UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
Securities registered pursuant to Section 12(b) of the Act:
SHARES OF BENEFICIAL INTEREST, PAR VALUE $.10
Name of each exchange on which registered:
AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [X] No [ ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Large Accelerated filer [ ] Accelerated filer [X] Non-accelerated
filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The approximate aggregate market value of the voting and non-voting common
equity held by non-affiliates of the Registrant as of June 30, 2006 was
approximately $119,980,000.
As of March 1, 2007 there were 8,402,049 outstanding common shares of the
Registrant's shares of beneficial interest.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Those portions of the Registrant's Proxy Statement for the Annual
Meeting of Shareholders to be held in June 2007, which are incorporated into
Items 10, 11, 12, 13 and 14.
TABLE OF CONTENTS
AMERICAN MORTGAGE ACCEPTANCE COMPANY
ANNUAL REPORT ON FORM 10-K
PAGE
PART I
Item 1. Business 4
Item 1A. Risk Factors 7
Item 1B. Unresolved Staff Comments 15
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities 16
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 30
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 68
Item 9A. Controls and Procedures 68
Item 9B. Other Information 68
PART III
Item 10. Directors, Executive Officers and Corporate Governance 69
Item 11. Executive Compensation 69
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 69
Item 13. Certain Relationships and Related Transactions, and Director
Independence 69
Item 14. Principal Accounting Fees and Services 69
PART IV
Item 15. Exhibits, Financial Statement Schedules 69
SIGNATURES 73
2
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements include statements regarding the intent, belief
or current expectations of us and our management (which includes our Advisor)
and involve known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. These factors, which are outlined in detail in
Item 1A of this document, include, but are not limited to the following:
o Risks of investing in uninsured and non-investment grade mortgage
assets;
o Competition in acquiring desirable investments;
o Interest rate fluctuations;
o Risks associated with investments in real estate generally and the
properties which secure many of our investments;
o General economic conditions, 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 that have similar investment policies to ours;
o Risks associated with the repurchase agreements we utilize to finance
our investments and the ability to raise capital;
o Risks associated with the failure to qualify as a REIT; and
o Risks associated with Collateral Debt Obligation ("CDO") transactions,
which include, but are not limited to:
o The inability to acquire eligible investments for a CDO issuance;
o Interest rate fluctuations on variable-rate swaps entered into to
hedge fixed-rate loans;
o The inability to find suitable replacement investments within
reinvestment periods; and
o The negative impact on our cash flow that may result from the use
of CDO financings with over-collateralization and interest
coverage requirements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this annual report on Form 10-K.
3
PART I
ITEM 1. BUSINESS.
General
-------
American Mortgage Acceptance Company was formed in 1991 as a Massachusetts
business trust. We elected to be treated as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). We
are an externally managed REIT; all of our operations are conducted, pursuant to
an Advisory Services Agreement, 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 and other
debt instruments secured by multifamily and commercial property throughout the
United States. Throughout this report, the terms "we", "us", "our", "our
Company" and similar terms are meant to refer to American Mortgage Acceptance
Company and its consolidated subsidiaries.
Additional Information
----------------------
Additional information about us beyond what is included in this Form 10-K,
including our CODE OF BUSINESS CONDUCT AND ETHICS, is available at
www.americanmortgageco.com. As soon as reasonably practicable after such
material is electronically filed with, or furnished to, the Securities and
Exchange Commission ("SEC"), we make available on or through our website, free
of charge:
o our annual report on Form 10-K;
o our quarterly reports on Form 10-Q;
o our current reports on Form 8-K; and
o amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act.
You may also read and copy these materials at the SEC's Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549, or obtain them by calling the SEC at
1-800-SEC-0300. The SEC also maintains an Internet website that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC at WWW.SEC.GOV. We will provide a
copy of any of the foregoing documents upon request.
None of the information on our website that is not otherwise expressly set forth
or incorporated by reference in the Form 10-K is a part of this Form 10-K.
Business Strategy
-----------------
Our business plan focuses on originating and acquiring mortgage loans and other
debt instruments secured by multifamily and commercial properties throughout the
United States. We invest in mezzanine loans, construction loans, first mortgage
loans, subordinated interests in first mortgage loans and bridge loans. These
mortgages may have fixed or variable interest rates. Additionally, we may invest
in subordinate commercial mortgage-backed securities and other real estate
assets. We have also invested in government insured or agency guaranteed first
mortgages, insured mortgage pass-through certificates or insured mortgage backed
securities, but we have divested ourselves of many of these assets.
We have begun funding the growth in our investment portfolio by utilizing CDO
securitizations. 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. We securitized $400.0 million of our
investment portfolio in November 2006, of which, approximately $383.1 million
had been originated when the securitization closed, and we intend to securitize
additional growth in our investment portfolio using these types of transactions.
Securities issued in CDO transactions will not be registered under the
Securities Act of 1933 and will not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements.
In November 2006, we formed a subsidiary to accumulate assets for the purposes
of executing a planned second CDO securitization.
4
Investing
---------
We seek to leverage the expertise of our Advisor and its affiliates in
originating the loans and other assets in which we invest. In addition, our
Advisor, through its affiliates, provides the expertise to perform both the
initial underwriting of the properties which serve as direct or indirect
collateral for our loans, as well as the ongoing asset management and special
servicing of those properties through construction, lease-up and stabilization.
We invest, or have invested in, the following types of commercial real estate
loans:
o First mortgage loans;
o Subordinated B-notes and mezzanine loans;
o Bridge loans;
o Government insured and guaranteed investments; and
o Other investments
FIRST MORTGAGE LOANS
During 2006, we significantly grew our investment base by investing in first
mortgage loans that are secured by multifamily or commercial properties. The
loans, which are originated by affiliates of our Advisor, may be in the form of
long-term fixed-rate financing obligations or subordinate interests in long-term
fixed-rate financing obligations.
We may also invest in revenue bonds that are secured by first mortgages on
affordable multifamily housing properties throughout the country. The revenue
bonds generally rank on par with tax-exempt first mortgage revenue bonds that
are owned by CharterMac, the parent of our Advisor. The proceeds from these
revenue bonds are generally used for the new construction or substantial
rehabilitation of affordable multifamily properties.
SUBORDINATED B-NOTES AND MEZZANINE LOANS
We originate or acquire B-notes and mezzanine loans (subordinate loans secured
by interests in the borrowing entity) that typically finance newly stabilized or
transitional multifamily and commercial real estate properties. We originate
B-notes and mezzanine loans for office, retail or industrial properties as well.
The interest rates we offer are either fixed or variable rate. We seek assets
secured by properties in real estate markets with strong fundamentals and
transactions with well capitalized developers or guarantors. Our B-notes and
mezzanine transactions may involve us:
1) issuing mezzanine debt subordinated to an existing first mortgage
loan;
2) jointly bidding with a senior lender and closing simultaneously (the
process can be seamless to the client);
3) acquiring a subordinated loan from a senior lender; or
4) originating the entire debt structure and selling the first mortgage
to a senior lender.
B-notes and mezzanine loans are subordinate to senior mortgages and may include
a participating component, such as a right to a portion of the cash flow and
proceeds generated from the refinancing and sale of the underlying properties.
Typically, they are secured by equity interests in the borrower and have limited
recourse to the borrower.
BRIDGE LOANS
We originate or acquire Bridge financing on commercial properties nationwide.
Bridge loans are secured by first mortgage liens on assets undergoing a
transition or repositioning. Due to the transitional nature of the underlying
assets, bridge loans typically require additional credit enhancement such as
letters of credit or performance guarantees. Bridge loans are typically short
term financings with terms ranging from 1 to 5 years. The interest rates may be
either fixed or variable.
5
GOVERNMENT INSURED AND GUARANTEED INVESTMENTS
Our debt securities investments consist of government insured or guaranteed
investments, primarily through the acquisition of Government National Mortgage
Association ("GNMA" or "Ginnie Mae") and Federal National Mortgage Association
("FNMA" or "Fannie Mae") mortgage-backed securities and pass-through
certificates. We believe that government agency insured lending offers safety,
liquidity and moderate yields, while also providing a strong asset base for
collateralized borrowing on favorable terms.
OTHER INVESTMENTS
From time to time, we may invest in assets outside of our normal investment
strategy (for example, equity investments or Commercial Mortgage Backed
Securities ("CMBS")) if we believe that making such an investment is
advantageous in maximizing our return on equity.
Financing
---------
During 2006, we began financing our investment growth by utilizing CDO
securitizations. Prior to a securitization, we finance investments through a
mortgage loan repurchase facility, or similar arrangement, which is repaid from
the proceeds received when the CDO securitization is complete.
We finance our remaining investing activity primarily through borrowing from
various other facilities at short-term rates. We have two debt securities
repurchase facilities and a line of credit with a related party, all of which
are used as financing sources.
For further information about these facilities, see MANAGEMENT'S DISCUSSION AND
ANALYSIS - LIQUIDITY AND CAPITAL RESOURCES and Notes 8, 9, 10 and 12 to the
consolidated financial statements.
In addition, we may also issue common shares to fund investing activity. We have
the capacity to raise approximately $170.0 million of additional funds by
issuing either common or preferred shares pursuant to a shelf registration
statement filed with the SEC.
From time to time, we may also issue other types of securities to raise
additional capital. For example, during 2005, our subsidiary issued $25.0
million of variable rate preferred securities, the proceeds of which were used
to purchase FNMA certificates.
Competition
-----------
We compete with various financial institutions including investment banks,
commercial banks, insurance companies, other REITs, opportunity and private
equity funds and pension fund advisors for investment opportunities.
Management and Governance
-------------------------
We have engaged our Advisor to manage our day-to-day affairs. Our Advisor has
subcontracted with CharterMac Capital LLC ("CharterMac Capital") and ARCap
Servicing, Inc. ("ASI"), subsidiaries of CharterMac, to provide the services
necessary for our operations. Through our Advisor, CharterMac Capital and ASI
offer us a core group of experienced staff and executive management personnel
who provide us with services on both a full- and part-time basis. These services
include, among other things, origination, acquisition, underwriting, asset
monitoring, portfolio management, legal, finance, accounting, capital markets,
investor relations and loan servicing.
We have no employees. Our Advisor receives compensation for the services it
provides to us as set forth in Item 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA; Item 11, EXECUTIVE COMPENSATION; and Item 13, CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. In addition, we reimburse our
Advisor and certain of its affiliates for expenses they incur in connection with
their performance of services for us in accordance with our Advisory Services
Agreement ("Advisory Agreement").
We are governed by a board of trustees comprised of five independent trustees
and three non-independent trustees who are affiliated with our Advisor.
6
ITEM 1A. RISK FACTORS.
An investment in our common shares involves a number of risks. Before making an
investment decision, you should carefully consider all of the risks described in
this document. If any of the risks discussed actually occur, our business,
financial condition, results of operations and cash flows, and the value of your
investment, could be materially adversely affected.
For convenience, we have grouped these risk factors as follows:
1. Risks related to our investments
2. Risks related to our Advisor
3. Risks related to our debt obligations
4. Risks related to our classification as a REIT and not as an investment
company
5. Risks related to our common shares and our shareholders
1. RISKS RELATED TO OUR INVESTMENTS
THERE ARE RISKS ASSOCIATED WITH INVESTMENTS SECURED BY REAL ESTATE, WHICH MAY
NEGATIVELY AFFECT OUR EARNINGS
We derive most of our income by investing, directly and indirectly, in debt
secured by multifamily or commercial properties. Such investments subject us to
various types and degrees of risk that could adversely affect the value of our
investments and our ability to generate revenue and net income.
Multifamily and commercial property values and net operating income derived from
such properties are subject to volatility and may be affected adversely by a
number of factors, including, but not limited to:
o national, regional and local economic conditions (which may be
adversely affected by industry slowdowns and other factors);
o local real estate conditions (such as an oversupply of housing,
retail, industrial, office or other commercial space and market demand
for condominium units) as well as national, regional and local
politics, including current or future rent stabilization and rent
control laws and agreements;
o stability of the controlling entity of our borrower and managing agent
of the borrower's property;
o construction quality, age and design;
o demographic factors;
o retroactive changes to building or similar codes;
o increases in operating expenses (such as energy costs);
o the potential need to expend additional capital in order to preserve
our investment if a mortgage loan is called due to construction not
being completed as required in the mortgage loan documents;
o the ability to increase rents to generate the funds necessary to
maintain the properties securing our investments in proper condition
which can depend upon rent limitations imposed by the federal low
income housing tax credit ("LIHTC") Program and city, state and
federal housing subsidy or similar programs;
o if a loan defaults, the value of the property securing the loan (plus,
for properties that are financed through the LIHTC Program, the value
of the credits) may be less than the unamortized principal amount of
the loan;
o the costs of removal of certain hazardous substances released on a
property securing our investment; a property operator could be liable
for without regard to whether the owner or operator knew of, or was
responsible for, the release of such hazardous substances; and
o costs to comply with the Americans with Disabilities Act, fire and
safety regulations, building codes, and other land use regulations.
These conditions and events may increase the possibility that a property
operator or developer may be unable to meet its obligations to us or otherwise
expose us to losses, thereby affecting our net income.
From time to time, through the foreclosure process, we may also take title to
properties as a result of loan defaults by borrowers. While our Advisor would
act to improve the operating performance of any such properties and actively
market them for sale, the assets tend to be illiquid and there is no assurance
that we would realize the full carrying amounts when the properties are sold.
7
COMMERCIAL REAL ESTATE INVESTMENTS THAT ARE NON-INVESTMENT GRADE INVOLVE RISK OF
LOSS
GENERAL. We intend to continue to originate and acquire non-investment grade
mortgage loans and mortgage assets as part of our investment strategy. Such
loans and assets may include first mortgage loans, mezzanine loans, construction
loans, bridge loans, subordinated interests in first mortgage loans and CMBS.
While holding such interests, we will be subject to risks of borrower defaults,
bankruptcies, fraud and losses and special hazard losses that are not covered by
standard hazard insurance. In the event of any default under mortgage loans we
hold, we will bear the risk of loss of principal and non-payment of interest and
fees to the extent of any deficiency between the value of the mortgage
collateral and the principal amount of the mortgage loan.
LIMITED RECOURSE LOANS MAY LIMIT OUR RECOVERY TO THE VALUE OF THE MORTGAGED
PROPERTY. Our loans are generally non-recourse, although some may have limited
recourse provisions for a short period. In addition, limited recourse against
the borrower may be further limited by applicable provisions of the laws of the
jurisdictions in which the mortgaged properties are located or by the selection
of remedies and the impact of those laws on that selection. With respect to our
non-recourse mortgage loans, in the event of a borrower default, the value of
the specific mortgaged property and other assets, if any, pledged to secure the
relevant mortgage loan, may be less than the amount owed under the mortgage
loan. As to those mortgage loans that provide for recourse against the borrower
and its assets generally, there can be no assurance that such recourse will
provide a recovery in respect of a defaulted mortgage loan greater than the
liquidation value of the mortgaged property securing that mortgage loan.
In addition, investment in subordinated interests in mortgage loans do not
provide us with foreclosure remedies upon default. Should an investment default,
we may lose our entire investment in such loans.
COMPETITION IN ACQUIRING DESIRABLE INVESTMENTS MAY LIMIT THEIR AVAILABILITY
WHICH COULD, IN TURN, NEGATIVELY AFFECT OUR ABILITY TO GENERATE NET INCOME
We compete for loan investments with numerous public and private real estate
investment vehicles, such as investment banks, commercial banks, insurance
companies, other REITS, opportunity and private equity funds and pension fund
advisors. Mortgages, mezzanine loans, subordinated interests in CMBS and other
investments are often obtained through a competitive bidding process. In
addition, competitors may seek to establish relationships with the financial
institutions and other firms from which we intend to purchase such assets. Many
of our competitors are larger than us, may have access to greater capital
resources and other resources, and may have other advantages over us and our
Advisor in conducting certain business and providing certain services.
Competition may result in higher prices for mortgage assets, lower yields and a
narrower spread of yields over our borrowing costs. There can be no assurance
that we will achieve investment results that will allow any specified level of
cash distribution.
INTEREST RATE FLUCTUATIONS WILL AFFECT THE VALUE OF OUR ASSETS AND OUR ABILITY
TO GENERATE NET INCOME
Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
considerations and other factors beyond our control. Interest rate fluctuations
can adversely affect our net income in many ways and present a variety of risks,
including the risk of a mismatch between asset yields and borrowing rates.
Our income depends primarily on the spread between income we earn and our
borrowing costs to fund investments. Interest rate mismatch occurs because many
of our assets generate income at a fixed rate while our borrowings have interest
rates that reset relatively rapidly, such as monthly or quarterly. In addition,
in periods of declining market rates, income from our variable rate investments
would decline. Consequently, changes in interest rates, particularly short-term
interest rates, may influence our net income and could result in operating
losses. See also Item 7A, QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK.
PREPAYMENT RATES MAY NEGATIVELY AFFECT THE VALUE OF OUR INVESTMENTS.
The value of our investments may be affected by prepayment rates. Prepayment
rates are influenced by changes in current interest rates and a variety of
economic, geographic and other factors beyond our control, and consequently,
such prepayment rates cannot be predicted with certainty. To the extent we
originate mortgage loans, we expect that such mortgage loans will have a measure
of protection from prepayment in the form of prepayment lock-out periods or
8
prepayment penalties. In periods of declining mortgage interest rates,
prepayments on mortgages generally increase. If general interest rates decline
as well, the proceeds of such prepayments received during such periods are
likely to be reinvested by us in assets yielding less than the yields on the
investments that were prepaid. In addition, the market value of mortgage
investments may, because of the risk of prepayment, benefit less from declining
interest rates than would other fixed-income securities. Conversely, in periods
of rising interest rates, prepayments on mortgages generally decrease, in which
case we would not have the prepayment proceeds available to invest in assets
with higher yields. Under certain interest rate and prepayment scenarios we may
fail to recoup fully our cost of acquisition of certain investments.
WE MAY NOT ACCURATELY ASSESS INVESTMENT YIELDS, WHICH MAY NEGATIVELY AFFECT OUR
EARNINGS
Before making any investment, our Advisor will consider the expected yield of
the investment and the factors that may influence the yield actually obtained on
such investment. These considerations will affect our or our Advisor's decision
whether to purchase such an investment and the price offered for such an
investment. No assurances can be given that we or our Advisor will make an
accurate assessment of the yield to be produced by an investment. Many factors
beyond our and our Advisor's control are likely to influence the yield on the
investments, including, but not limited to, competitive conditions in the local
real estate market, local and general economic conditions and the quality of
management of the underlying property. Our Advisor's inability to accurately
assess investment yields may result in our purchasing assets that do not perform
as well as expected, which may negatively affect our earnings.
PARTICIPATING INTERESTS IN MORTGAGES MAY NOT BE REALIZED
In connection with the acquisition and origination of mortgages, we have
obtained and may continue to obtain participating interests that may entitle us
to payments based upon a property's cash flow, profits or any increase in the
value of the property that would be realized upon a refinancing or sale of the
property. As the operation of a particular property is subject to numerous
variables and risks, there can be no assurance that a participating interest
will result in additional payments to us.
CONCENTRATION AND THE CREDIT QUALITY OF BORROWERS MAY RESULT IN LOSSES
We have not established any limit upon the geographic concentration of
properties securing our investments or the credit quality of borrowers of
uninsured investments. As a result, properties securing our investments may be
overly concentrated in certain geographic areas and the underlying borrowers of
our uninsured investments may have low credit quality. As of December 31, 2006,
87.9% of our portfolio was comprised of non-insured investments. Of this group
of assets, 19.8%, 19.4% and 11.0% were secured by properties in Texas,
California and New York, respectively. We had no borrowers exceeding 10% of our
portfolio of investments in mortgage loans, notes receivable and revenue bonds.
