to preferred shareholders were recorded following the issuance of
the securities in March 2005. There were no such securities outstanding during
2004.
General and administrative expenses increased for the three and nine months
ended September 30, 2005, as compared to 2004, primarily due to an increase in
legal fees related to foreclosed properties, an increase in accounting fees
related to Sarbanes-Oxley compliance, and an increase in excise taxes due to
undistributed taxable income.
Fees to Advisor increased for the three and nine months ended September 30,
2005, as compared to 2004, due to incentive management fees relating to the
increase in 2005 earnings. In addition, we incurred higher overhead costs and
asset management fees because of expansion of our business and an increased
asset base.
Property operations represent all non-interest costs at the property level on
all of our Real Estate Owned - Held and Used properties. Mortgage interest for
Real Estate Owned - Held and Used increased for the three and nine months ended
September 30, 2005, as compared to 2004, due to debt service costs associated
with a $41.0 million mortgage on the Concord Portfolio (see "Real Estate Owned"
below).
Depreciation expense increased for the three and nine months ended September 30,
2005, as compared to 2004, due to a higher base of depreciable real estate owned
in 2005 as compared to the 2004 period. In 2004, only the Plaza at San Jacinto
property was depreciated. In 2005, the Concord Portfolio is depreciating,
partially offset by the removal of Plaza at San Jacinto upon its sale.
OTHER INCOME
Other income increased for the three and nine months ended September 30, 2005,
as compared to 2004, due to purchase of the Autumn Creek mortgage, resulting in
the recording of property operations from Real Estate Owned - Held For Sale (see
"Real Estate Owned" below).
REAL ESTATE OWNED
During 2004, we reclassified some of our investments in foreclosed properties as
Real Estate Owned - Held for Sale on our balance sheet and recognized income
from the operations of these properties. As a result of these circumstances, we
have reclassified certain prior year amounts relating to the income recognition
of our real estate owned portfolio to conform to current year presentation.
During the time we have owned the real estate, certain circumstances have
occurred that warranted the reclassification of most of these assets. The
following is the September 30, 2005 classification of our real estate owned
portfolio:
o REAL ESTATE OWNED - HELD AND USED
During 2004, we had three properties classified as Real Estate Owned -
Subject to Sales Contracts, as the sale of these properties did not
constitute a sale in accordance with GAAP. After the properties were
refinanced during December 2004, we reclassified these properties on our
balance sheet as Real Estate Owned - Held and Used; we recorded
depreciation on the properties in 2004, as well as retroactively for the
period since foreclosure. We recognized income associated with the
properties as income from real estate owned on the income statement up to
the date of refinancing. Subsequently, we recognize income associated with
a $12.8 million mezzanine loan (our remaining economic interest in the
properties) as rental income, property operations and mortgage interest on
Real Estate Owned - Held and Used on the income statement.
During 2005, we sold the Plaza at San Jacinto property to an unaffiliated
third party for approximately its carrying value.
o REAL ESTATE OWNED - HELD FOR SALE
One remaining property in our real estate owned portfolio, Reserve at
Autumn Creek, will continue to remain as Real Estate Owned - Held for Sale
as we continue to market the real estate. We have changed the marketing
strategy of this asset in order to reflect marketplace behavior.
19
IMPACT OF HURRICANES DURING THE QUARTER ENDED SEPTEMBER 30, 2005
During the third quarter of 2005, two hurricanes struck the Gulf Coast region of
the United States. Six of our investments, secured by properties in Texas, were
affected by Hurricane Rita. The damage to these properties was minor and
therefore it is expected that we have no financial exposure in this matter.
There were no properties affected by Hurricane Katrina or by Hurricane Wilma,
which occurred subsequent to September 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 to fund
other cash needs.