2. RISKS RELATED TO OUR ADVISOR
WE ARE DEPENDENT ON OUR ADVISOR AND IF OUR ADVISOR TERMINATES THE ADVISORY
AGREEMENT, WE MAY NOT BE ABLE TO FIND AN ADEQUATE REPLACEMENT ADVISOR
We have no employees, although we have officers. We have entered into an
Advisory Agreement with our Advisor under which it provides us with all of the
services necessary for our operations. We are dependent on our Advisor for the
management and administration of our business and investments. The results of
our operations will be dependent upon the availability of, and our Advisor's
ability to identify and capitalize on, investment opportunities. The agreement
may be terminated:
(i) without cause by our Advisor; or
(ii) with or without cause by a majority of our independent trustees.
The Advisor can terminate the agreement without penalty, but we are subject to a
termination fee, except in certain instances, for termination or non-renewal,
equal to four times the asset management fee and four times the incentive
management fee that our Advisor would have been entitled to receive from us
during the four calendar quarter period immediately proceeding the effective
date of such termination. Termination would be effective upon 60 days prior
9
written notice to the non-terminating party. If our Advisor terminates our
agreement, we may not be able to find an adequate replacement advisor.
CONFLICTS OF INTEREST COULD ARISE AMONG US AND OUR RELATED PARTIES
Our Advisor has subcontracted to its affiliates, CharterMac Capital and ASI, its
obligation to provide services under the Advisory Agreement, and there are risks
involved with this arrangement. Under our Advisory Agreement, the Advisor,
CharterMac Capital and ASI are permitted to act as advisor to other entities
having investment policies similar to ours, including other REITs. Generally, in
conflict situations with non-affiliated entities, our Advisor must present an
investment opportunity to us if the opportunity is within our investment
objectives and policies, the opportunity is of a character that could be taken
by us, and we have the financial resources to take advantage of the opportunity.
Additionally, CharterMac, the parent of the Advisor, has in the past, and may in
the future, invest in first mortgage loans, including taxable first mortgage
revenue bonds or other investments that are similar to those in which we invest.
To the extent that these existing entities, as well as affiliated entities which
may be formed by affiliates of our Advisor in the future, have funds available
for investment at the same time as we do and a potentially suitable investment
is offered to us or the affiliated entities, our Advisor will review the
affiliated entities' and our investment portfolios and will determine whether or
not the investment should be made by one of the affiliated entities or by us
based upon factors such as the amount of funds available for investment, yield
and portfolio diversification. If the making of a mortgage loan or other
mortgage investment appears equally appropriate for us and these affiliated
entities, the mortgage loan or other mortgage investment will either be made by
a joint venture between two or more of such entities (which may include us), or
will be allocated to one of such entities on a basis of rotation with the
initial order of priority determined by the dates of formation of the entities.
We also have a co-investment agreement with a fund affiliated with (and managed
by an affiliate of) our Advisor whereby we invest equally in commercial real
estate loans. In the event that there is a default with respect to any of these
investments, however, a conflict could exist with respect to claims on
underlying assets, proceeds from liquidation, etc.
In addition, Stephen M. Ross is the principal owner of The Related Companies L.P
("Related"), as well as the Chairman and an indirect owner of a 20.7% economic
interest in CharterMac. Jeff T. Blau, one of our managing trustees, is also
President of Related. Affiliates of Related are the borrowers of commercial real
estate loans we own (see Notes 2 and 20 to the consolidated financial
statements) and any defaults with respect to those loans would present a
conflict of interest with respect to exercising our remedies.
CONFLICTS OF INTEREST COULD ARISE IN TRANSACTIONS WHERE WE LEND TO OR BORROW
FROM AFFILIATES OF OUR ADVISOR
Every transaction entered into between us and an affiliate of our Advisor raises
a potential conflict of interest. In addition to the initial determination to
invest in mortgage investments secured by properties owned by an affiliate of
our Advisor, such conflicts of interest with respect to these mortgage
investments include, among others, decisions regarding:
o whether to waive defaults of such affiliate;
o whether to foreclose on a loan; and
o whether to permit additional financing on the properties securing our
investments other than financing provided by us.
We have invested in, and may in the future invest in, mortgage investments
secured by properties in which affiliates of our Advisor own equity interests in
the borrower. Our declaration of trust requires that any transaction between our
Advisor or any of its affiliates and us be approved by a majority of our
trustees, including a majority of the independent trustees, not otherwise
interested in the transaction, as being fair and reasonable and on terms not
less favorable to us than those available from unaffiliated third parties. As of
December 31, 2006, we had four first mortgage loans with a total carrying value
of approximately $91.9 million, and four multifamily housing first mortgage
bonds with a total carrying value of approximately $5.0 million to borrowers
that are affiliates of our Advisor, which represents 13.4% of our total assets.
10
In June 2004, we entered into a revolving credit facility with CharterMac, which
provides up to $50.0 million in borrowings and bears interest at LIBOR plus 3.0%
basis points. This facility was extended through June 2007 and contains terms
that are similar to those we would obtain from a third-party lender. In June
2007, we will have the option to extend the maturity date one year, which we
expect to do. As of December 31, 2006, there was approximately $15.0 million
outstanding on this facility.
3. RISKS RELATED TO OUR DEBT OBLIGATIONS
SHORT-TERM REPURCHASE AGREEMENTS INVOLVE RISK OF LOSS
We finance, and expect to continue to finance, a portion of our investments
through collateralized borrowing in the form of repurchase agreements, which
involve us selling assets concurrently with our agreement to repurchase them at
a later date and at a fixed price. During the repurchase agreement period, we
continue to receive principal and interest payments on the assets. The use of
borrowing, or "leverage," to finance our assets involves a number of risks,
including the following:
IF WE ARE UNABLE TO RENEW OUR BORROWINGS AT FAVORABLE RATES, WE MAY BE
FORCED TO SELL ASSETS, AND OUR PROFITABILITY MAY BE ADVERSELY AFFECTED.
We rely on short-term repurchase agreements to finance a portion of our
assets. Our ability to achieve our investment objectives depends on our
ability to borrow money in sufficient amounts and on favorable terms and
our ability to renew or replace these short-term borrowings on a continuous
basis as they mature. If we are not able to renew or replace maturing
borrowings, we would be forced to sell some of our assets under possibly
adverse market conditions, which may adversely affect our profitability. As
of December 31, 2006, we had borrowings of approximately $163.6 million
outstanding under our repurchase facilities.
A DECLINE IN THE MARKET VALUE OF OUR ASSETS MAY RESULT IN MARGIN CALLS THAT
MAY FORCE US TO SELL ASSETS UNDER ADVERSE MARKET CONDITIONS.
Repurchase agreements involve the risk that the market value of the
securities sold by us may decline and that we will be required to post
additional collateral, reduce the amount borrowed or suffer forced sales of
the collateral. If forced sales were made at prices lower than the carrying
value of the collateral, we would experience additional losses. If we are
forced to liquidate our assets to repay borrowings, there can be no
assurance that we will be able to maintain compliance with the REIT asset
and source of income requirements.
OUR USE OF REPURCHASE AGREEMENTS TO BORROW MONEY MAY GIVE OUR LENDERS
GREATER RIGHTS IN THE EVENT OF BANKRUPTCY.
Our repurchase agreements require us to pledge certain of our assets to the
lender to secure our obligations thereunder. Borrowings made under
repurchase agreements may qualify for special treatment under the U.S.
Bankruptcy Code, which may make it difficult for us to recover our pledged
assets if a lender files for bankruptcy. In addition, if we were to file
for bankruptcy, lenders under our repurchase agreements may be able to
avoid the automatic stay provisions of the U.S. Bankruptcy Code and take
possession of, and liquidate, the assets we pledged under these agreements
without delay.
THERE ARE RISKS ASSOCIATED WITH OUR CDO TRANSACTIONS
We are exposed to additional risks when we finance a portion of our investment
portfolio through a CDO transaction. Risks associated with financing investments
through a CDO include the following:
WE MAY NOT BE ABLE TO ACQUIRE ELIGIBLE INVESTMENTS FOR A CDO ISSUANCE, OR
MAY NOT BE ABLE TO ISSUE CDO SECURITIES ON ATTRACTIVE TERMS, WHICH MAY
REQUIRE US TO UTILIZE MORE COSTLY FINANCING FOR OUR INVESTMENTS, OR TO
LIQUIDATE THE INVESTMENTS.
We have begun to finance certain of our investments on a non-recourse,
long-term basis through the issuance of CDOs. During the period that we are
acquiring these investments, we finance our purchases through warehouse
facilities. We use these facilities to finance our acquisition of
investments until we have accumulated a sufficient quantity of them, at
11
which time we may refinance these lines through a securitization, such as a
CDO issuance, or other types of long-term financing. As a result, we are
subject to the risk that we will not be able to acquire a sufficient amount
of eligible investments to maximize the efficiency of a CDO issuance. In
addition, conditions in the capital markets may make the issuance of CDOs
less attractive to us when we do have a sufficient pool of collateral. If
we are unable to issue a CDO to finance these investments, we may be
required to utilize other forms of potentially less attractive financing,
or otherwise liquidate the collateral.
WE MAY NOT BE ABLE TO FIND SUITABLE REPLACEMENT INVESTMENTS IN
COLLATERALIZED DEBT OBLIGATIONS WITH REINVESTMENT PERIODS.
Some CDOs have periods where principal proceeds received from assets
securing the obligation can be reinvested for a defined period of time,
commonly referred to as a reinvestment period. Our ability to find suitable
investments during any reinvestment period that meet the criteria set forth
in the CDO documentation and by rating agencies may determine the success
of our CDO investments. Our potential inability to find suitable
investments may, among other things:
o cause interest deficiencies;
o cause hyper-amortization of the senior CDO liabilities; and
o cause us to reduce the life of our CDOs and accelerate the
amortization of certain fees and expenses.
THE USE OF CDO FINANCINGS WITH OVER-COLLATERALIZATION AND INTEREST COVERAGE
REQUIREMENTS MAY HAVE A NEGATIVE IMPACT ON OUR CASH FLOW.
The terms governing CDOs generally provide that the principal amount of
investments must exceed the principal balance of the related bonds by a
certain amount and that interest income exceed interest expense by a
certain amount. If delinquencies and/or losses or other factors cause a
decline in collateral or cash flow levels, the cash flow otherwise payable
on our investment may be redirected to repay the senior classes of debt
until such point as the CDO is in compliance with the terms of the CDO. We
cannot assure you that the performance tests will be satisfied. If our
investments fail to perform as anticipated, our over-collateralization,
interest coverage or other credit enhancement expense associated with our
CDO financings will increase.
WE MAY BE REQUIRED TO REPURCHASE LOANS THAT WE HAVE SOLD OR TO INDEMNIFY
HOLDERS OF OUR CDOS.
If any of the loans we originate or acquire and sell or securitize through
CDOs do not comply with representations and warranties that we make about
certain characteristics of the loans, the borrowers and the underlying
properties, we may be required to repurchase those loans or replace them
with substitute loans. In addition, we may be required to indemnify persons
for losses or expenses incurred as a result of a breach of a representation
or warranty. Repurchases or indemnification payments could adversely affect
our financial condition and operating results.
HEDGING TRANSACTIONS CAN LIMIT GAINS AND INCREASE EXPOSURE TO LOSSES
Hedging involves risk and hedging activities may not have the desired beneficial
impact on our results of operations, financial condition or cash flows.
Moreover, no hedging activity can completely insulate us from the risks
associated with changes in interest rates and prepayment rates.
We intend generally to hedge as much of the interest rate risk as our Advisor
determines is in our best interests given the cost of such hedging transactions.
REIT provisions of the Code may limit our ability to hedge our assets and
related borrowings. Any limitation on our use of hedging techniques may result
in greater interest rate risk.
12
4. RISKS RELATED TO OUR CLASSIFICATION AS A REIT AND NOT AS AN INVESTMENT
COMPANY
There are risks associated with being a REIT, which include the following:
FAILURE TO QUALIFY AS A REIT WOULD SUBJECT US TO FEDERAL, STATE AND LOCAL INCOME
TAXES, WHICH WOULD REDUCE THE NET INCOME AND CASH AVAILABLE FOR DISTRIBUTION TO
OUR SHAREHOLDERS.
We offer investors the opportunity to invest through an entity intended to
qualify as a REIT for federal income tax purposes. The federal income tax laws
governing REITs are extremely complex, and interpretations of the federal income
tax laws governing REIT qualification are limited. Given the highly complex
nature of the rules governing REITs, the ongoing importance of factual
determinations, including the tax treatment of participation interests in
mortgage loans and mezzanine loans, and the possibility of future changes in its
circumstances, no assurance can be given that we will qualify for any particular
year.
If we fail to qualify as a REIT in any calendar year and do not qualify for
certain statutory relief provisions, we would be required to pay federal, state
and local income taxes on our taxable income. We might need to borrow money or
sell assets in order to pay that tax. Our payment of income tax would decrease
the amount of our cash available for distribution to our shareholders.
Furthermore, if we fail to maintain our qualification as a REIT and we do not
qualify for certain statutory relief provisions, we no longer would be required
to distribute substantially all of our taxable income to our shareholders.
Unless our failure to qualify as a REIT were excused or cured under federal tax
laws, we would be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost.
AS A REIT, OUR INCOME CAN ONLY COME FROM LIMITED TYPES OF SOURCES.
To qualify as a REIT, at least 75% of our gross income must come from qualified
real estate sources and at least 95% of our gross income must come from
qualified real estate sources and certain other sources that are itemized in the
REIT tax laws. In addition to these income tests, we must satisfy certain
requirements concerning our assets on a quarterly basis, including the
requirement that at least 75% of our assets qualify as real estate assets.
Therefore, we may have to forego opportunities to invest in potentially
profitable businesses or assets because they would produce income that could
jeopardize our status as a REIT.
FAILURE TO MAKE REQUIRED DISTRIBUTIONS WOULD SUBJECT US TO TAX, WHICH WOULD
REDUCE THE CASH AVAILABLE FOR DISTRIBUTION TO OUR SHAREHOLDERS.
In order for us to qualify as a REIT, we must distribute to our shareholders,
each calendar year, at least 90% of our taxable income (including certain items
of non-cash income), determined without regard to the deduction for dividends
paid and excluding net capital gains. In addition, we may be subject to a 4%
nondeductible excise tax on the amount, if any, by which our distributions in
any calendar year are less than certain specified amounts.
Our taxable income may substantially exceed our net income as determined based
on accounting principles generally accepted in the United States of America
("GAAP"), because, for example, realized capital losses will be deducted in
determining the REIT's GAAP net income, but may not be deductible in computing
our taxable income. In addition, we may invest in assets that generate taxable
income in excess of net income or in advance of the corresponding cash flow from
the assets. To the extent that we generate such non-cash taxable income, or
"phantom" income, in a taxable year, we may incur corporate income tax and the
4% nondeductible excise tax on that income if we do not distribute such income
to our shareholders in that year or we may be required to use cash reserves,
incur debt or liquidate assets at rates or times that we regard as unfavorable
in order to satisfy the distribution requirement and to avoid corporate income
tax and the 4% nondeductible excise tax in that year.
WE ARE ALSO SUBJECT TO OTHER TAX LIABILITIES.
As a REIT, we may be subject to federal, state and local taxes on certain types
of income, property and transactions. Any of these taxes would reduce our
operating cash flow.
13
LIQUIDATION OF COLLATERAL MAY JEOPARDIZE OUR REIT STATUS.
To continue to qualify as a REIT, we must comply with requirements regarding our
assets and our sources of income. If we are compelled to liquidate our mortgage
investments to satisfy our obligations to our lenders, we may be unable to
comply with these requirements, ultimately jeopardizing our status as a REIT.
CHANGES IN TAX LAWS REGARDING REITS COULD ADVERSELY AFFECT OUR NET INCOME.
Congress, and to some extent the United States Department of Treasury, as well
as state legislatures and regulatory authorities, could at any time adversely
change the way in which a REIT and its stockholders are taxed, by imposing
additional entity-level taxes, further restricting the permissible beneficial
ownership and types of assets and income of a REIT, requiring additional
distributions, or changing the law in any other respect. Moreover, such changes
could apply retroactively. Should any such changes be implemented, they may
cause our net income to decline.
LOSS OF INVESTMENT COMPANY ACT EXCLUSION WOULD ADVERSELY AFFECT US.
We intend to conduct our business so as not to become regulated as an investment
company under the Investment Company Act of 1940, as amended (the "Investment
Company Act"). Towards this end, we rely on an exclusion from regulation as an
investment company available to entities that are primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate. Under the current interpretation of the SEC staff, in
order to qualify for this exclusion, we must maintain at least 55% of our assets
directly in these qualifying real estate interests, and 80% of our assets in
qualifying real estate interests and real estate-related interests. In meeting
the 55% requirement, we treat as qualifying real estate interests our
investments in whole mortgage loans and revenue bonds that are secured by first
mortgages on affordable multifamily housing properties. We also treat as
qualifying real estate interests our investments in mortgage-backed securities
issued with respect to an underlying pool as to which we hold all issued
certificates. Mortgage-backed securities that do not represent all the
certificates issued with respect to an underlying pool of mortgages may be
treated as securities separate from the underlying mortgage loans and, thus, may
not be considered qualifying real estate interests for purposes of the 55%
requirement. Instead, we treat our interests in these mortgage-backed securities
as real estate-related interests. Therefore, our ownership of these
mortgage-backed securities is limited by the provisions of the Investment
Company Act.
If we fail to qualify for the exclusion for real estate companies, we would be
regulated as an investment company and our business would be materially
adversely affected. As a regulated investment company, we would be prevented
from conducting our business as described in this document because the
Investment Company Act contains various restrictions that, among other things,
would reduce our ability to borrow. If the SEC or its staff adopts a contrary
interpretation with respect to the treatment of investments in mortgage backed
securities, we could be required to sell a substantial amount of our
mortgage-backed securities under potentially adverse market conditions. In
addition, in order to insure that we at all times qualify for the exclusion from
the Investment Company Act, we may be precluded from acquiring mortgage-backed
securities whose yield is somewhat higher than the yield on those that could be
purchased in a manner consistent with the exemption. The net effect of these
factors may be to lower our net income.
5. RISKS RELATED TO OUR COMMON SHARES AND OUR SHAREHOLDERS
RESTRICTIONS ON SHARE ACCUMULATION IN REITS COULD DISCOURAGE A CHANGE OF CONTROL
OF OUR COMPANY.
In order for us to qualify as a REIT, not more than 50% of the number or value
of our outstanding shares may be owned, directly or indirectly, by five or fewer
individuals during the last half of a taxable year or during a proportionate
part of a shorter taxable year.
In order to prevent five or fewer individuals from acquiring more than 50% of
our outstanding shares and a resulting failure to qualify as a REIT, our
declaration of trust provides that, no person may own, or be deemed to own by
virtue of the attribution provisions of the Code, more than 9.8% of the
outstanding shares. The shares most recently acquired by a person that are in
excess of the 9.8% limit will not have any voting rights and will be deemed to
have been offered for sale to us for a period subsequent to the acquisition. Any
person who acquires shares in excess of the 9.8% limit is obliged to immediately
give written notice to us and provide us with any information we may request in
order to determine the effect of the acquisition on our status as a REIT.
14
While these restrictions are designed to prevent any five individuals from
owning more than 50% of our shares, preserving our status as a REIT, they also
discourage a change in control of our company. These restrictions may also deter
tender offers that may be attractive to shareholders or limit the opportunity
for shareholders to receive a premium for their shares if an investor makes
purchases of shares to acquire a block of shares.
SUPERMAJORITY VOTING REQUIREMENTS FOR ACQUISITIONS AND MERGERS COULD DISCOURAGE
A CHANGE OF CONTROL OF OUR COMPANY.
Our declaration of trust requires that 80% of our shareholders and all of our
independent trustees approve exchange offers, mergers, consolidations or similar
transactions involving us in which our shareholders receive securities in a
surviving entity having materially different investment objectives and policies,
or that is anticipated to provide significantly greater compensation to
management, except for transactions affected because of changes in applicable
law, or to preserve tax advantages for a majority in interest of our
shareholders. These restrictions may also deter tender offers that may be
attractive to shareholders or limit the opportunity for shareholders to receive
a premium for their shares if an investor makes purchases of shares to acquire a
block of shares.
ISSUANCES OF LARGE AMOUNTS OF OUR COMMON SHARES COULD CAUSE OUR SHARE PRICE TO
DECLINE.
Our declaration of trust permits our trustees to issue an unlimited number of
shares (subject to SEC registration requirements and the consent of shareholders
if required pursuant to the rules of the American Stock Exchange). The issuance
of common shares could cause dilution of our existing common shares and a
decrease in the market price of our common shares.
OUR SHAREHOLDERS MAY HAVE PERSONAL LIABILITY FOR OUR ACTS AND OBLIGATIONS.
It is possible that certain states may not recognize the limited liability of
shareholders, although our declaration of trust provides that our shareholders
shall not be subject to any personal liability for our acts or obligations. In
certain states, our shareholders may be held personally liable for contract
claims where the underlying agreement does not specifically exclude shareholder
liability. Our shareholders may also be held personally liable for other claims
against us, such as tort claims, claims for taxes and certain statutory
liability. Upon payment of any such liability, however, the shareholder will, in
the absence of willful misconduct on the shareholder's part, be entitled to
reimbursement from our general assets, to the extent such assets are sufficient
to satisfy the claim.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
We utilize office space of our Advisor and otherwise have no owned or leased
properties that we use to conduct our business.
As a result of not being eligible for sale accounting treatment on certain
properties sold in 2004, we have three properties classified as real estate
owned - held and used. See Note 6 to the consolidated financial statements for
further discussion of these properties.
ITEM 3. LEGAL PROCEEDINGS.
We are not party to any pending material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
As of March 8, 2007, there were 224 registered shareholders owning 8,402,049
shares. Our common shares have been listed on the American Stock Exchange since
July 1, 1999, under the symbol "AMC". Prior to July 1, 1999, there was no
established public trading market for our shares.
The high and low common share prices for each quarterly period in the past two
fiscal years in which the shares were traded is as follows:
2006 2005
----------------------- -----------------------
Quarter Ended Low High Low High
------------------ --------- --------- --------- ---------
March 31 $ 14.66 $ 16.05 $ 13.70 $ 17.15
June 30 $ 14.15 $ 15.86 $ 13.44 $ 16.44
September 30 $ 14.65 $ 18.11 $ 13.93 $ 16.45
December 31 $ 16.13 $ 19.82 $ 13.14 $ 14.99
The last reported sale price of our common shares on the American Stock Exchange
on March 8, 2007 was $9.80.
Incentive Share Option Plan
---------------------------
The following table provides information related to our Incentive Share Option
Plan as of December 31, 2006:
Equity Compensation Plan Information
(a) (b) (c)
Number of securities
Number of remaining available for
securities to be future issuance under
issued upon exercise Weighted-average equity compensation
of outstanding exercise price of plans (excluding
options, warrants outstanding options, securities reflected
and rights warrants and rights in column (a))
---------------------- --------------------- -----------------------
Equity compensation plans
approved by security holders 93,000 $15.03 652,941
Equity compensation plans not
approved by security holders -- -- --
---------------------- --------------------- -----------------------
Totals 93,000 $15.03 652,941
====================== ===================== =======================
16
Dividends
---------
Cash dividends per share for the years ended December 31, 2005 and 2006 are as
set forth in the following table:
Total Amount
Cash Dividends Distributed
for Quarter Ended Date Paid Per Share (in thousands)
----------------- ----------- --------- --------------
March 31, 2005 5/13/05 $ 0.40 $ 3,335
June 30, 2005 8/12/05 0.40 3,324
September 30, 2005 11/14/05 0.40 3,325
December 31, 2005 2/14/06 0.40 3,322
Special dividends 11/30/05 0.30 2,493
-------- -------
Total for 2005 $ 1.90 $15,799
======== =======
March 31, 2006 5/12/06 $ 0.40 $ 3,322
June 30, 2006 8/11/06 0.40 3,322
September 30, 2006 11/13/06 0.40 3,331
Special dividends 1/15/07 1.40 11,760
December 31, 2006 2/14/07 0.40 3,360
-------- -------
Total for 2006 $ 3.00 $25,095
======== =======
There are no material legal restrictions upon our present or future ability to
make distributions in accordance with the provisions of our declaration of
trust. Future distributions paid by us will be at the discretion of our board of
trustees and will depend on our actual cash flow, our financial condition,
capital requirements, REIT requirements and such other factors as the trustees
deem relevant.
Share Repurchases
-----------------
We did not repurchase any of our common shares during the fourth quarter of
2006.
Other information required by this item, as well as additional information
regarding our share repurchase program and share compensation paid to our
independent trustees, is included in Notes 16 and 17 to our consolidated
financial statements.
17
ITEM 6. SELECTED FINANCIAL DATA.
The information set forth below presents our selected financial data. See Item
7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS for factors affecting the comparability of this data. Additional
financial information is set forth in the audited financial statements and
footnotes thereto contained in Item 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.
(In thousands except per share amounts)
Year ended December 31,
--------------------------------------------------------
OPERATIONS 2006 (1) 2005 (2) 2004 2003 2002
---------- -------- -------- -------- -------- --------
Total revenues $38,628 $33,863 $21,200 $16,368 $10,458
======= ======= ======= ======= =======
Income from continuing
operations $ 2,118 $14,801 $11,450 $11,733 $ 9,660
======= ======= ======= ======= =======
Net income $ 2,687 $15,235 $11,273 $11,884 $ 9,660
======= ======= ======= ======= =======
Income from continuing
operations per share,
basic and diluted $ 0.25 $ 1.78 $ 1.37 $ 1.50 $ 1.61
======= ======= ======= ======= =======
Net income per share,
basic and diluted $ 0.32 $ 1.83 $ 1.35 $ 1.52 $ 1.61
======= ======= ======= ======= =======
Dividends per share $ 3.00 $ 1.90 $ 1.60 $ 1.60 $ 1.51
======= ======= ======= ======= =======
December 31,
----------------------------------------------------------------
FINANCIAL POSITION 2006 2005 2004 2003 2002
------------------ --------- --------- --------- --------- --------
Total assets $ 720,984 $ 400,723 $ 349,033 $ 327,107 $195,063
========= ========= ========= ========= ========
CDO notes payable $ 362,000 $ -- $ -- $ -- $ --
========= ========= ========= ========= ========
Debt securities repurchase facilities $ 79,427 $ 209,101 $ 157,633 $ 149,529 $ 87,880
========= ========= ========= ========= ========
Mortgage loan repurchase facility $ 84,149 $ -- $ -- $ -- $ --
========= ========= ========= ========= ========
Warehouse facility $ -- $ 4,070 $ 3,827 $ 34,935 $ 8,788
========= ========= ========= ========= ========
Line of credit - related party $ 15,000 $ -- $ 4,600 $ -- $ --
========= ========= ========= ========= ========
Mortgages payable on real estate owned $ 39,944 $ 40,487 $ 56,993 $ 15,993 $ --
========= ========= ========= ========= ========
Preferred shares of subsidiary
(subject to mandatory repurchase) $ 25,000 $ 25,000 $ -- $ -- $ --
========= ========= ========= ========= ========
Total liabilities $ 635,976 $ 286,540 $ 228,501 $ 206,212 $100,725
========= ========= ========= ========= ========
Total shareholders' equity $ 85,008 $ 114,183 $ 120,532 $ 120,895 $ 94,338
========= ========= ========= ========= ========
(1) During 2006, net income was significantly impacted by a gain resulting from
the sale of our ARCap membership interests, offset by a substantial expense
related to changes in the fair value of certain interest rate swaps to
which we do not apply hedge accounting, a loss incurred from the sale of 20
FNMA securities and impairment charges recorded on two notes receivable and
three mezzanine loans.
(2) During 2005, net income was impacted by the recognition of fees relating to
an early payoff of a GNMA certificate and a mezzanine loan.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Factors Affecting Comparability
-------------------------------
During 2006, we recognized impairment losses on several mortgage loans and notes
receivable. As a result, these charges have been recorded in impairment losses
on investments on our consolidated statements of income. There were no such
losses recognized in the 2005 and 2004 periods.
During 2006, we entered into fair value swaps to which we do not apply hedge
accounting. As a result, changes in the market value of these derivatives have
been recorded as gains and losses in other income on our consolidated statements
of income. There were no such gains or losses recorded in prior comparable
periods.
During August 2006, we sold our membership interests in ARCap, resulting in a
significant gain on the sale, as well as additional equity income recognized
from a special distribution prior to the sale, while eliminating any further
equity income. Prior comparable periods, included equity income from the
investment and 2005 included a conversion premium for when we converted a
portion of our preferred membership units to common units.
During 2006, we sold twenty debt securities, resulting in a reduction of net
income from impairment charges recorded, as well as the recognition of a loss on
the sale. There were no such losses or impairments recorded in prior comparable
periods.
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 periods prior to 2005.
During September 2005, the GNMA certificate and mezzanine loan investments
relating to one property were repaid prior to its maturity date. This pay off
resulted in significantly higher levels of fees earned and gain on redemption.
There were no such fees recognized in any comparable period.
Investment Activity
-------------------
During the years ended December 31, we originated the following investments:
2006 2005 2004
--------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Interest Interest Interest
(In thousands) Amount Rate Amount Rate Amount Rate
-------- -------- -------- -------- -------- --------
Mortgage loans $500,140 6.32% $ 47,500 15.00% $ 8,500 11.64%
Debt securities -- -- 61,691 6.04% 34,823 5.60%
Notes receivable -- -- -- -- 4,517 12.96%
-------- ------- -------- ------- -------- -------
Total $500,140 6.32% $109,191 9.94% $ 47,840 7.37%
======== ======= ======== ======= ======== =======
During 2006, the composition of our investment portfolio shifted to include a
large portion of mortgage loans that collateralize our CDO notes payable, or
will collateralize a planned second CDO securitization in 2007. We have shifted
our investment strategy away from debt securities and increased our investments
in mortgage loans, which are in the form of first mortgage loans, mezzanine and
bridge loans and subordinated B-notes. The increases in these types of mortgage
assets allows us to increase our ability to obtain leverage on those assets to
allow for further investment activity.
19
Components of our 2006 mortgage investments are as follows:
(In thousands) Weighted
average
Amount interest rate
-------- -------------
Mortgage loans investments
First mortgage loans $426,045 6.12%
Bridge loans 37,596 5.84
Mezzanine loans 6,500 8.32
Subordinated B-notes 29,999 9.25
-------- -------
Total $500,140 6.32 %
======== =======
Results of Operations
---------------------
The following is a summary of our operations:
% Change % Change
2006 vs 2005 vs
(In thousands) 2006 2005 2005 2004 2004
-------- -------- -------- -------- --------
Total revenues $ 38,628 $ 33,863 14.1 % $ 21,200 59.7%
Total expenses (52,277) (22,043) 137.2 (12,150) 81.4
Total other income 15,767 2,981 428.9 2,400 24.2
Income from discontinued operations 569 434 31.1 (177) 345.2
-------- -------- ------- -------- -------
Net income $ 2,687 $ 15,235 (82.4)% $ 11,273 35.1%
======== ======== ======= ======== =======
The growth in our annual revenues in both 2006 and 2005 resulted primarily from
increases in investment volume activity, as well as fees received as a result of
an early paydown of a GNMA certificate and a mezzanine loan during 2005.
Expenses also increased for these periods due to:
o impairment charges recorded with respect to five mortgage loans and
notes receivable in 2006;
o financing costs (particularly due to higher debt balances and steady
increases in interest rates);
o the increase in property operations, interest expense and depreciation
costs for Real Estate Owned; and
o Advisory fees for the 2005 period due to higher net income and an
increased asset base.
The 2006 expense increase was offset by reduced advisory fees because we did not
pay incentive management fees for that period.
Other income increased substantially during 2006 as a result of a gain on the
sale of our ARCap Investors, L.L.C. ("ARCap") investment, partially offset by
significant losses related to "mark to market" adjustments made to our
free-standing derivatives.
20
REVENUES
Changes in components of our revenues were as follows:
(dollars in thousands)
% % % of % of % of
Year Ended December 31, Change Change Total Total Total
-------------------------------- 2006 vs 2005 vs 2006 2005 2004
2006 2005 2004 2005 2004 Revenues Revenues Revenues
-------- -------- -------- -------- -------- -------- -------- --------
Interest income:
Mortgage loans $19,637 $ 5,425 $ 1,808 262.0 % 200.1 % 50.8% 16.0% 8.5%
Debt securities 10,497 12,823 9,734 (18.1) 31.7 27.2 37.9 45.9
Notes receivable 387 1,563 2,546 (75.2) (38.6) 1.0 4.6 12.0
Revenue bonds 503 581 633 (13.4) (8.2) 1.3 1.7 3.0
Temporary
investments 384 233 42 64.8 454.8 1.0 0.7 0.2
Fees related to
the prepayment
of assets -- 5,581 181 (100.0) 2,983.4 -- 16.5 0.9
Other revenues 286 954 153 (70.0) 523.5 0.7 2.8 0.7
------- ------- ------- ------- ------- ----- ----- -----
Subtotal 31,694 27,160 15,097 16.7 79.9 82.0 80.2 71.2
------- ------- ------- ------- ------- ----- ----- -----
Rental income 6,934 6,703 6,103 3.4 9.8 18.0 19.8 28.8
------- ------- ------- ------- ------- ----- ----- -----
Total revenues $38,628 $33,863 $21,200 14.1 % 59.7 % 100.0% 100.0% 100.0%
======= ======= ======= ======= ======= ===== ===== =====
At December 31, we had the following investments (exclusive of Real Estate Owned
and temporary investments):
(dollars in thousands)
2006 2005 2004
--------------------------------- --------------------------------- ---------------------------------
Weighted Weighted Weighted
Average Average Average
Carrying Interest Carrying Interest Carrying Interest
Amount % of Total Rate Amount % of Total Rate Amount % of Total Rate
-------- ---------- -------- -------- ---------- -------- -------- ---------- --------
Mortgage loans $536,685 84.7% 7.15% $ 51,981 17.6% 14.74% $ 21,376 8.7% 11.68%
Debt securities 82,582 13.0 6.35 222,723 75.5 6.23 194,587 79.2 6.48
Notes receivable 9,213 1.5 9.79 13,725 4.7 10.00 23,111 9.4 9.43
Revenue bonds 4,967 0.8 8.70 6,626 2.2 8.68 6,672 2.7 8.69
-------- ------ ------ -------- ------ ------ -------- ------ ------
Total $633,447 100.0% 7.01% $295,055 100.0% 7.96% $245,746 100.0% 7.36%
======== ====== ====== ======== ====== ====== ======== ====== ======
Interest income from mortgage loans increased significantly in 2006 and 2005 due
to the funding of 58 first mortgage loans, bridge notes, mezzanine loans, and
subordinated B-notes in 2006, as well as the funding of three mezzanine loans
during the second half of 2004 and seven mezzanine loans during 2005. The
decrease in the weighted average interest rates on mortgage loans during 2006
was due to a large portion of investments made in the form of first mortgage
loans, which are significantly lower yielding than the mezzanine loan
investments we acquired in 2005.
Interest income from debt securities decreased during 2006, primarily due to the
sale of 20 FNMA certificates in November 2006, as well as the payoff of three
GNMA certificates during the year. The increase in the weighted average interest
rate on debt securities during 2006 is due to the lower yields of the FNMA
certificates sold relative to the yields of those retained. During 2005,
interest income from debt securities increased because of the funding of various
FNMA certificates during the latter half of 2004 and during 2005, which were
lower yielding debt securities than the ones we previously held, thus decreasing
the weighted average interest rate.
Interest income from notes receivable decreased during both 2006 and 2005,
primarily due to the payoff of several notes during these periods, as well as
three loans which defaulted in 2006.
21
Interest income from revenue bonds decreased during both 2006 and 2005 primarily
due to the payoff of two revenue bonds in 2006 and two others in the latter half
of 2004.
Interest income from temporary investments increased during 2006 and 2005
primarily due to excess cash on hand resulting from the payoff of several
mortgage loans and debt securities, as well as the funds received from the sale
of our investment in ARCap and debt securities in 2006.
Fees related to prepayment of assets in 2005 represent the recognition of fees
relating to an early payoff of a GNMA certificate and a mezzanine loan during
that year, which were significantly larger than fees received for investments
prepaid in 2004. There were no such fees recognized in 2006 as the prepayment
fee on a comparable transaction was deferred and will be recognized over the
life of a refinanced loan we originated.
Other revenues increased for 2005, primarily due to the recognition of a
commitment fee and a non-refundable due diligence fee during 2005. We had no
comparable transactions in 2006 or 2004.
Rental income increased during the 2005 period, as compared to 2004, primarily
due to the completion of construction on one property in the portfolio in 2004,
thus, due to the stabilization of the property in 2005, rental income increased
steadily during 2005 and into 2006.
EXPENSES
Changes in components of our expenses in 2006, 2005 and 2004 were as follows:
(dollars in thousands)
% % of % % of % of
Year Ended December 31, Change Total Change Total Total
-------------------------------- 2006 vs 2006 2005 vs 2005 2004
2006 2005 2004 2005 Revenues 2004 Revenues Revenues
-------- -------- -------- -------- -------- -------- -------- --------
Interest $19,149 $ 7,057 $ 4,017 171.3% 49.6% 75.7 % 20.8% 18.9%
Distributions to
preferred
shareholders 2,241 1,452 -- 54.3 5.8 100.0 4.3 --
General and
administrative 2,500 1,956 1,740 27.8 6.5 12.4 5.8 8.2
Impairment loss
on investments 17,496 -- -- 100.0 45.3 100.0 -- --
Fees to Advisor 3,483 4,347 1,956 (19.9) 9.0 122.2 12.8 9.2
Amortization and
other 160 294 411 (45.6) 0.4 (28.5) 0.9 1.9
------- ------- ------- ------- ------- ------- ------ ------
Subtotal 45,029 15,106 8,124 198.1 116.6 85.9 44.6 38.3
------- ------- ------- ------- ------- ------- ------ ------
Property operations 3,527 3,185 2,308 10.7 9.1 38.0 9.4 10.9
Depreciation 1,345 1,345 1,718 -- 3.5 (21.7) 4.0 8.1
Mortgage interest
for real estate
owned, held and
used 2,376 2,407 -- (1.3) 6.2 100.0 7.1 --
------- ------- ------- ------- ------- ------- ------ ------
Total expenses $52,277 $22,043 $12,150 137.2% 135.3% 81.4 % 65.1% 57.3%
======= ======= ======= ======= ======= ======= ====== ======
22
Interest expense increased for both 2006 and 2005, primarily related to trust
preferred securities and also due to the increased loan originations and the
increase in market interest rates during 2005 and 2006. Excluding preferred
shares of a subsidiary (subject to mandatory repurchase) and mortgages on real
estate owned, we had total debt as follows as of December 31:
(dollars in thousands) 2006 2005 2004
-------------------------------------------- ----------- ----------- -----------
Total outstanding $ 540,576 $ 213,171 $ 166,060
Weighted average interest rate (including
effect of interest rate swaps) 5.71% 4.33% 2.76%
Notional amount of interest rate swaps $ 512,084 $ 30,000 $ 30,000
Weighted average rate of interest rate swaps 5.17% 3.48% 3.48%
In accordance with SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS
WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY, we classify distributions
made on preferred shares of our wholly owned subsidiary (issued in March 2005)
as interest expense. Distributions to preferred shareholders increased during
2006, as compared to 2005, as the 2006 period included twelve months of
distributions compared to nine months in 2005. The increase is also due to the
increase in interest rates during 2005 and 2006, as the distributions are at a
variable rate, based on LIBOR. There were no such securities outstanding during
2004.