The following table reconciles net income to FFO:
Three months ended Nine months ended
(In thousands) September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net income $ 7,312 $ 3,249 $ 13,208 $ 9,924
Add back: depreciation of real property $ 336 $ 59 $ 1,038 $ 367
-------- -------- -------- --------
FFO $ 7,648 $ 3,308 $ 14,246 $ 10,291
======== ======== ======== ========
Cash flows from:
Operating activities $ 8,547 $ 3,765 $ 15,051 $ 10,349
======== ======== ======== ========
Investing activities $(10,619) $ 3,113 $(67,257) $ 11,796
======== ======== ======== ========
Financing activities $ 10,182 $ 3,101 $ 66,491 $(11,738)
======== ======== ======== ========
Weighted average shares outstanding:
Basic 8,311 8,336 8,320 8,337
======== ======== ======== ========
Diluted 8,314 8,336 8,323 8,341
======== ======== ======== ========
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. We also believe we have the capacity and the ability to fund our long
term growth through equity issuances, debt offerings and other funding vehicles.
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. 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 September 30, 2005, we had approximately
$20.0 million available to borrow, contractually, under our debt facilities
without exceeding limits imposed by debt covenants and our by-laws.
20
In August 2005, our warehouse facility matured. Although we can no longer
originate new loans on this facility, two existing loans were extended through
February 2006. We are currently in negotiations with several financial
institutions to replace this facility with others in the near term.
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 FNMA
certificates.
We have capacity to raise approximately $170.0 million of additional funds by
issuing either common or preferred shares pursuant to a shelf registration
statement filed with the SEC in 2002. If market conditions warrant, we may seek
to raise additional funds for investment through further offerings, although the
timing and amount of such offerings cannot be determined at this time.
We are currently exploring further expansion of our investment platform through
the use of Collateralized Debt Obligations ("CDOs"). A real estate CDO is a
capital markets transaction in which the holder of various forms of real estate
debt instruments finances those assets by selling bonds backed by the assets.
The assets can be floating or fixed rate, and may include first mortgages,
subordinate participations in first mortgages, bridge loans, mezzanine loans,
CMBS, and trust preferred stock. The assets would be aggregated on our balance
sheet and would later be securitized. The CDO execution would enable us to lower
our cost of capital significantly, which in turn would make us more competitive
in the mezzanine lending marketplace. It is anticipated that our origination
activity would begin to increase in the fourth quarter 2005 and we would access
the securitization market in the first quarter of 2006, although there are no
assurances that we will proceed with such a program.
SUMMARY OF CASH FLOWS
During the nine months ended September 30, 2005, as compared to the nine months
ended September 30, 2004, the net change in cash and cash equivalents increased
approximately $3.9 million. Operating cash flows increased by approximately $4.7
million primarily due to higher earnings and the timing of collections of
receivables. Earnings increased for the nine months ended September 30, 2005 due
to fees received from an early paydown of a GNMA security and mezzanine loan.
An increase in net cash used in investing activities (approximately $79.1
million) offset by an increase in net cash provided by financing activities
(approximately $78.2 million) was due to a higher level of investing activity in
debt securities and mortgage loans, and the purchase of a mortgage loan on real
estate owned during the 2005 period. The investing activity was funded through
borrowings from our repurchase facilities and through the issuance of preferred
shares.
OTHER
During November 2005, distributions of approximately $3.3 million ($0.40 per
share) will be paid to common shareholders, which were declared in September
2005, and special distributions of approximately $2.5 million ($0.30 per share)
will be paid, which were declared in October 2005. The special distribution
relates to the earnings realized in the third quarter from fees received from
the early repayment of a GNMA security and mezzanine loan and is to be made in
accordance with REIT provisions.
In addition, we expect to purchase an interest in revenue bonds from CharterMac
for approximately $18.8 million during November 2005.
We are not aware of any trends or events, commitments or uncertainties, which
have not otherwise been disclosed that will or are likely to impact liquidity in
a material way.
Distributions
-------------
Of the total distributions made (approximately $10.0 million for both the nine
months ended September 30, 2005 and 2004), none were determined to be returns of
capital in 2005, while in 2004, approximately $80,000 ($0.01 per share or 0.80%)
represented a return of capital determined in accordance with GAAP. As of
September 30, 2005, the aggregate amount of distributions made since the initial
public offering representing returns of capital in accordance with GAAP was
approximately $14.0 million. The portion of the distributions which constituted
21
a return of capital was more significant in our initial years in order to permit
us to maintain level distributions to shareholders while we were in the process
of investing the proceeds from our initial public offering.