General and administrative expenses increased for both 2006 and 2005, primarily
due to increased legal fees, trustee fees and insurance. The 2006 period also
includes higher share based compensation costs due to the accelerated vesting of
certain options in the first half of 2006 and a $150,000 legal settlement. These
increases were partially offset by decreased investor services expenses, as
compared to 2005 (due to costs in 2005 related to changes in our trust agreement
for which we needed shareholder approval) and a decrease in excise taxes because
distributions were in excess of taxable earnings for the year.
Impairment losses on assets relate to debt securities we sold in October 2006
that no longer met our investment return criteria (see Note 3 to the
consolidated financial statements) and impairments recognized on five mortgage
loans and notes receivable due to deteriorating operating performance (see Note
2 to the consolidated financial statements).
Fees to Advisor decreased during the 2006 period as compared to 2005 as we
incurred no incentive management fee expense in 2006 because of the earnings
decline. The decrease is partially offset by higher shared services costs
because of the expansion of our business. Unlike 2006, fees to Advisor increased
for the 2005 period as compared to 2004 due to the payment of an incentive
management fee as well as increased shared services costs.
Amortization and other costs decreased for the 2006 and 2005 periods, due to the
deferred financing costs related to our warehouse facility being fully amortized
in August 2005.
Property operations represent all non-interest costs at the property level on
all of our Real Estate Owned - Held and Used properties. The increase for the
2006 period, as compared to 2005, was mainly due to higher property tax costs.
The increase in the 2005 period, as compared to 2004, was due to debt service
costs associated with a mortgage payable on the Concord portfolio.
OTHER INCOME
Other income increased during the 2006 period, as compared to 2005, primarily
due to a gain resulting from the sale of our ARCap membership interests offset
by a substantial expense related to changes in the fair value of certain
interest rate swaps to which we did not apply hedge accounting and the loss
incurred on the sale of 20 FNMA securities. The increase in 2005 as compared to
2004 was primarily due to a special distribution we earned upon conversion of a
portion of our ARCap investment from preferred membership interests to common
interests.
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
23
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 GAAP net income to FFO for the years ended
December 31,:
(In thousands)
2006 2005 2004
--------- --------- ---------
Net income $ 2,687 $ 15,235 $ 11,273
Add back: depreciation of real property 1,671 2,389 2,143
Less: gain on sale of real property (230) -- --
--------- --------- ---------
FFO $ 4,128 $ 17,624 $ 13,416
========= ========= =========
Cash flows from:
Operating activities $ 8,290 $ 18,049 $ 14,032
========= ========= =========
Investing activities $(320,856) $ (64,512) $ (22,592)
========= ========= =========
Financing activities $ 308,905 $ 55,003 $ 9,206
========= ========= =========
Weighted average shares outstanding:
Basic 8,323 8,316 8,336
========= ========= =========
Diluted 8,330 8,317 8,343
========= ========= =========
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 REIT status in the foreseeable future. In order to qualify as a REIT
under the Internal Revenue 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.
As of December 31, 2006, our credit facilities consisted of:
o a mortgage loan repurchase facility;
o debt securities repurchase facilities; and
o a line of credit with CharterMac.
Mortgage Loan Repurchase Facility
---------------------------------
During 2006, we began financing our investment growth by utilizing CDO
securitizations. Prior to a securitization, we finance investments through a
mortgage loan repurchase facility, which is repaid from the proceeds received
when the CDO securitization is complete.
During December 2006, we executed a repurchase agreement with Citigroup Global
Markets, Inc. ("Citigroup") for the purpose of funding investment activity for
loans that are to be placed into a second CDO securitization. Advance rates on
the borrowings from this facility, ranging from 80% to 90% of collateral value,
are determined on a loan-by-loan basis. Interest on the borrowings, which ranges
from LIBOR plus 0.40% to LIBOR plus 1.25%, is also determined on a loan-by-loan
basis. The repurchase facility expires upon inception of the CDO securitization,
or twelve months after the inception of the repurchase facility, whichever comes
24
first. At December 31, 2006, we had approximately $84.1 million of borrowings
outstanding under this facility, at a weighted average interest rate of 6.13%.
Debt Securities Repurchase Facilities
-------------------------------------
As a vehicle to leverage our investments in debt securities, we have repurchase
agreements with two counter parties, RBC Capital Markets and UBS Financial
Services. These facilities offer advance rates between 94% and 97% of collateral
value and borrowing rates between LIBOR minus 0.03% and LIBOR plus 0.10%. The
borrowings are subject to 30-day settlement terms. As of December 31, 2006, the
amount outstanding under these repurchase facilities was $79.4 million with a
weighted average interest rate of 4.68%.
Related Party Line of Credit
----------------------------
We finance our remaining investing activity primarily through borrowings from a
credit facility we maintain with CharterMac. As of December 31, 2006, the amount
outstanding was $15.0 million with a weighted average interest rate of 8.35%. We
had approximately $35.0 million available to borrow on this line at December 31,
2006.
Other Financing
---------------
As noted above, in 2006, we began financing our investment growth by utilizing
CDO securitizations. At December 31, 2006, we had outstanding CDO securitization
certificates totaling $362.0 million at a weighted average rate of 5.73%.
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. If market conditions warrant, we may seek to raise
additional funds for investment through further offerings, although the timing
and amount of such offerings cannot be determined at this time.
SUMMARY OF CASH FLOWS
During the year ended December 31, 2006, as compared to the year ended December
31, 2005, the net change in cash and cash equivalents decreased by approximately
$12.2 million. Operating cash flows decreased by $9.8 million primarily due to
lower cash earnings, offset by an increase in distributions received from ARCap
and the favorable variance in timing of liabilities payable. An increase in net
cash used in investing activities (approximately $256.3 million) and a
corresponding increase in net cash provided by financing activities
(approximately $253.9 million) were due to a higher level of investing activity
in mortgage loans, subordinated B-notes and bridge loans during the 2006 period.
The higher level of investing in 2006 corresponded to the increase in net
borrowings.
During the year ended December 31, 2005, as compared to the year ended December
31, 2004, the net change in cash and cash equivalents increased approximately
$7.9 million. Operating cash flows improved by approximately $4.0 million
primarily due to higher earnings. An increase in net cash used in investing
activities (approximately $41.9 million) and an increase in net cash provided by
financing activities (approximately $45.8 million) were due to an increase in
proceeds received from repurchase and warehouse facilities used for purchases of
mortgage loans and debt securities.
LIQUIDITY REQUIREMENTS AFTER DECEMBER 31, 2006
During January 2007, dividends of approximately $11.8 million ($1.40 per share),
which were declared in November 2006, were paid to common shareholders.
During February 2007, dividends of approximately $3.4 million ($0.40 per share),
which were declared in December 2006, were paid to common shareholders.
25
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 year ended December 31:
(dollars in thousands)
2006 2005 2004
---------- ---------- ----------
Total dividends declared $ 25,095 $ 15,799 $ 13,337
Return of capital:
Amount $ 22,407 $ 564 $ 2,065
Per share $ 2.69 $ .07 $ .25
Percent of total dividends 89.29% 3.57% 15.48%
Application of Critical Accounting Estimates
--------------------------------------------
Our consolidated financial statements are based on the selection and application
of GAAP, which requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. These estimates
and assumptions sometimes involve future events which cannot be determined with
absolute certainty. Therefore, our determination of estimates requires that we
exercise our judgment. While we have used our best estimates based on the facts
and circumstances available to us at the time, different results may actually
occur and any such differences could be material to our financial statements.
We believe the following policies may involve a higher degree of judgment and
complexity and represent the critical accounting policies used in the
preparation of our financial statement:
o assessment of impairment of mortgage loans and notes;
o classification and valuation of mezzanine loan investments; and
o classification and valuation of real estate owned.
ASSESSMENT OF IMPAIRMENT OF MORTGAGE LOANS AND NOTES
SFAS No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, establishes
standards regarding impairment issues related to our mortgage loans and notes
receivable. Our portfolio of mortgage loans and notes is periodically evaluated
for impairment to establish appropriate loan loss reserves, if necessary. Our
Advisor has a credit review committee which meets monthly and reviews the status
of each loan and note and maintains a "watch list" of loans (including loans for
which we have issued guarantees) for which the underlying property may be
experiencing construction cost overruns, delays in construction completion,
occupancy shortfalls, lower than expected debt service coverage ratios, or other
matters which might cause the borrower to be unable to make scheduled interest
and principal payments. If a loan is experiencing difficulties, members of this
credit committee work with the borrower to try to resolve the issues, which
could include extending the loan term, making additional advances, or reducing
required payments. If, in the judgment of our Advisor, it is determined that it
is probable that we will not receive all contractually required payments when
they are due, the loan or note would be deemed impaired, and a loan loss reserve
established.
CLASSIFICATION AND VALUATION OF MEZZANINE LOAN INVESTMENTS
Our mezzanine loan investments bear interest at fixed or variable rates, and
some also include provisions that allow us to participate in a percentage of the
underlying property's cash flows from operations and proceeds from a sale or
refinancing. At the inception of each such investment, our management must
determine whether such investment should be accounted for as a loan, joint
venture or as real estate, using the guidance contained in the Third Notice to
Practitioners issued by the AICPA. Although the accounting methodology does not
affect our cash flows from these investments, this determination affects the
balance sheet classification of the investments as well as the classification,
timing and amounts of reported earnings.
26
Accounting for the investment as real estate is required if we expect that the
amount of profit, regardless of its nature, is over 50 percent of the property's
total expected residual profit. If a mezzanine investment were accounted for as
an investment in real estate, our consolidated balance sheets would show the
underlying property and its related senior debt (if such debt were not also held
by us), and our consolidated statements of income would include the property's
rental revenues, operating expenses and depreciation.
If we expect to receive less than 50 percent of the property's residual profit,
then loan or joint venture accounting is applied. Loan accounting is
appropriate:
o if the borrower has a substantial equity investment in the property;
o if we have recourse to substantial assets of the borrower;
o if the property is generating sufficient cash flow to service normal
loan amortization; or
o if certain other conditions are met.
Under loan accounting, we recognize interest income as earned and additional
interest from participations as received. Joint venture accounting would require
that we only record our share of the net income from the underlying property.
Our management must exercise judgment in making the required accounting
determinations. For each mezzanine arrangement, we project total cash flows over
the loan's term and our share in those cash flows, and consider the borrower's
equity, the contractual cap, if any, on total yield to us over the term of the
loan, market yields on comparable loans, borrower guarantees, and other factors
in making an assessment of the proper accounting. To date, we have determined
that all mezzanine investments should be accounted for as loans.
CLASSIFICATION AND VALUATION OF REAL ESTATE OWNED
The accounting for the foreclosure, ownership and subsequent sale of real estate
is governed by:
o SFAS No. 15, ACCOUNTING BY DEBTORS AND CREDITORS FOR TROUBLED DEBT
RESTRUCTURINGS;
o SFAS No. 144, ACCOUNTING FOR THE SALE OR DISPOSAL OF LONG-LIVED
ASSETS; and
o SFAS No. 66, ACCOUNTING FOR SALES OF REAL ESTATE.
During 2003, we exercised our rights under subordinated promissory notes and
other documents to take possession of certain real estate collateral. We have
also purchased the first mortgage loans on all of the respective properties, and
acquired the real estate at foreclosure auctions. All of the properties were
subsequently sold, although the sale transaction for three of the properties did
not meet the sale criteria of SFAS No. 66, despite the fact that the purchaser
later secured permanent first-mortgage financing.
When a loan is in the process of foreclosure, it is our policy to initially
reclassify the balance of the loan into Real Estate Owned-Held for Sale at the
lower of fair value of the real estate, less estimated disposal costs or the
carrying amount of the loan, and to cease accrual of interest. We obtain
independent appraisals of all foreclosed real estate to assist management in
evaluating property values. To date, no losses have been recorded upon
foreclosure.
It is our intent to sell foreclosed properties within a short time period. Due
to the Held for Sale classification, we do not initially depreciate the
properties. If we do not sell a property or do not meet sale criteria within the
permissible timeframe for Held for Sale classification, we reclassify the
property into Real Estate Owned-Held and Used or Subject to Sales Contract
categories and account for it as an operating asset. Depreciation is recorded
for the asset including a retroactive adjustment for the full period that the
property was classified as Real Estate Owned-Held for Sale. Income from property
operations is recorded provided realization and collectibility of the amounts
are considered likely. Likewise, interest income on notes receivable for
properties sold that do not meet the criteria for sale recognition is recorded
to the extent that collectibility is considered likely.
This accounting for real estate owned requires substantial judgment as to the
fair value of the assets, the likelihood of collecting income and our ability to
sell the properties. As of December 31, 2006, we believe that the amounts
reported are fairly stated and realizable.
27
Commitments, Contingencies and Off Balance Sheet Arrangements
-------------------------------------------------------------
We have no unconsolidated subsidiaries, special purpose off-balance sheet
financing entities, or other off-balance sheet arrangements.
The following table reflects our maximum exposure and carrying amount as of
December 31, 2006, for guarantees we have entered into:
Maximum
Exposure Carrying
(In thousands) Amount
-------------- ---------
FNMA loan program (1) $ 3,150 $ --
--------- ---------
$ 3,150 $ --
========= =========
(1) These indemnification agreements relate to a program we initiated and have
since discontinued. We believe the risk of any cost associated with the
indemnity agreement is minimal.
The maximum exposure amount is not indicative of any expected losses under the
guarantees. For full description of these guarantees, see Note 22 to the
consolidated financial statements.
Contractual Obligations
-----------------------
In conducting business, we enter into various contractual obligations. Details
of these obligations, including expected settlement periods, are contained
below.
Payments Due by Period
(In thousands)
-------------------------------------------------------------------
Less than 3 - 5 More than
Total 1 Year 1 - 3 Years Years 5 Years
---------- ----------- ----------- ---------- ----------
Debt:
CDO notes payable (1) $ 362,000 $ -- $ -- $ -- $ 362,000
Debt securities repurchase facilities
(1) 79,427 79,427 -- -- --
Mortgage loan repurchase facility (1) 84,149 84,149 -- -- --
Mortgage payable on real estate owned
(2) 39,944 527 1,254 1,411 36,752
Preferred shares of subsidiary
(subject to mandatory repurchase) (1) 25,000 -- -- -- 25,000
Funding commitments:
Future funding loan commitments 1,022 1,022 -- -- --
---------- ----------- ----------- ---------- ----------
Total $ 591,542 $ 165,125 $ 1,254 $ 1,411 $ 423,752
========== =========== =========== ========== ==========
(1) Includes principal amounts only and therefore does not include accrued
interest of $3.1 million. At December 31, 2006, the weighted average
interest rate on debt that was recourse to us was 5.85%.
(2) Represents a first mortgage on properties we report as Real Estate Owned -
Held and Used (Concord Portfolio) as a sale of the properties did not meet
the criteria for sale recognition in accordance with GAAP. The first
mortgage loan is non-recourse with respect to us, the debt service is paid
from the cash flows of the properties and we will not be required to satisfy
the obligation. (See Note 6 to the consolidated financial statements).
Recently Issued Accounting Standards
------------------------------------
In November 2005, the FASB issued Staff Position 115 / 124 - 1, THE MEANING OF
OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS. The
Staff Position clarified, among other matters, the determination as to when an
unrealized loss on debt securities should be reflected in the income statement
as opposed to accumulated other comprehensive income. The Staff Position was
effective as of the first quarter of 2006. Application of the Staff Position had
no material impact on our consolidated financial statements.
During the first quarter of 2006, we adopted Statement of Financial Accounting
Standards No. 123(R), SHARE-BASED PAYMENT ("SFAS No. 123(R)") which replaces
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS No. 123"). Among
28
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 17 to the consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY
IN INCOME TAXES, AN INTERPRETATION OF FASB STATEMENT NO. 109 ("FIN 48"). FIN 48
establishes new evaluation and measurement processes for all income tax
positions taken. FIN 48 also requires expanded disclosures of income tax
matters. We expect that the adoption of this standard on January 1, 2007, will
have an immaterial effect on our consolidated financial statements.
In September 2006, the FASB issued Statement No. 157, FAIR VALUE MEASUREMENTS,
which established a framework for calculating the fair value of assets and
liabilities as required by numerous other accounting pronouncements, and expands
disclosure requirements of the fair values of certain assets and liabilities.
The statement is effective as of our 2008 fiscal year. We are currently
evaluating the impact, if any, that the adoption of this statement will have on
our consolidated financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, CONSIDERING
THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN
CURRENT YEAR FINANCIAL STATEMENTS ("SAB 108"). SAB 108 provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
The SEC staff believes that a registrant should quantify errors using both a
balance sheet and an income statement approach and evaluate whether either
approach results in quantifying a misstatement that, when all relevant
quantitative and qualitative factors are considered, is material. SAB 108 was
effective for 2006 and its adoption did not have a material effect on our
consolidated financial statements.
In January 2007, the FASB issued SFAS No. 159, THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES. This statement was issued with the
intent to provide an alternative measurement treatment for certain financial
assets and liabilities. The alternative measurement would permit fair value to
be used for both initial and subsequent measurement, with changes in fair value
recognized in earnings as those changes occur. This "Fair Value Option" would be
available on a contract by contract basis. The effective date for this statement
is the beginning of our 2008 fiscal year. The Company is currently assessing the
impact adoption may have on its financial statements.
There are no other new pending accounting pronouncements which we are required
to adopt that would have a significant impact on our consolidated financial
statements.
Inflation
---------
Inflation did not have a material effect on our results for the periods
presented.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the exposure to loss resulting from changes in interest rates and
equity prices. The primary market risk to which we are exposed is interest rate
risk, which is highly sensitive to many factors, including governmental monetary
and tax policies, domestic and international economic and political
considerations and other factors beyond our control.
INTEREST RATE RISK
Interest rate fluctuations can adversely affect our income in many ways and
present a variety of risks, including the risk of mismatch between asset yields
and borrowing rates.
Our operating results depend in large part on differences between the income
from our assets (net of credit losses) and our borrowing costs. Although we have
originated variable rate loans, most of our assets generate fixed returns and
have terms in excess of five years. We fund the origination and acquisition of a
significant portion of these assets with borrowings which have variable interest
rates that reset relatively rapidly, such as weekly, monthly or quarterly. In
most cases, the income from assets will respond more slowly to interest rate
fluctuations than the cost of borrowings, creating a mismatch between asset
yields and borrowing rates. Consequently, changes in interest rates,
particularly short-term interest rates, may influence our net income. Our
borrowings under repurchase facilities and our trust preferred securities bear
interest at rates that fluctuate with LIBOR.
Various financial vehicles exist which would allow our management to mitigate
the impact of interest rate fluctuations on our cash flows and earnings. We
enter into certain hedging transactions to protect our positions from interest
rate fluctuations and other charges in market conditions. These transactions
include interest rate swaps and fair value hedges.
Based on the $92.9 million unhedged portion of $565.5 million of borrowings
outstanding at December 31, 2006, a 1% change in LIBOR would impact our annual
net income and cash flows by approximately $929,000. 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
$133,000. The net effect of a 1% change in LIBOR would therefore result in a
change of our annual net income by approximately $796,000. 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.
30
MANAGEMENT'S REPORT ON THE EFFECTIVENESS OF
INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of American Mortgage Acceptance Company and its subsidiaries (the
"Company") is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control system was designed to
provide reasonable assurance to our management and Board of Trustees regarding
the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
American Mortgage Acceptance Company management assessed the effectiveness of
the Company's internal control over financial reporting as of December 31, 2006.
In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in
INTERNAL CONTROL - INTEGRATED FRAMEWORK. Based upon our assessment we believe
that, as of December 31, 2006, our internal control over financial reporting is
effective in accordance with those criteria.
Deloitte & Touche LLP, our independent auditors, have issued an audit report on
our assessment of the Company's internal control over financial reporting, which
appears on page 32.
/s/ James L. Duggins /s/ Robert L. Levy
-------------------- ------------------
James L. Duggins Robert L. Levy
Chief Executive Officer Chief Financial Officer
March 15, 2007 March 15, 2007
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of
American Mortgage Acceptance Company
New York, New York
We have audited management's assessment, included in the accompanying
"Management's Report on the Effectiveness of Internal Controls over Financial
Reporting", that American Mortgage Acceptance Company and subsidiaries (the
"Company") maintained effective internal control over financial reporting as of
December 31, 2006, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2006, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
32
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2006 of the Company and our
report dated March 15, 2007 expressed an unqualified opinion on those financial
statements.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 15, 2007
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page
--------
(a) 1. Financial Statements
--------------------
Report of Independent Registered Public Accounting Firm 35
Consolidated Balance Sheets as of December 31, 2006 and 2005 36
Consolidated Statements of Income for the years ended December 31,
2006, 2005 and 2004 37
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2006, 2005 and 2004 38
Consolidated Statements of Cash Flows for the years ended December 31,
2006, 2005 and 2004 39
Notes to Consolidated Financial Statements 41
(a) 2. Financial Statement Schedules
-----------------------------
All schedules have been omitted because they are not required or
because the required information is contained in the consolidated
financial statements or notes thereto.
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of
American Mortgage Acceptance Company
New York, New York
We have audited the accompanying consolidated balance sheets of American
Mortgage Acceptance Company and subsidiaries (the "Company") as of December 31,
2006 and 2005, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2006. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, such consolidated financial
statements present fairly, in all material respects, the financial position of
American Mortgage Acceptance Company and subsidiaries as of December 31, 2006
and 2005, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2006, based on the
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 15, 2007 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 15, 2007
35
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
ASSETS
December 31,
------------------------
2006 2005
--------- ---------
Cash and cash equivalents $ 7,553 $ 11,214
Restricted cash 14,951 --
Investments
Mortgage loans receivable, net 536,685 51,981
Debt securities available for sale, at fair value 82,582 222,723
Notes receivable, net 9,213 13,725
Revenue bonds available for sale, at fair value 4,967 6,626
ARCap -- 20,678
Real estate owned - held and used, net 48,692 50,345
Real estate owned - held for sale, net -- 18,448
Accounts receivable 7,670 3,079
Deferred charges and other assets, net 8,671 1,904
--------- ---------
Total assets $ 720,984 $ 400,723
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
CDO notes payable $ 362,000 $ --
Debt securities repurchase facilities 79,427 209,101
Mortgage loan repurchase facility 84,149 --
Warehouse facility -- 4,070
Mortgages payable on real estate owned 39,944 40,487
Preferred shares of subsidiary (subject to mandatory
repurchase) 25,000 25,000
Line of credit - related party 15,000 --
Accounts payable and accrued expenses 13,666 1,599
Due to Advisor and affiliates 1,670 2,961
Dividends payable 15,120 3,322
--------- ---------
Total liabilities 635,976 286,540
--------- ---------
Commitments and contingencies
Shareholders' equity:
Shares of beneficial interest; $0.10 par value; 25,000
shares authorized; 8,815 issued and 8,400 outstanding in
2006 and 8,719 issued and 8,304 outstanding in 2005 881 871
Treasury shares of beneficial interest at par; 415 shares
in 2006 and 2005 (42) (42)
Additional paid-in capital 127,971 126,357
Share - based compensation -- (20)
Accumulated deficit (40,174) (17,766)
Accumulated other comprehensive (loss) income (3,628) 4,783
--------- ---------
Total shareholders' equity 85,008 114,183
--------- ---------
Total liabilities and shareholders' equity $ 720,984 $ 400,723
========= =========
See accompanying notes to consolidated financial statements.
36
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
Years Ended December 31,
------------------------------------
2006 2005 2004
-------- -------- --------
Revenues:
Interest income:
Mortgage loans $ 19,637 $ 5,425 $ 1,808
Debt securities 10,497 12,823 9,734
Notes receivable 387 1,563 2,546
Revenue bonds 503 581 633
Temporary investments 384 233 42
Rental income of real estate owned - held and used 6,934 6,703 6,103
Fees related to prepayment of investments -- 5,581 181
Other revenues 286 954 153
-------- -------- --------
Total revenues 38,628 33,863 21,200
-------- -------- --------
Expenses:
Interest 19,149 7,057 4,017
Interest - distributions to preferred shareholders of subsidiary (subject
to mandatory repurchase) 2,241 1,452 --
Mortgage interest for real estate owned - held and used 2,376 2,407 --
Property operations of real estate owned - held and used 3,527 3,185 2,308
General and administrative 2,500 1,956 1,740
Impairment losses on investments 17,496 -- --
Fees to Advisor 3,483 4,347 1,956
Depreciation 1,345 1,345 1,718
Amortization and other 160 294 411
-------- -------- --------
Total expenses 52,277 22,043 12,150
-------- -------- --------
Other income:
Gain on sale of ARCap 19,223 -- --
Change in fair value of derivative instruments (5,522) -- --
Equity in earnings of ARCap 3,000 2,837 2,400
(Loss) gain on sale or repayment of investments (934) 183 --
Other non-operating expense -- (39) --
-------- -------- --------
Total other income 15,767 2,981 2,400
-------- -------- --------
Income from continuing operations 2,118 14,801 11,450
Income (loss) from discontinued operations 569 434 (177)
-------- -------- --------
Net income $ 2,687 $ 15,235 $ 11,273
======== ======== ========
Per share amounts (basic and diluted):
Net income from continuing operations $ 0.25 $ 1.78 $ 1.37
Net income (loss) from discontinued operations $ 0.07 $ 0.05 $ (0.02)
-------- -------- --------
Net income $ 0.32 $ 1.83 $ 1.35
======== ======== ========
Dividends per share $ 3.00 $ 1.90 $ 1.60
======== ======== ========
Weighted average shares outstanding
Basic 8,323 8,316 8,336
======== ======== ========
Diluted 8,330 8,317 8,343
======== ======== ========
See accompanying notes to consolidated financial statements.
37
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except per share amounts)
) TREASURY SHARES OF
SHARES OF BENEFICIAL INTEREST BENEFICIAL INTEREST ADDITONAL
----------------------------- ----------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- -------- -------- -------- ---------
Balance at January 1, 2004 8,713 $ 871 (375) $ (38) $126,779
Net income
Other comprehensive income:
Net unrealized gain on interest rate derivatives
Unrealized holding gain on investments
Plus: reclassification adjustment
Total other comprehensive income
Comprehensive income
Issuance of share based compensation 3 74
Amortization of share option costs
Purchase of treasury shares (4) (53)
Dividends
----------------------------------------------------------------------------
Balance at December 31, 2004 8,716 871 (379) (38) 126,800
Net income
Other comprehensive income (loss):
Net unrealized gain on interest rate derivatives
Unrealized holding loss on investments
Less: reclassification adjustment
Total other comprehensive income (loss)
Comprehensive income
Issuance of share based compensation 3 47
Amortization of share option costs
Purchase of treasury shares (36) (4) (490)
Dividends
----------------------------------------------------------------------------
Balance at December 31, 2005 8,719 871 (415) (42) 126,357
Net income
Other comprehensive income (loss):
Net unrealized loss on interest rate derivatives
Unrealized holding loss on investments
Plus: reclassification adjustment
Total other comprehensive income (loss)
Comprehensive loss
Reclassification of unamortized share based
compensation upon adoption of SFAS No. 123(R) (20)
Options exercised and other share based compensation 96 10 1,614
Amortization of share option costs 20
Dividends
----------------------------------------------------------------------------
Balance at December 31, 2006 8,815 $ 881 (415) $ (42) $127,971
============================================================================
ACCUMULATED OTHER
SHARE-BASED ACCUMULATED COMPREHENSIVE COMPREHENSIVE
COMPENSATION DEFICIT INCOME (LOSS) (LOSS) INCOME TOTAL
------------ ----------- ------------- ----------------- ---------
Balance at January 1, 2004 $ (29) $(15,138) $ 8,450 $120,895
Net income 11,273 $ 11,273 11,273
Other comprehensive income:
Net unrealized gain on interest rate derivatives 407
Unrealized holding gain on investments 1,219
Plus: reclassification adjustment 41
--------
Total other comprehensive income 1,667 1,667 1,667
--------
Comprehensive income $ 12,940
========
Issuance of share based compensation (34) 40
Amortization of share option costs 47 47
Purchase of treasury shares (53)
Dividends (13,337) (13,337)
------------------------------------------------------------------------------
Balance at December 31, 2004 (16) (17,202) 10,117 120,532
Net income 15,235 $ 15,235 15,235
Other comprehensive income (loss):
Net unrealized gain on interest rate derivatives 679
Unrealized holding loss on investments (2,916)
Less: reclassification adjustment (3,097)
--------
Total other comprehensive income (loss) (5,334) (5,334) (5,334)
--------
Comprehensive income $ 9,901
========
Issuance of share based compensation (2) 45
Amortization of share option costs (2) (2)
Purchase of treasury shares (494)
Dividends (15,799) (15,799)
------------------------------------------------------------------------------
Balance at December 31, 2005 (20) (17,766) 4,783 114,183
Net income 2,687 $ 2,687 2,687
Other comprehensive income (loss):
Net unrealized loss on interest rate derivatives (3,642)
Unrealized holding loss on investments (6,993)
Plus: reclassification adjustment 2,224
--------
Total other comprehensive income (loss) (8,411) (8,411) (8,411)
--------
Comprehensive loss $ (5,724)
========
Reclassification of unamortized share based
compensation upon adoption of SFAS No. 123(R) 20
Options exercised and other share based compensation 1,624
Amortization of share option costs 20
Dividends (25,095) (25,095)
------------------------------------------------------------------------------
Balance at December 31, 2006 $ -- $(40,174) $ (3,628) $ 85,008
============================ =============================
See accompanying notes to consolidated financial statements.
38
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
---------------------------------------
2006 2005 2004
--------- --------- ---------
Cash flows from operating activities:
Net income $ 2,687 $ 15,235 $ 11,273
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense 1,671 2,389 2,143
Gain on sale of ARCap (19,223) -- --
Equity in earnings of ARCap (3,000) (2,837) (2,400)
Net (gain) loss on impairment or disposal of assets 18,200 (183) --
Change in fair value of derivative instruments 5,522 39 --
Amortization and accretion (207) 135 220
Other non-cash expense 89 45 40
Distributions received from ARCap 4,037 2,400 2,400
Changes in operating assets and liabilities:
Accounts receivable (3,961) (1,154) 273
Other assets 405 (705) 64
Due to Advisor and affiliates (1,291) 2,191 179
Accounts payable and accrued expenses 3,361 494 (160)
--------- --------- ---------
Net cash provided by operating activities 8,290 18,049 14,032
--------- --------- ---------
Cash flows from investing activities:
Funding and purchase of mortgage loans (509,083) (42,246) (8,802)
Principal repayments of mortgage loans 8,368 11,853 1,306
Investment in debt securities -- (64,173) (43,943)
Principal repayments or sale of debt securities 131,813 29,627 17,787
Prepayment penalty from debt security refinancing 3,200 -- --
Purchase of mortgage loans on real estate owned -- (17,150) --
Return of capital and proceeds from the sale of ARCap 37,181 -- --
Increase in restricted cash (14,951) -- --
Proceeds from sale of real estate owned 17,951 7,474 --
Principal repayment on real estate owned -- 480 --
Funding of notes receivable (108) (472) (8,308)
Repayment of notes receivable 3,122 9,883 21,286
Principal repayment of revenue bonds 1,651 212 891
Additions to real estate owned -- -- (2,809)
--------- --------- ---------
Net cash used in investing activities (320,856) (64,512) (22,592)
--------- --------- ---------
(continued)
See accompanying notes to consolidated financial statements.
39
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(continued)
Years Ended December 31,
---------------------------------------
2006 2005 2004
--------- --------- ---------
Cash flows from financing activities:
Proceeds from CDO notes payable 362,000 -- --
Proceeds from mortgage loan repurchase facility 419,284 -- --
Repayments of mortgage loan repurchase facility (335,135) -- --
Proceeds from debt securities repurchase facilities 13,597 104,418 27,613
Repayments of debt securities repurchase facilities (143,271) (52,950) (19,509)
Proceeds from line of credit - related party 206,242 32,561 15,361
Repayments of line of credit - related party (191,242) (37,161) (10,761)
Proceeds from warehouse facility -- 243 1,245
Repayments of warehouse facility (4,070) -- (32,353)
Proceeds from refinancing of real estate owned -- -- 41,000
Deferred financing costs (6,760) (802) --
Dividends paid to shareholders (13,297) (15,812) (13,337)
Treasury stock purchases -- (494) (53)
Stock options exercised 1,557 -- --
Issuance of preferred shares of subsidiary -- 25,000 --
--------- --------- ---------
Net cash provided by financing activities 308,905 55,003 9,206
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (3,661) 8,540 646
Cash and cash equivalents at the beginning of the year 11,214 2,674 2,028
--------- --------- ---------
Cash and cash equivalents at the end of the year $ 7,553 $ 11,214 $ 2,674
========= ========= =========
Supplemental information:
Interest paid (including distributions to preferred shareholders
of subsidiary (subject to mandatory repurchase)) $ 19,399 $ 8,383 $ 3,822
========= ========= =========
See accompanying notes to consolidated financial statements.
40
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of American Mortgage
Acceptance Company and its wholly owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation. Unless otherwise
indicated, we herein refer to American Mortgage Acceptance Company and its
subsidiaries as "AMAC," "we", "us", "our", and "our Company". We are externally
managed by CharterMac AMI Associates, Inc., which acts as our Advisor and is a
subsidiary of CharterMac. We operate in one business segment.
During 2006, we formed several subsidiaries for the purposes of conducting our
first Collateralized Debt Obligation ("CDO") securitization and to accumulate
assets for the purposes of executing a planned second CDO securitization.
Our consolidated financial statements are prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). The preparation of financial statements in
conformity with GAAP requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Certain amounts from prior years have been reclassified to conform to the 2006
presentation, in particular, the results of operations of two properties sold
now recorded as discontinued operations. In addition, the asset balances for
2005 were reclassified from Real Estate Owned - Held and Used to Real Estate
Owned - Held for Sale.
b) Revenue Recognition
We derive our revenues from a variety of sources as follows:
o INTEREST INCOME FROM MORTGAGE LOANS AND NOTES RECEIVABLE - We
recognize interest on mortgage loans and notes receivable on the
accrual basis as it becomes due. We amortize deferred loan origination
costs and fees on a straight line basis, which approximates the
interest method, over the life of the applicable loan as an adjustment
to interest income. Certain mortgage loans contain provisions that
allow us to participate in a percentage of the underlying property's
excess cash flows from operations and excess proceeds from a sale or
refinancing. We evaluate these loans in accordance with EITF 86-21,
APPLICATION OF THE AICPA NOTICE TO PRACTITIONERS REGARDING
ACQUISITION, DEVELOPMENT, AND CONSTRUCTION ARRANGEMENTS TO ACQUISITION
OF AN OPERATING PROPERTY to determine the classification of the
investment as a loan. This income is recognized on the accrual basis
as it becomes due. We place these assets on non-accrual status when
collectibility is not assured.
o INTEREST INCOME ON DEBT SECURITIES - We recognize interest on GNMA and
FNMA certificates on the accrual basis as it becomes due. Interest
income also includes the amortization or accretion of premiums and
discounts arising at the purchase date, using the effective yield
method.
o INTEREST INCOME ON REVENUE BONDS - Interest income from revenue bonds
is recognized on the accrual basis as it becomes due. We place these
assets on non-accrual status when collectibility is not assured.
o INTEREST INCOME ON TEMPORARY INVESTMENTS - Interest income from
temporary investments, such as cash in banks and short-term
instruments, is recognized on the accrual basis as it becomes due.
o INCOME FROM REAL ESTATE OWNED - We recognize rental income on
properties classified as Held and Used as earned.
41
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o OTHER REVENUES
o STANDBY LOAN COMMITMENT FEES - We receive fees for issuing
standby loan commitments. If we do not expect to fund the
commitment, we recognize the fee ratably over the commitment
period. If we determine that it is probable that a commitment
will be exercised, we defer the fee and, if the commitment is
exercised, amortize it over the life of the loan as an adjustment
to interest income; if the commitment expires unexercised, we
recognize it upon expiration.
o STABILIZATION GUARANTEE AND LOAN ADMINISTRATION FEES - We receive
fees from borrowers for guaranteeing construction loans made by
third-party lenders for the period between construction
completion and funding of the permanent loan. We receive these
fees in advance and amortize them over the guarantee periods. We
also receive loan administration fees on these guaranteed loans,
on a monthly basis during the guarantee period. We recognize
these fees when due.
o FNMA LOAN GUARANTEE FEES - We receive monthly loss
sharing/guarantee fees related to the FNMA loan program (see Note
22) and recognize them when due.
o PREPAYMENT FEES - We may receive fees from borrowers that repay
loans earlier than their maturity dates. We recognize these fees
as earned, unless a loan is refinanced, in which case the
prepayment fees may be deferred and amortized over the life of
the refinanced loan.
c) Investments in Debt Securities and Revenue Bonds
We account for our investments in debt securities and revenue bonds pursuant to
SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
("SFAS No. 115"). For investments classified as available for sale, we record
changes in fair value in other comprehensive income unless we consider an
investment impaired, or a decline in fair value to be other than temporary (see
IMPAIRMENT below).
1. Debt Securities
We classify our investments in GNMA and FNMA certificates as
available for sale debt securities and use third-party quoted
market prices as our primary source of valuation.
2. Revenue Bonds
We classify our investments in revenue bonds as available for
sale debt securities. Because revenue bonds have a limited
market, we estimate fair value for each bond as the present value
of its expected cash flows using a discount rate for comparable
investments.
3. Impairment
For any investments classified as available for sale, a decline
in market value below cost that we deem other than temporary is
charged to earnings. If, in the judgment of our Advisor, it is
determined probable that we will not receive all contractual
payments required when due, the bond is deemed impaired and is
written down to its then estimated fair value, with the amount of
the write-down accounted for as a realized loss.
4. Gain or Loss on Sale
Realized gains and losses on securities are included in earnings
and are recorded on the trade date and calculated as the
difference between the amount of cash received and the carrying
cost of the specific investment, including any unamortized
discounts, premiums, origination costs and fees.