Commitments, Contingencies and Off-Balance Sheet Arrangements
-------------------------------------------------------------
See Note 12 of our condensed consolidated financial statements for a complete
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, 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:
Lines of credit:
Repurchase facilities $ 214,645 $ 214,645 $ -- $ -- $ --
Warehouse facility 4,070 4,070 -- -- --
Mortgage loan on real estate owned (1) 40,618 490 1,165 1,310 37,653
Preferred shares of subsidiary
(subject to mandatory repurchase) 25,000 -- -- -- 25,000
Funding Commitments:
Standby and forward loan commitments 4,428 3,828 600 -- --
---------- ----------- ---------- ----------- -----------
Total $ 288,762 $ 223,033 $ 1,765 $ 1,311 $ 62,653
========== =========== ========== =========== ===========
(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. (See Note 5).
Inflation
---------
Inflation did not have a material effect on our results for the periods
presented.
Subsequent Event
----------------
Refer to Note 13 of the condensed consolidated financial statements with respect
to the resignation of our Chief Executive Officer.
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 the 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 are
increasing our originations of 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 monthly or
22
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, warehouse and revolving facilities bear interest at
rates that fluctuate with LIBOR.
Various financial vehicles exist which would allow our management to mitigate
the impact of interest rate fluctuations on our cash flows and earnings. During
March 2003, upon our management's analysis of the interest rate environment and
the costs and risks of such strategies, we entered into an interest rate swap in
order to hedge against increases in the floating interest rate on our repurchase
facilities. The swap is a five-year agreement with Bank of America ("BOA")
whereby we pay BOA a fixed 3.48% on a notional amount of $30.0 million. In
return, BOA pays us a floating rate equivalent to the 30-day LIBOR rate on the
same notional amount. A possible risk of such swap agreements is the possible
inability of BOA to meet the terms of the contracts with us; however, there is
no current indication of such an inability.
Based on the $213.7 million unhedged portion of the $243.7 million of borrowings
outstanding at September 30, 2005, 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% increase in
LIBOR would increase our annual net income and cash flows from such loans by
approximately $366,000. The net effect of a 1% increase in LIBOR would therefore
result in a reduction of our annual net income by approximately $1.8 million. In
addition, an increase in LIBOR could also impede the collections of interest on
our variable rate loans. 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 partnership and
was not for a legitimate partnership 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 discovery phase of this suit has been completed. A summary judgment
was filed by us, but was denied on July 25, 2005. It is not known when
the case will be called to trial.
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 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
On November 8, 2005, Stuart J. Boesky, announced that he will step
down from his positions as Chairman of the Board of Trustees, Chief
Executive Officer and President, effective November 15, 2005. Mr.
Boesky will serve as a consultant to CharterMac, the parent of our
Advisor, for a period of one year, and his consulting contract may be
terminated by either party. In the interim, the Board of Trustees has
appointed Jeff T. Blau, a trustee of CharterMac, as interim Chairman
and Chief Executive Officer. The Board has also appointed Marc D.
Schnitzer, the President of CharterMac, as our President.
ITEM 6. EXHIBITS
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.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, 2005 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
President and Chief Executive Officer
Date: November 8, 2005 By: /s/ Alan P. Hirmes
------------------
Alan P. Hirmes
Chief Financial Officer
Exhibit 31.1
CERTIFICATION
I, Stuart J. Boesky, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period
ending September 30, 2005, of American Mortgage Acceptance Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure the material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 8, 2005 By: /s/ Stuart J. Boesky
---------------- --------------------
Stuart J. Boesky
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Alan P. Hirmes, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period
ending September 30, 2005, of American Mortgage Acceptance Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure the material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 8, 2005 By: /s/ Alan P. Hirmes
---------------- ------------------
Alan P. Hirmes
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18.U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of American Mortgage Acceptance Company
(the "Company") on Form 10-Q for the period ending September 30, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
Stuart J. Boesky, as Chief Executive Officer of the Company, and Alan P. Hirmes,
as Chief Financial Officer of the Company each hereby certifies, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
By: /s/ Stuart J. Boesky By: /s/ Alan P. Hirmes
-------------------- ------------------
Stuart J. Boesky Alan P. Hirmes
Chief Executive Officer Chief Financial Officer
November 8, 2005 November 8, 2005
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.