42
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
d) Mortgage Loans and Notes Receivable
We carry mortgage loans and notes receivable at cost, including unamortized loan
origination costs and fees.
For investments in mortgage loans and notes receivable, we follow the provisions
of Statement of Financial Accounting Standards No. 114, ACCOUNTING BY CREDITORS
FOR IMPAIRMENT OF A LOAN ("SFAS No. 114"). Under SFAS No. 114, a loan is
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. SFAS No. 114 requires lenders to measure impaired
loans based on:
(i) the present value of expected future cash flows discounted at the
loans' effective interest rate;
(ii) the loan's observable market price; or
(iii) the fair value of the collateral if the loan is collateral-dependent.
We periodically evaluate our portfolio of mortgage loans and notes receivable
for possible impairment to establish appropriate loan loss reserves, if
necessary. If, in the judgment of our Advisor, we determine that it is probable
that we will not receive all contractually required payments when they are due,
we deem the loan or note impaired and establish a loan loss reserve.
e) Investment in ARCap
Prior to December 2005, our investment in ARCap Investors, L.L.C. ("ARCap")
consisted of preferred membership interests. In December 2005, we converted a
portion of our preferred interests to common interests. While we continued to
account for this investment under the equity method until we sold it in August
2006, a portion of the equity income recorded was based on the preferred
dividend, while the balance was based on our proportionate share of common
interests outstanding.
f) Real Estate Owned
Real estate owned consists of properties of which we took possession by
exercising our rights under subordinated promissory notes and other documents.
In some cases, we also purchased the first mortgage loans on the properties. We
recorded these properties at the lower of fair value of the real estate, less
estimated disposal costs, or the carrying amount of the foreclosed loan. The
determination of fair value of the real estate is based on independent
appraisals. These properties fall into three classifications:
o Held for Sale - properties for which we are actively seeking a buyer;
o Held and Used - properties for which we are actively seeking a buyer,
but have held for longer than one year; and
o Subject to Sales Contracts - properties for which the buyer has not
contributed sufficient equity to qualify for sale treatment pursuant
to Statement of Financial Accounting Standards No. 66, ACCOUNTING FOR
SALES OF REAL ESTATE ("SFAS No. 66").
When the foreclosure process is complete and we own the property, it is
classified as Held for Sale. As it is our intent to sell those properties in the
near term, we do not initially depreciate the assets. For properties later
reclassified as Held and Used, if full sale recognition is not achieved within
one year, we record depreciation on the asset, including an initial retroactive
adjustment for the entire period we owned the property. For properties sold, the
results of operations of the property are reclassified into income from
discontinued operations for all periods presented.
Our portfolio of real estate owned is periodically evaluated for possible
impairment. If, in the judgment of our Advisor, we determine that the property's
fair value is below its carrying value, we will deem the property impaired and
it will be written down to its then estimated fair value, with the amount of the
write-down accounted for as a realized loss.
43
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
g) Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash in banks and temporary investments in
short-term instruments with original maturity dates equal to or less than three
months. Restricted cash includes escrow deposits set aside for future funding
obligations or required collateral deposits made by us due to the decline in the
fair value of our cash flow hedges.
h) Loan Origination Costs and Fees
In accordance with SFAS No. 91, ACCOUNTING FOR NONREFUNDABLE FEES AND COSTS
ASSOCIATED ORIGINATING OR ACQUIRING LOANS AND INITIAL DIRECT COSTS OF LEASES, we
capitalize acquisition fees and other direct expenses incurred for activities
performed to originate mortgage loans and include them in Investment in Mortgage
Loans, net of any fees received from borrowers for loan originations. We
amortize these costs on a straight-line basis over the lives of the loans.
i) Mortgage Loan Repurchase Facility
We finance our mortgage loan investments that are to be placed into CDO
securitizations using a mortgage loan repurchase facility pursuant to a
repurchase agreement. We sell our mortgage loans to a counterparty for a price
set at approximately 80-90% of the value of the collateral, as determined on a
loan-by-loan basis. We account for these transactions as collateralized
borrowings; accordingly, the loans remain on our consolidated balance sheets
with the proceeds from the sales recorded as debt. We defer the fees relating to
the facility and amortize them over the life of the CDO securitization.
j) Debt Securities Repurchase Facilities
We finance our investments in debt securities using repurchase facilities, under
which we sell the certificates to counterparties under an agreement requiring us
to repurchase them for a fixed price on a fixed date, generally 30 days from the
sale date. We account for these transactions as collateralized borrowings;
accordingly, the securities remain on our consolidated balance sheets with the
proceeds from the sales recorded as debt. The difference between the sale
proceeds and the fixed repurchase price is recorded as interest expense ratably
over the period between the sale and repurchase dates.
k) Subsidiary Equity
We account for our preferred securities under SFAS No. 150, ACCOUNTING FOR
CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND
EQUITY, which requires that mandatorily redeemable financial instruments be
classified as liabilities in the consolidated financial statements and the
payments or accruals of dividends and other amounts to be paid to the holders of
these securities be reported as interest costs. The fair value of the securities
approximates the liquidation amount due to the variable rate nature of their
dividends.
l) Stock Options
We account for stock options we issue under the fair value based method pursuant
to Statement of Financial Accounting Standards No. 123(R), SHARE-BASED PAYMENT
("SFAS No. 123(R)"). Under SFAS No. 123(R), we are required to select a
valuation technique or option pricing model that meets the criteria as stated in
the standard and we use the Black-Scholes model, which requires the input of
subjective assumptions. These assumptions include estimating the length of time
optionees will retain their vested stock options before exercising them
("expected term"), the estimated volatility of the Company's common stock price
over the expected term ("volatility"), the risk free interest rate and the
dividend yield.
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
44
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
m) Interest Rate Derivatives
We account for our interest rate swap agreements under SFAS No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133"). We enter
into interest rate swaps, which are designated, at inception, as cash flow
hedges with the hedged item being the interest payments on our variable-rate
repurchase facilities. We record these swaps at fair value, and record changes
in fair value in other comprehensive income to the extent the hedge is effective
in achieving offsetting cash flows. We reclassify amounts in accumulated other
comprehensive income 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 record the net amounts receivable or payable under the swap
agreement as a component of interest expense.
We also entered into interest rates swaps that hedged the 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.
n) Fair Value of Financial Instruments
As described above, our debt securities, revenue bonds, and interest rate
derivatives are carried at estimated fair values. We have determined that the
fair value of our remaining financial instruments, including mortgage loans and
cash and cash equivalents, notes receivable, and secured borrowings approximate
their carrying values at December 31, 2006 and 2005. The fair value of
investments in mortgage loans, revenue bonds, notes receivable, and debt
securities are based on actual market price quotes or by determining the present
value of the projected future cash flows using appropriate discount rates,
credit losses and prepayment assumptions. Other financial instruments carry
interest rates which are deemed to approximate market rates.
o) Income Taxes
We have qualified as a REIT under the Internal Revenue Code (the "Code"). A REIT
is generally not subject to federal income tax on that portion of its REIT
taxable income ("Taxable Income") which is distributed to its shareholders
provided that at least 90% of Taxable Income is distributed and provided that
such income meets certain other conditions. Accordingly, no provision for
federal income taxes is required. We may be subject to state taxes in certain
jurisdictions.
p) New Accounting Pronouncements
In November 2005, the FASB issued Staff Position 115 / 124 - 1, THE MEANING OF
OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS. The
Staff Position clarified, among other matters, the determination as to when an
unrealized loss on debt securities should be reflected in the income statement
as opposed to accumulated other comprehensive income and was effective as of the
first quarter of 2006. Initial application of the Staff Position had no material
impact on our consolidated financial statements.
During the first quarter of 2006, we adopted SFAS No. 123(R) which replaces
Statement of Financial Accounting Statements No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS No. 123") under the modified prospective method. Among other
things, SFAS No. 123(R) requires that companies record the value of stock option
grants as compensation expense, while SFAS No. 123 allowed disclosure of the
impact instead of recording the expense. As we had been accounting for
share-based payments as an expense following the fair value provisions of SFAS
No. 123, the impact of adopting SFAS No. 123(R) was not material to us.
In June 2006, the FASB issued Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY
IN INCOME TAXES, AN INTERPRETATION OF FASB STATEMENT NO. 109 ("FIN 48"). FIN 48
establishes new evaluation and measurement processes for all income tax
positions taken. FIN 48 also requires expanded disclosures of income tax
45
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
matters. We expect that the adoption of this standard on January 1, 2007, will
have an immaterial effect on our consolidated financial statements.
In September 2006, the FASB issued Statement No. 157, FAIR VALUE MEASUREMENTS,
which established a framework for calculating the fair value of assets and
liabilities as required by numerous other accounting pronouncements, and expands
disclosure requirements of the fair values of certain assets and liabilities.
The statement is effective as of our 2008 fiscal year. We are currently
evaluating the impact, if any, that the adoption of this statement will have on
our consolidated financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, CONSIDERING
THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN
CURRENT YEAR FINANCIAL STATEMENTS ("SAB 108"). SAB 108 provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
The SEC staff believes that a registrant should quantify errors using both a
balance sheet and an income statement approach and evaluate whether either
approach results in quantifying a misstatement that, when all relevant
quantitative and qualitative factors are considered, is material. SAB 108 was
effective for 2006 and its adoption did not have a material effect on our
consolidated financial statements.
In January 2007, the FASB issued SFAS No. 159, THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES. This statement was issued with the
intent to provide an alternative measurement treatment for certain financial
assets and liabilities. The alternative measurement would permit fair value to
be used for both initial and subsequent measurement, with changes in fair value
recognized in earnings as those changes occur. This "Fair Value Option" would be
available on a contract by contract basis. The effective date for this statement
is the beginning of our 2008 fiscal year. The Company is currently assessing the
impact adoption may have on its financial statements.
46
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENTS IN MORTGAGE LOANS
Information relating to our investments in mortgage loans as December 31, 2006
is as follows:
(Dollars in thousands)
FINAL
MATURITY PERIODIC
PROPERTY DESCRIPTION DATE CALL DATE (A) INTEREST RATE PAYMENT TERMS PRIOR LIENS
------------------------------------ ----------- -------- ------------- ------------- ------------- -----------
FIRST MORTGAGE LOANS:
The Victor (D)(E)(F)
Camden, NJ Mixed Use 12/14 12/14 6.17% (G) $ --
Washington Heights (E)(F)
Worcester, MA Multifamily 5/16 12/15 6.85% (G) --
Robert Plan (E)
Bethpage, NY Office 4/16 04/16 6.77% (H) --
Sage at Cupertino (E)(F)
Cupertino, CA Multifamily 5/16 05/16 5.99% (H) --
The Pines (E)
Las Vegas, NV Multifamily 5/16 11/15 5.84% (G) --
Forest Pointe (E)
Lake Bluff, IL Multifamily 6/11 12/07 5.92% (G) --
Harbour Pointe (E)
Mukilteo, WA Retail 6/11 12/07 5.92% (G) --
1800 Walt Whitman (E)
Melville, NY Office 6/16 06/16 6.24% (H) --
Ellington Plaza (E)
Washington, DC Multifamily 9/16 09/09 5.82% (H) --
Stone Cliff Heights (E)
Aurora, CO Multifamily 8/16 02/16 6.08% (G) --
Citrus Grove (E)
Elk Grove, CA Multifamily 9/16 03/16 6.01% (H) --
Courtyard Apartments (E)
Albuquerque, NM Multifamily 8/11 08/09 5.93% (H) --
The Crossroads at Chapel Hills (E)
Colorado Springs, CO Multifamily 9/16 03/16 6.05% (G) --
Arbors Apartments (E)
Albuquerque, NM Multifamily 8/11 10/09 5.93% (H) --
Westpointe Apartments (E)
Stockton, CA Multifamily 9/13 02/16 6.28% (G) --
Islip Terrace (E)
Islip Terrace, NY Retail 8/11 07/09 6.12% (I) --
236 W. 16th Street (E)
New York, NY Multifamily 9/16 09/09 6.13% (H) --
OUSTANDING
FACE AMOUNT CARRYING
OF IMPAIRMENT UNAMORTIZED AMOUNT OF INTEREST INCOME
PROPERTY MORTGAGES (B) CHARGES COSTS AND FEES MORTGAGES (C) IN 2006
------------------------------------ ------------- ---------- --------------- ------------- ---------------
FIRST MORTGAGE LOANS:
The Victor (D)(E)(F)
Camden, NJ $ 31,000 -- $ (739) $ 30,261 $ 1,630
Washington Heights (E)(F)
Worcester, MA 27,000 -- -- 27,000 1,314
Robert Plan (E)
Bethpage, NY 20,000 -- -- 20,000 1,020
Sage at Cupertino (E)(F)
Cupertino, CA 22,000 -- -- 22,000 907
The Pines (E)
Las Vegas, NV 13,000 -- -- 13,000 713
Forest Pointe (E)
Lake Bluff, IL 11,000 -- -- 11,000 423
Harbour Pointe (E)
Mukilteo, WA 11,000 -- -- 11,000 423
1800 Walt Whitman (E)
Melville, NY 7,000 -- -- 7,000 265
Ellington Plaza (E)
Washington, DC 13,500 -- (1,307) 12,193 309
Stone Cliff Heights (E)
Aurora, CO 26,500 -- -- 26,500 674
Citrus Grove (E)
Elk Grove, CA 21,000 -- -- 21,000 451
Courtyard Apartments (E)
Albuquerque, NM 8,500 -- -- 8,500 203
The Crossroads at Chapel Hills (E)
Colorado Springs, CO 8,050 -- -- 8,050 188
Arbors Apartments (E)
Albuquerque, NM 7,500 -- -- 7,500 179
Westpointe Apartments (E)
Stockton, CA 6,500 -- -- 6,500 140
Islip Terrace (E)
Islip Terrace, NY 5,984 -- -- 5,984 160
236 W. 16th Street (E)
New York, NY 5,348 -- -- 5,348 130
(continued)
47
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINAL
MATURITY PERIODIC
PROPERTY DESCRIPTION DATE CALL DATE (A) INTEREST RATE PAYMENT TERMS PRIOR LIENS
------------------------------------ ----------- -------- ------------- ------------- ------------- -----------
253 Elizabeth Street (E)
New York, NY Multifamily 9/16 09/09 6.13% (H) --
515 E. 5th Street (E)
New York, NY Multifamily 9/16 09/09 6.13% (H) --
Valley Village (E)
Bakersfield, CA Retail 9/16 03/16 5.78% (I) --
Rite Aid (E)
Arroyo Grande, CA Retail 10/16 04/16 5.57% (I) --
Garden Lakes (E)
Phoenix, AZ Office 10/16 07/16 6.06% (G) --
Highland Square II (E)
Greenville, SC Multifamily 10/16 10/09 6.04% (G) --
Wasilla Portfolio (E)
Wasilla, AK Multifamily 7/16 12/15 6.05% (I) --
Manhattan Beach (E)
Manhattan Beach, CA Other 11/16 05/16 6.22% (I) --
Alvin Center (E)
San Jose, CA Office 11/16 05/16 5.79% (I) --
Davidson Building (E)
Fife, WA Office 11/16 05/16 6.26% (G) --
Equinox (E)(F)
Great Neck, NY Retail 11/16 05/16 5.68% (G) --
Tiburon at Buckhead (E)
Atlanta, GA Multifamily 11/16 11/08 5.90% (H) --
Camden Village (E)
Fremont, CA Multifamily 11/09 11/08 6.53% (G) --
Talega Corporate Center (E)
San Clemente, CA Office 12/11 12/10 5.94% (G) --
Tennyson Retail Center (E)
Hayward, CA Retail 1/17 07/16 5.80% (I) --
Connecticut Village Apartments (J)
Gaffney, SC Multifamily 12/16 12/09 6.08% (H) --
Oakland Apartments (J)
Abbeville, SC Multifamily 12/16 12/09 6.08% (H) --
Westwood Apartments (J)
Manning, SC Multifamily 12/16 12/09 6.08% (H) --
OUSTANDING
FACE AMOUNT CARRYING
OF IMPAIRMENT UNAMORTIZED AMOUNT OF INTEREST INCOME
PROPERTY MORTGAGES (B) CHARGES COSTS AND FEES MORTGAGES (C) IN 2006
------------------------------------ ------------- ---------- --------------- ------------- ---------------
253 Elizabeth Street (E)
New York, NY 5,236 -- -- 5,236 129
515 E. 5th Street (E)
New York, NY 3,416 -- -- 3,416 83
Valley Village (E)
Bakersfield, CA 2,994 -- -- 2,994 68
Rite Aid (E)
Arroyo Grande, CA 2,497 -- -- 2,497 36
Garden Lakes (E)
Phoenix, AZ 2,300 -- -- 2,300 37
Highland Square II (E)
Greenville, SC 4,700 -- -- 4,700 74
Wasilla Portfolio (E)
Wasilla, AK 9,168 -- -- 9,168 300
Manhattan Beach (E)
Manhattan Beach, CA 1,570 -- -- 1,570 22
Alvin Center (E)
San Jose, CA 2,847 -- -- 2,847 25
Davidson Building (E)
Fife, WA 6,500 -- -- 6,500 103
Equinox (E)(F)
Great Neck, NY 12,680 -- -- 12,680 164
Tiburon at Buckhead (E)
Atlanta, GA 21,500 -- -- 21,500 325
Camden Village (E)
Fremont, CA 23,400 -- -- 23,400 237
Talega Corporate Center (E)
San Clemente, CA 8,700 -- -- 8,700 80
Tennyson Retail Center (E)
Hayward, CA 2,300 -- -- 2,300 5
Connecticut Village Apartments (J)
Gaffney, SC 2,720 -- -- 2,720 50
Oakland Apartments (J)
Abbeville, SC 361 -- -- 361 2
Westwood Apartments (J)
Manning, SC 795 -- -- 795 4
(continued)
48
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINAL
MATURITY PERIODIC
PROPERTY DESCRIPTION DATE CALL DATE (A) INTEREST RATE PAYMENT TERMS PRIOR LIENS
------------------------------------ ----------- -------- ------------- ------------- ------------- -----------
Lincoln Apartments (J)
Walterboro, SC Multifamily 12/16 12/09 6.08% (H) --
Raymonia Apartments (J)
Vidalia, GA Multifamily 12/16 12/09 6.08% (H) --
Westlake Apartments (J)
Savannah, GA Multifamily 12/16 12/09 6.08% (G) --
Twelve Atlantic Station (J)
Atlanta, GA Hotel/Mote1 1/09 11/08 6.38% (G) --
The Sanctuary Lofts
Apartments (J)
San Marcos, TX Multifamily 1/12 10/11 6.08% (H) --
Woodside at Holladay
Apartments (K)
Holladay, UT Multifamily 12/16 06/16 5.82% (H) --
Office Depot (K)
Arlington, TX Retail 1/17 N/A 5.79% (I) --
Cedar Glen Apartments (K)
Suisun City, CA Multifamily 1/12 12/09 5.81% (H) --
Venon Center (K)
Los Angeles, CA Retail 1/17 07/16 5.51% (I) --
Desert View
Coolidge, AZ Multifamily 5/06 N/A 10.00% (G) --
Subtotal First Mortgage Loans
BRIDGE LOANS:
Queen Vista Apartments (J)
Seattle, TX Multifamily 5/06 N/A 5.875% (G) --
Summit East Apartments (J)
Seattle, WA Multifamily 12/09 05/09 5.875% (G) --
Highland Crest Apartments (J)
Seattle, WA Multifamily 12/09 05/09 5.875% (G) --
Los Alamitos Center Plaza (J)
Los Alamitos, TX Multifamily 7/08 N/A 5.500% (I) --
Reserve at Autumn Creek (J)
Friendswood, TX Multifamily 11/16 N/A 5.875% (G) --
Subtotal Bridge Loans
OUSTANDING
FACE AMOUNT CARRYING
OF IMPAIRMENT UNAMORTIZED AMOUNT OF INTEREST INCOME
PROPERTY MORTGAGES (B) CHARGES COSTS AND FEES MORTGAGES (C) IN 2006
------------------------------------ ------------- ---------- --------------- ------------- ---------------
Lincoln Apartments (J)
Walterboro, SC 1,445 -- -- 1,445 7
Raymonia Apartments (J)
Vidalia, GA 1,445 -- -- 1,445 7
Westlake Apartments (J)
Savannah, GA 3,234 -- -- 3,234 17
Twelve Atlantic Station (J)
Atlanta, GA 17,000 -- -- 17,000 127
The Sanctuary Lofts
Apartments (J)
San Marcos, TX 23,000 -- -- 23,000 78
Woodside at Holladay
Apartments (K)
Holladay, UT 3,500 -- -- 3,500 18
Office Depot (K)
Arlington, TX 2,900 -- -- 2,900 6
Cedar Glen Apartments (K)
Suisun City, CA 17,200 -- -- 17,200 36
Venon Center (K)
Los Angeles, CA 4,800 -- -- 4,800 2
Desert View
Coolidge, AZ -- -- -- -- 58
----------------------------------------------------------------------------
Subtotal First Mortgage Loans 433,090 -- (2,046) 431,044 11,229
----------------------------------------------------------------------------
BRIDGE LOANS:
Queen Vista Apartments (J)
Seattle, TX 10,764 -- -- 10,764 65
Summit East Apartments (J)
Seattle, WA 5,345 -- -- 5,345 32
Highland Crest Apartments (J)
Seattle, WA 3,891 -- -- 3,891 24
Los Alamitos Center Plaza (J)
Los Alamitos, TX 3,796 -- -- 3,796 27
Reserve at Autumn Creek (J)
Friendswood, TX 13,800 -- -- 13,800 132
----------------------------------------------------------------------------
Subtotal Bridge Loans 37,596 -- -- 37,596 280
----------------------------------------------------------------------------
(continued)
49
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINAL
MATURITY PERIODIC
PROPERTY DESCRIPTION DATE CALL DATE (A) INTEREST RATE PAYMENT TERMS PRIOR LIENS
------------------------------------ ----------- -------- ------------- ------------- ------------- -----------
MEZZANINE LOANS:
The Hollows (E) (L) (M) (N)
Greenville, NC Multifamily 1/42 02/12 10.00% (S) (G) 8,755
Northbrooke
Harris County, TX Multifamily 8/43 N/A 11.50% (S) (G) --
Club at Brazos (L) (M) (N)
Rosenberg, TX Multifamily 5/43 06/08 10.00% (S) (G) 14,384
Del Mar Villas (O)(P)
Dallas, TX Multifamily 5/06 N/A LIBOR + 4.625% (G) 5,554
Villas at Highpoint (N)
Lewisville, TX Multifamily 4/33 04/13 14.57% (G) 18,800
Villas at Highpoint (N)
Lewisville, TX Multifamily 4/33 04/13 23.76% (G) 18,800
Sawmill Plaza (E)(N)
Columbus, OH Retail 10/14 09/14 13.50% (I) 15,859
Champaign Offices (E)(N)
Champaign, IL Office 10/11 05/11 10.67% (I) 25,950
Atlantic - Hearthstone (N)(Q)
Hillsborough, NJ Multifamily 4/07 04/07 20% (G) 11,030
South Burnswick (N)
South Brunswick, NJ Retail 6/15 06/15 10.25% (G) 36,750
Pasadena (N)(Q)
Pasadena, FL Multifamily 12/07 N/A LIBOR + 12.75% (G) 34,559
222 Pearson (N)(R)
Chicago, IL Multifamily 8/07 N/A LIBOR + 11.50% (G) 17,800
Bayfront Villas (N)(Q)
Gulfport, FL Multifamily 8/07 N/A LIBOR + 12.75% (G) 15,773
Marbella (N)(R)
Clearwater, FL Multifamily 9/06 N/A LIBOR + 12.50% (G) 19,492
Hotel QT (E) (N)
New York, NY Hotel 10/08 10/07 8.32% (G) 20,000
Subtotal Mezzanine Loans --
OUSTANDING
FACE AMOUNT CARRYING
OF IMPAIRMENT UNAMORTIZED AMOUNT OF INTEREST INCOME
PROPERTY MORTGAGES (B) CHARGES COSTS AND FEES MORTGAGES (C) IN 2006
------------------------------------ ------------- ---------- --------------- ------------- ---------------
MEZZANINE LOANS:
The Hollows (E) (L) (M) (N)
Greenville, NC 1,549 -- (80) 1,469 172
Northbrooke
Harris County, TX -- -- -- -- 50
Club at Brazos (L) (M) (N)
Rosenberg, TX 1,962 -- (70) 1,892 198
Del Mar Villas (O)(P)
Dallas, TX 765 (765) -- -- 30
Villas at Highpoint (N)
Lewisville, TX 2,599 -- (130) 2,469 384
Villas at Highpoint (N)
Lewisville, TX 693 -- (36) 657 165
Sawmill Plaza (E)(N)
Columbus, OH 1,988 -- -- 1,988 266
Champaign Offices (E)(N)
Champaign, IL 1,898 -- (27) 1,871 210
Atlantic - Hearthstone (N)(Q)
Hillsborough, NJ 5,592 (900) (24) 4,668 1,031
South Burnswick (N)
South Brunswick, NJ 3,250 -- -- 3,250 338
Pasadena (N)(Q)
Pasadena, FL 9,012 (9,012) -- -- 1,448
222 Pearson (N)(R)
Chicago, IL 7,500 -- (19) 7,481 1,257
Bayfront Villas (N)(Q)
Gulfport, FL 2,952 (2,952) -- -- 481
Marbella (N)(R)
Clearwater, FL 5,800 -- -- 5,800 1,069
Hotel QT (E) (N)
New York, NY 6,500 -- -- 6,500 38
----------------------------------------------------------------------------
Subtotal Mezzanine Loans 52,060 (13,629) (386) 38,045 7,137
----------------------------------------------------------------------------
(continued)
50
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINAL
MATURITY PERIODIC
PROPERTY DESCRIPTION DATE CALL DATE (A) INTEREST RATE PAYMENT TERMS PRIOR LIENS
------------------------------------ ----------- -------- ------------- ------------- ------------- -----------
SUBORDINATED B-NOTES
Twelve Atlantic Station (J) (O)
Atlantic, GA Hotel 11/09 11/08 8.08% (G) 17,000
Highland Crest Apartments (J) (O)
Seattle, WA Multifamily 12/09 05/09 8.63% (G) 3,891
Pierre Laclede Center (E) (N)
Clayton, MO Office 9/11 04/08 7.44% (G) 56,250
Queen Vista Apartments (J) (O)
Seattle, WA Multifamily 12/09 05/09 8.63% (G) 10,764
Summit East Apartments (J) (O)
Seattle, WA Multifamily 12/09 05/09 8.63% (G) 5,345
Intech (E) (N)
Indianapolis, IN Office 10/15 07/15 9.05% (G) 44,500
Ellington (E) (O)
Washington, DC Multifamily 9/16 09/09 10.00% (G) 40,800
Subtotal Subordinated B-notes
2006 Total Mortgage Loans
2005 Total Mortgage Loans (T)
OUSTANDING
FACE AMOUNT CARRYING
OF IMPAIRMENT UNAMORTIZED AMOUNT OF INTEREST INCOME
PROPERTY MORTGAGES (B) CHARGES COSTS AND FEES MORTGAGES (C) IN 2006
------------------------------------ ------------- ---------- --------------- ------------- ---------------
SUBORDINATED B-NOTES
Twelve Atlantic Station (J) (O)
Atlantic, GA 2,500 -- -- 2,500 7
Highland Crest Apartments (J) (O)
Seattle, WA 730 -- -- 730 4
Pierre Laclede Center (E) (N)
Clayton, MO 3,375 -- -- 3,375 21
Queen Vista Apartments (J) (O)
Seattle, WA 2,018 -- -- 2,018 12
Summit East Apartments (J) (O)
Seattle, WA 1,002 -- -- 1,002 6
Intech (E) (N)
Indianapolis, IN 5,500 -- (197) 5,303 327
Ellington (E) (O)
Washington, DC 16,669 -- (1,597) 15,072 614
----------------------------------------------------------------------------
Subtotal Subordinated B-notes 31,794 -- (1,794) 30,000 $ 991
----------------------------------------------------------------------------
2006 Total Mortgage Loans $554,540 (13,629) $(4,226) $536,685 $19,637
============================================================================
2005 Total Mortgage Loans (T) $ 52,707 -- $ (726) $ 51,981 $ 5,425
============================================================================
51
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) Call date means the date the loan can either be called by us or paid off by
borrower, which may result in prepayment penalties.
(B) As of December 31, 2006, all interest payments on the mortgage loans are
current, except as noted.
(C) Carrying amounts of the loans are net of unamortized origination costs and
fees and loan discounts.
(D) In 2005, we purchased a $5.0 million subordinated mortgage secured by this
property. During 2006, we purchased the remaining $26.0 million portion of
this first mortgage loan from CharterMac at approximately its face value
(see Note 20).
(E) Loans are pledged as collateral on $362.0 million of Series I CRE notes
issued during 2006 (see Note 8).
(F) Borrower is a related party (see Note 20).
(G) Interest only payments due monthly, with loan balance due at maturity.
(H) Currently interest only payments due monthly, followed by principal and
interest payments due at various future dates.
(I) Principal and interest payments due monthly.
(J) At December 31, 2006, loans are pledged as collateral under the mortgage
loan repurchase facility with Citigroup (see Note 10).
(K) Subsequent to December 31, 2006, loans were pledged as collateral under the
mortgage loan repurchase facility with Citigroup (see Note 10).
(L) The Hollows and the Club at Brazos loans are participating mezzanine loans
with a maximum annual return of 16% and 14%, respectively. We can share 50%
of excess operating cash flows, as well as 25% of excess sale or
refinancing proceeds on both loans.
(M) The principal balance of the mezzanine loan is secured by the partnership
interests of the entity that owns the underlying property and a third
mortgage deed of trust. Interest payments on the mezzanine loan are secured
by a second mortgage deed of trust and are guaranteed for the first 36
months after construction completion by an entity related to the general
partner of the entity that owns the underlying property.
(N) We do not have an interest in the first lien position relating to this
loan.
(O) We have an interest in the first lien position relating to this loan.
(P) During 2006, this mezzanine loan stopped making required interest payments,
causing it to be in default. We recognized an impairment charge on the
mezzanine loan ($765,000), as well as a related note receivable (see Note
4).
(Q) During 2006, these mezzanine loans did not make required interest payments,
causing them to be in default. We recognized impairment charges of $12.9
million for these loans due to construction and sales issues relating to
the underlying properties. We have determined the impairment amounts by
analyzing the cash flows of the respective projects upon completion of
construction at the property level and determining a fair value of the
properties. As a result the carrying amounts have been written down to
reflect these values as follows:
52
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pasadena $ 9,012
Bayfront Villas 2,952
Atlantic Hearthstue 900
----------
Total $ 12,864
========
(R) During 2006, these mezzanine loans did not make required interest payments,
causing them to be in default. We are currently in the process of
determining the necessary steps we need to take to protect our investment.
We have done an internal analysis for the property underlying the mortgage
and the analysis indicates that the value of the property exceeds the
carrying amount of our investment. Accordingly, we have not recorded an
allowance for probable losses on this investment.
(S) Interest on the mezzanine loan is based on a fixed percentage of the unpaid
principal balance of the related first mortgage loan. The amount shown is
the approximate effective rate earned on the balance of the mezzanine loan.
The mezzanine loan also provides for payments of additional interest based
on a percentage of cash flow remaining after debt service and participation
in sale or refinancing proceeds and certain provisions that cap our total
yield, including additional interest and participations, over the term of
the loan.
(T) The weighted average interest rate on the portfolio at December 31, 2005,
was 14.74%.
Further information relating to investments in mortgage loans is as follows:
(In thousands)
2006 2005
--------- ---------
Balance at beginning of year $ 51,981 $ 21,376
Advances made 509,991 42,247
Loan origination fees (net of acquisition expenses) -- (279)
Repayments (8,368) (11,853)
Amortization of costs and fees 507 236
Impairment losses (13,629) --
Prepayment penalty from debt security refinancing, net of unamortized loan origination fees (3,005) --
Discount on swap (792) 254
--------- ---------
Balance at end of year $ 536,685 $ 51,981
========= =========
53
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS IN DEBT SECURITIES - AVAILABLE FOR SALE
Information relating to our debt securities as of December 31, 2006 is as
follows:
(In thousands)
Date Purchased/
Certificate Final Stated
Name Number Payment Date Interest Rate
---------------------------- ----------- --------------- -------------
GNMA CERTIFICATES
SunCoast Capital Group, Ltd. G002412 6/23/97 7.000%
4/20/27
Village at Marshfield 519281 3/11/02 7.475%
1/15/42
Cantera Crossing 532663 3/28/02 6.500%
6/1/29
Burlington 595515 11/1/02 5.900%
4/15/31
FNMA DUS CERTIFICATES
Coventry Place 384920 5/9/03 6.480%
3/1/32
Elmwood Gardens 386113 5/15/03 5.350%
5/1/33
Pomono 386995 9/21/04 6.220%
7/1/34
Maple Street 387093 10/4/04 5.750%
10/1/22
Beach Grove 387114 12/21/04 5.620%
9/1/34
York 386631 12/29/04 5.490%
8/1/33
Inn at Summit Ridge 385258 1/10/05 6.650%
5/1/27
Wyndhurst 386641 2/28/05 5.800%
12/1/33
FNMA 830083 830083 11/9/05 7.218%
7/1/35
FNMA 254568 254568 11/10/05 6.799%
11/1/32
FNMA 255366 255366 11/10/05 6.470%
7/1/34
FNMA 254611 254611 11/10/05 6.823%
12/1/32
Total interest income from debt securities sold or repaid during 2006
2006 Total
2005 Total (1)
(In thousands)
Amortized Unrealized
Cost at Gain(Loss) at Balance at Interest Income
Name December 31, 2006 December 31, 2006 December 31, 2006 in 2006
---------------------------- ----------------- ----------------- ----------------- ---------------
GNMA CERTIFICATES
SunCoast Capital Group, Ltd. $ 54 $ 2 $ 56 $ 4
Village at Marshfield 20,963 (216) 20,747 1,420
Cantera Crossing 6,197 340 6,537 412
Burlington 6,480 (61) 6,419 379
FNMA DUS CERTIFICATES
Coventry Place 761 (26) 735 43
Elmwood Gardens 5,320 (194) 5,126 280
Pomono 5,735 (186) 5,549 317
Maple Street 1,455 (19) 1,436 79
Beach Grove 1,252 (42) 1,210 68
York 12,564 (441) 12,123 666
Inn at Summit Ridge 1,511 13 1,524 89
Wyndhurst 3,014 (88) 2,926 162
FNMA 830083 1,045 43 1,088 92
FNMA 254568 8,458 (18) 8,440 532
FNMA 255366 6,623 (9) 2,055 424
FNMA 254611 2,064 (12) 6,611 140
Total interest income from debt
securities sold or repaid
during 2006 -- -- -- 5,390
------------------------------------------------------------------------------
2006 Total $ 83,496 $ (914) $ 82,582 $10,497
==============================================================================
2005 Total (1) $218,891 $ 3,832 $222,723 $12,823
==============================================================================
Twenty certificates were sold during 2006. The sale resulted in aggregate
impairment losses of approximately $2.2 million and a loss on sale associated
with the write-off of unamortized premiums related to the securities, which was
approximately $784,000.
(1) The weighted average interest rate on the portfolio at December 31, 2005,
was 6.23%.
54
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding our investments in debt securities is as follows:
December 31,
-----------------------------
(In thousands) 2006 2005
--------- ---------
Amortized cost $ 83,496 $ 218,891
Unrealized gains 359 5,707
Unrealized losses (1,273) (1,875)
--------- ---------
Net unrealized (loss) gain (914) 3,832
--------- ---------
Fair value $ 82,582 $ 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 December 31, 2006 and 2005, is summarized in the
table below:
(dollars in thousands)
December 31, 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 3 9 12 8 16 24
Fair value $35,799 $37,579 $73,378 $25,905 $56,281 $82,186
Gross unrealized loss $ 246 $ 1,027 $ 1,273 $ 197 $ 1,678 $ 1,875
The unrealized losses shown above are as a result of increases in interest rates
subsequent to the acquisition of the securities. All of the debt securities are
performing according to their terms. Furthermore, we have the intent and ability
to hold these securities to maturity, or at least until interest rates change
such that the fair value is no longer less than book value. Accordingly, we have
concluded that these declines in value are temporary.
At December 31, 2006, all of our debt securities were partially or wholly
pledged as collateral under our debt securities repurchase facilities (see Note
9).
NOTE 4 - NOTES RECEIVABLE
Our notes receivable are collateralized by equity interests in the owner of the
underlying property and consist of the following as of December 31, 2006:
(In thousands)
Carrying Interest
Property Location Amount Rate
------------------------------------------------------------------------------------
Del Mar Villas Dallas, TX $ 4,940 LIBOR + 4.625% (1)
Oaks of Baytown Baytown, TX 2,975 LIBOR + 4.500% (1)
Quay Point Houston, TX 1,298 LIBOR + 3.600% (1)
--------
2006 Total $ 9,213
========
2005 Total $ 13,725
========
(1) 30-day LIBOR at December 31, 2006 was 5.33%.
55
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2006, all of these notes stopped making required interest payments,
causing them to be in default. As information regarding these loans
materialized, we recognized impairment charges on the Del Mar Villas and Oaks of
Baytown notes due to deteriorating operating performance of the underlying
properties and recorded a charge of $2.4 million. We determined the impairment
amounts by analyzing the real estate markets in the locations of the properties
and determining a fair value based on the types of the properties. As a result,
the carrying amounts have been written down to reflect these fair values. We
determined that no impairment of Quay Point existed as of 12/31/06.
NOTE 5 - INVESTMENT IN ARCAP
We owned 485,000 units Series A Convertible Preferred Membership Interests in
ARCap as well as 315,000 common units, which we acquired upon converting an
equal number of preferred units in December 2005. The initial cost of all units
was $25 each.
During August 2006, we sold our membership interests and common units in ARCap
to CharterMac (see also Note 20). In connection with the sale, we received
proceeds of $38.8 million, consisting of $24.5 million for the purchase of the
interests and $14.3 million of special distributions for income earned prior to
consummation of the sale. Of the distributions, we recorded approximately $12.6
million as a return of capital and the sales proceeds yielded a gain of
approximately $19.2 million. We expect to receive an additional $1.7 million of
proceeds in September 2007 which is included in the gain recognized and is
recorded in accounts receivable in the consolidated balance sheet. Contingent
upon future events, we may receive an additional $791,000 of proceeds in 2007
and 2008 which would result in additional gain when received.
NOTE 6 - REAL ESTATE OWNED
Our real estate owned consisted of the following:
(dollars in thousands)
Carrying Value
as of
December 31,
----------------------------------
Number of Units Location 2006 2005
-------------------------------------------------------------------------
Real Estate Owned - Held and Used, net
Concord Portfolio (1) 852 Houston, TX $53,100 $53,407
Less: accumulated depreciation (4,408) (3,062)
------- -------
Net $48,692 $50,345
======= =======
Mortgages Payable on Real Estate Owned
Concord Portfolio $39,944 $40,487
======= =======
Real Estate Owned - Held for Sale, net
Reserve at Autumn Creek (2) 212 Friendswood, TX $ -- $19,462
Less: accumulated depreciation -- (1,014)
------- -------
Net $ -- $18,448
======= =======
(1) The three properties underlying these notes receivable stopped paying
interest in May 2003. We subsequently exercised our rights under the
subordinated promissory notes and other documents and took possession of all
three properties. We purchased the first mortgages and acquired the real estate
at foreclosure auctions and sold all three properties to a qualified 501(c)(3)
entity during 2003. Because we provided 100% financing to the purchaser, the
transaction did not meet the criteria for sale recognition pursuant to SFAS No.
66, and we classified the properties as Real Estate Owned - Subject to Sales
Contracts. Following the provisions of SFAS No. 66, we account for the
properties under the deposit method.
During 2004, the properties were refinanced with UBS Real Estate Investments
Inc., who provided first mortgages of $41.0 million for these properties, and we
reclassified the properties as Real Estate Owned - Held and Used as the
56
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
refinancing did not qualify as a sale under SFAS No. 66. We recorded the $41.0
million amortizing mortgage as a liability and began to record depreciation on
the properties in 2004, as well as retroactively for the period since
foreclosure. We recognize income associated with a 10-year $12.8 million
mezzanine loan, with a stated interest rate of 8.00% (our remaining economic
interest in the properties), as rental income, property operations and mortgage
interest on Real Estate Owned - Held and Used on our consolidated statements of
income.
The following is a schedule of future principal payments on the mortgage
payable.
2007 $ 577
2008 612
2009 649
2010 688
2011 3,196
------
Thereafter
$5,722
======
(2) During 2006, this property was sold, resulting in a gain of approximately
$230,000. We have reclassified results of property operations as income from
discontinued operations for the periods prior to the sale.
NOTE 7 - CONCENTRATION
As of December 31, 2006, 87.9% of our portfolio was comprised of noninsured
investments. Of this group of assets, 19.8%, 19.4% and 11.0% were secured by
properties in Texas, California and New York, respectively. We had no borrowers
exceeding 10% of our portfolio of investments in mortgage loans, notes
receivable and revenue bonds.
NOTE 8 - CDO NOTES PAYABLE
During 2006, we issued approximately $400.0 million of notes and preferred
shares for our first CDO securitization through a wholly owned subsidiary, AMAC
CDO Funding I ("AMAC CDO"). The CDO consists of $362.0 million Series I CRE
notes and $12.0 million of non-investment grade notes and $26.0 million of
preferred shares, both of which we retained. The Series I CRE notes have an
absolute maturity of November 2050 and carry a combined weighted average rate of
5.73%. We incurred approximately $6.8 million of costs related to our first CDO
securitization, which are being amortized on a straight-line basis over the
average life of the CDO.
We retained all of the non-investment grade securities and the preferred shares
in a wholly owned subsidiary, AMAC CDO I Equity, LLC ("AMAC Equity"). AMAC CDO
holds the assets, consisting primarily of first mortgage loans, subordinate
interests in first mortgage loans, mezzanine loans and bridge loans, which serve
as collateral for the CDO (see Note 2). As of December 31, 2006, these assets
totaled $383.1 million and the remainder of the proceeds is held in escrow to
fund additional assets.
The CDO may be replenished, pursuant to certain rating agency guidelines
relating to credit quality and diversification and substitute collateral for
loans that are repaid during the first five years of the CDO is permitted.
Thereafter, the CDO securities will be retired in sequential order from
senior-most to junior-most as loans are repaid. The financial statements of both
wholly owned subsidiaries are consolidated in our financial statements. The
Series I CRE notes are treated as a secured financing, and are non-recourse to
us. Proceeds from the issuance of these notes were used to repay all outstanding
debt under a mortgage loan repurchase facility (see Note 10) and to fund
additional investments.
NOTE 9 - DEBT SECURITIES REPURCHASE FACILITIES
As a vehicle to leverage our investments in debt securities, we had repurchase
agreements with four counterparties, Greenwich Capital, Bear Stearns, RBC
Capital Markets and UBS Financial Services. Subsequent to the sale of 20 debt
securities (see Note 3), we paid off two of these four repurchase facilities
with the sale proceeds. The remaining RBC Capital Markets and UBS Financial
Services repurchase agreements offer advance rates between 94% and 97% and
57
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
borrowing rates between the LIBOR minus 0.03% and LIBOR plus 0.10%. The
borrowings are subject to 30-day settlement terms. As of December 31, 2006 and
2005, the amount outstanding under repurchase facilities was $79.4 million and
$209.1 million, respectively, and weighted average interest rate was 4.68% and
4.30%, respectively.
All of our debt securities are pledged as collateral in connection with these
repurchase facilities (see Note 3).
NOTE 10 - MORTGAGE LOAN REPURCHASE FACILITIES
We executed two new repurchase facilities during 2006 in connection with CDO
financing. The first facility with Bank of America ("BOA") was put in place to
fund investments that were placed into our first CDO securitization, which
occurred in November 2006 and the repurchase facility expired at that time.
Advance rates on the borrowings from this facility ranged from 50% to 95% of
collateral value, as determined on a loan-by-loan basis. Interest on the
borrowings, which ranged from LIBOR plus 0.50% to LIBOR plus 2.25%, was also
determined on a loan-by-loan basis. The outstanding balance of this facility was
paid down with the proceeds received from the CDO securitization (see Note 8).
During December 2006, we executed a second repurchase agreement with Citigroup
Global Markets Inc. ("Citigroup"). The purpose of this facility is to fund
investments that are to be priced into a planned second CDO securitzation.
Advance rates on the borrowings from this facility, ranging from 80% to 90% of
collateral value, are determined on a loan-by-loan basis. Interest on the
borrowings, which range from LIBOR plus 0.40% to LIBOR plus 1.25%, is also
determined on a loan-by-loan basis. The repurchase facility expires upon the
closing of the associates CDO securitization, or twelve months after the
inception of the repurchase facility, whichever comes first. At December 31,
2006 we had approximately $84.1 million of borrowings outstanding under this
facility, at a weighted average interest rate of 6.13%.
NOTE 11 - WAREHOUSE FACILITY
During February 2006, we repaid the remaining outstanding balance of
approximately $4.1 million on a facility we had used to fund investments. We can
no longer borrow from this facility, as it has matured.
NOTE 12 - LINE OF CREDIT - RELATED PARTY
We have a revolving credit facility (the "Revolving Facility") with CharterMac.
The Revolving Facility, which is unsecured, provides up to $50.0 million in
borrowings to be used to purchase new investments and for general purposes, and
bears interest at 30-day LIBOR plus 3.00%. The Revolving Facility expires in
June 2007 with a one-year optional extension. In the opinion of our Advisor, the
terms of this facility are consistent with those of transactions with
independent third parties. At December 31, 2005, there were no outstanding
borrowings under this facility. As of December 31, 2006, we had approximately
$15.0 million in borrowings outstanding, bearing interest at 8.35%.
NOTE 13 - SUBSIDIARY EQUITY
During March 2005, AMAC Capital Financing I, a wholly owned subsidiary, issued
25,000 Floating Rate Preferred Securities with a stated liquidation amount of
$1,000 per security. We received approximately $24.2 million in proceeds, net of
closing costs. The securities are callable in March 2010 and bear interest,
re-set quarterly, equal to 30-day LIBOR plus 3.75%. At December 31, 2006, the
rate was 9.12%.
58
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
(In thousands) December 31, December 31,
2006 2005
----------- -----------
Interest rate derivatives (see Note 15) $ 8,673 $ 39
Refundable deposits (1) 1,161 --
Accrued interest payable 3,078 409
Other 754 1,151
------- -------
$13,666 $ 1,599
======= =======
(1) Includes refundable deposits collected during the due diligence period of a
loan transaction which are payable to other parties.
NOTE 15 - DERIVATIVE INSTRUMENTS
CASH FLOW HEDGES OF DEBT
Our borrowings under repurchase facilities, CDO notes payable and our related
party line of credit incur interest at variable rates, exposing us to interest
rate risk. We have established a policy for risk management and our objectives
and strategies for use of derivative instruments to potentially mitigate such
risks.
As of December 31, 2006, we had 31 interest rate swaps with an aggregate
notional amount of $512.1 million, which will expire on dates ranging from March
2008 through November 2016 and are designated as cash flow hedges with the
hedged item being the interest payments on our variable-rate repurchase
facilities. These swaps are recorded at fair value, with changes in fair value
recorded in comprehensive income to the extent the hedges are effective in
achieving offsetting cash flows. 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 assess both at inception and on an ongoing basis, whether the swaps are
effective in offsetting changes in the variable cash flows of the hedged item.
We measure ineffectiveness of our cash flow hedges on a quarterly basis and
record any ineffectiveness in other income on the consolidated statement of
income. With the exceptioin of one swap, our swaps have been effective and we
expect they will continue to be effective in the future. We have recorded
ineffectiveness of approximately $212,000 related to the $333.4 million total
return swap. This swap includes an embedded financing component, which has
caused and will continue to cause, some ineffectiveness.
We terminated 33 swaps, 28 of which were classified as free standing derivatives
(see below) when we issued the CDO in November 2006, at which time we entered
into a total return swap with a notional amount of approximately $333.4 million,
which will convert the variable cash flows from the CDO to fixed cash flows. We
have designated this swap as a cash flow hedge.
We estimate that approximately $503,000 of the net unrealized losses included in
accumulated other comprehensive (loss) income will be reclassified into interest
expense within the next twelve months.
FREE-STANDING DERIVATIVES RELATED TO INVESTMENTS
We have three interest rate swaps with an aggregate notional amount of
approximately $20.2 million, which expire on dates ranging from February 2017
through July 2017, that are hedging changes in the fair value of certain
investments. We had 28 others (as noted above) that were used similarly for
assets securitized through our first CDO transaction which were terminated at
that time. We did not elect to apply hedge accounting to these swaps and,
therefore, the changes in their fair values are included in net income.
59
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We are required to maintain a minimum balance of collateral with BOA in
connection with these interest rate swaps. From time to time, as market rates
fluctuate, we may be called upon to post additional cash collateral with BOA to
maintain the fair value of the swaps. These payments are held as deposits with
BOA and will be used to settle the swap at termination date if market rates fall
below the fixed rates on the swaps. At December 31, 2006, we had no deposits
held by BOA.
FINANCIAL STATEMENT IMPACT
Interest rate swaps for which we were in a net settlement liability position are
recorded in accounts payable and accrued expenses (see Note 14) and those for
which we are in a net settlement asset position are recorded in deferred charges
and other assets. The amounts recorded were as follows:
(In thousands) December 31, December 31,
2006 2005
----------- -----------
Net asset position $1,143 $ 808
Net liability position $8,673 $ 39
Net income included the following related to our free standing derivatives and
interest rate hedges:
Year ended December 31,
------------------------------------
(In thousands) 2006 2005 2004
------ ------ ------
Interest income $(659) $ (42) $ --
Interest expense 128 110 628
Other income 212 -- --
----- ----- -----
Net $(319) $ 68 $ 628
===== ===== =====
The decrease in the fair value of our free-standing derivatives for the year
ended December 31, 2006, was $5.5 million and is recorded as a reduction of
other income on our consolidated statements of income.
NOTE 16 - SHAREHOLDERS' EQUITY
Common Shares
-------------
Our independent trustees receive a portion of their annual compensation in
common shares. In 2006, we issued 2,040 shares for trustee compensation as
compared to 3,036 in 2005. An additional 2,120 were issued in January 2007 in
connection with 2006 services. Expense we recognized related to the 2005 grants
was approximately $45,000. Expense related to those shares issued in 2006 and
2007 was approximately $66,000.
Share Repurchase Program
------------------------
In August 2003, our Board of Trustees approved a share repurchase plan. The plan
enables us to repurchase, from time to time, up to 1,000,000 common shares. The
repurchases will be made in the open market, and the timing will be dependent on
the availability of shares and other market conditions. This program has no
expiration date. During 2005 and 2004, we repurchased 36,000 and 4,000 shares,
respectively, at a cost of approximately $494,000 and $53,000, respectively. We
made no such repurchases during 2006.
60
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated Other Comprehensive (loss) Income
---------------------------------------------
Changes in accumulated other comprehensive (loss) income consisted of the
following:
(In thousands) Net unrealized
Net unrealized (loss) gain on
gain (loss) on interest rate
investments derivatives Total
-------------- -------------- ---------
Balance at January 1, 2004 $ 8,728 $ (278) $ 8,450
Period change 1,260 407 1,667
-------- -------- --------
Balance at December 31, 2004 9,988 129 10,117
Period change (6,013) 679 (5,334)
-------- -------- --------
Balance at December 31, 2005 3,975 808 4,783
Period change (4,769) (3,642) (8,411)
-------- -------- --------
Balance at December 31, 2006 $ (794) $ (2,834) $ (3,628)
======== ======== ========
NOTE 17 - INCENTIVE SHARE OPTION PLAN
In accordance with our Amended and Restated Incentive Share Option Plan (the
"Plan"), our Board of Trustees can award share options to trustees, officers and
employees of our Advisor and its affiliates. A maximum of 839,993 options can be
granted, with annual limits based upon 10% of the shares outstanding at year
end, as specified in the Plan. Option terms and vesting requirements are
determined at the time of grant, provided that the term is no longer than ten
years.
Our compensation committee granted the following options to employees of an
affiliate of our Advisor pursuant to the Plan (none were granted in 2006 or
2004):
Year Number Exercise Price Term Vesting Period
------------ ------------- --------------- ------------- --------------
2003 190,000 $15.03 10 years 3 years
2005 65,062 $17.20 10 years 3 years
The weighted average assumptions used for valuing these options and the results
of the valuations were as follows:
2006 (1) 2005 2004
-------- -------- --------
Dividend Yield 9.98% 10.95% 9.30%
Estimated Volatility 25.00% 26.00% 16.00%
Risk Free Interest Rate 4.73% 4.36% 3.93%
Expected Lives (years) 4.9 8.0 8.3
(1) These weighted average assumptions are as of March 31, 2006, the last
period these options were re-valued, as both grants were vested shortly
after this date and fully amortized.
61
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes share option activity in our share option plans
for the years ended December 31:
2006 2005 2004
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- --------- --------- --------- --------- ---------
Outstanding
at Beginning of Year 187,052 $ 15.78 130,000 $ 15.03 190,000 $ 15.03
Granted -- -- 65,052 17.20 -- --
Forfeited -- -- (8,000) 15.03 (60,000) 15.03
Exercised (94,052) 16.53 -- -- -- --
--------- --------- --------- --------- --------- ---------
Outstanding
at End of Year 93,000 15.03 187,052 $ 15.78 130,000 $ 15.03
========= ========= ========= ========= ========= =========
Fair Value of options granted
during the year (at grant date) $ -- $ -- $ 64,000 $ 17.20 $ -- $ --
========= ========= ========= ========= ========= =========
Compensation cost recognized $ 59,000 (1) $ -- $ 45,500
============ ========= =========
(1) Includes accelerated vesting of 2005 grants upon the termination of the
optionee.
As of December 31, 2006
---------------------------------------------------
Weighted
Average
Weighted Remaining Aggregate
Average Contractual Intrinsic
Exercise Term Value
Options Price (in years) (in thousands)
---------------------------------------------------
Vested and expected to vest at
end of period 93,000 $ 15.03 6.3 $ 172
===================================================
Exercisable at end of year 93,000 $ 15.03 6.3 $ 172
===================================================
The aggregate intrinsic value at December 31, 2006, represents the difference
between our closing share price on the last trading day of the year and the
exercise prices of the outstanding options. This amount will change based on the
fair market value of our shares.
As of December 31, 2006, the cost of all of our share options was fully
amortized, and there was no unrecognized compensation cost related to
share-based compensation grants. There were 652,941 shares available for
issuance as of December 31, 2006.
62
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - 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)
Year Ended December 31, 2006 Income Shares Per Share
-------- -------- ---------
Basic EPS $ 2,687 8,323 $ 0.32
Effect of dilutive securities -- 7 --
------- ------- -------
Diluted EPS $ 2,687 8,330 $ 0.32
======= ======= =======
Year Ended December 31, 2005
Basic EPS $15,235 8,316 $ 1.83
Effect of dilutive securities -- 1 --
------- ------- -------
Diluted EPS $15,235 8,317 $ 1.83
======= ======= =======
Year Ended December 31, 2004
Basic EPS $11,273 8,336 $ 1.35
Effect of dilutive securities -- 7 --
------- ------- -------
Diluted EPS $11,273 8,343 $ 1.35
======= ======= =======
NOTE 19 - DISCONTINUED OPERATIONS
Income or loss from discontinued operations included the following related to
the Reserve at Autumn Creek (which we sold from our Real Estate Owned portfolio
in October 2006) and the Plaza at San Jacinto (which we sold from our Real
Estate Owned portfolio in 2005):
(in thousands) Year Ended December 31,
-------------------------------
2006 (1) 2005 2004
-------- ------ ------
Revenues $ 663 $2,280 $ 811
====== ====== ======
Net income (loss) $ 569 $ 434 $ (177)
====== ====== ======
(1) 2006 net income includes an approximate $230,000 gain on the sale realted to
the Autumn Creek property.
NOTE 20 - RELATED PARTY TRANSACTIONS
Fees to Advisor
---------------
Pursuant to the March 2006 amended Advisory Services Agreement with our Advisor
(the "Amended Advisory Agreement"), we pay certain fees, in addition to
reimbursements of certain administrative and other costs our Advisor incurs on
our behalf, for its ongoing management and operations of our Company:
Fees/Compensation Annual Amount
----------------- -------------
I. Asset management fees Our Advisor receives an asset management fee
equal to 1.75% per year of our equity balance,
reduced by certain costs to us from the
repurchasing of our common shares, and excluding
one time events pursuant to changes in GAAP, as
well as certain approved non-cash charges.
63
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
II. Loan origination fees Our Advisor is entitled to receive, with respect
to each investment originated by us, the
origination points, if any, paid by borrowers.
In connection with the acquisition of investments
for us, the Advisor may also act as an advisor to
third parties which participate with us in such
investments and may receive origination points,
if any, from such third parties or their
borrowers.
III. Annual incentive Subject to (1) a minimum annual distribution
management fees being made to shareholders from cash available
for distribution ("CAD") of $1.45 per share and
(2) the Company achieving at least annual
Adjusted Funds from Operations (defined below)
per share of $1.60 (net of this incentive fee),
the Advisor shall be entitled to receive
incentive compensation for each fiscal year in an
amount equal to the product of:
(A) 25% of the dollar amount by which
(1) Adjusted Funds From Operations before
this incentive management fee per share
(based on the weighted average number
of shares outstanding), excluding
non-cash gains or losses due to the
recording of fair value hedges
exceed
(2) an amount equal to the greater of:
(a)(i) the weighted average of (x) $20
and (y) the prices per share of
any secondary offerings by the
Company multiplied by
(ii) the Ten Year U.S. Treasury Rate
plus 2% per annum; and;
(b) $1.45
multiplied by
(B) the weighted average number of shares
outstanding during such year.
"Adjusted Funds From Operations" means net income
(computed in accordance with GAAP) including
realized gains (or losses) from debt
restructuring and sales of assets, plus
depreciation and amortization on real property,
and after adjustments for unconsolidated
partnerships and joint ventures.
"CAD" means cash available for distributions,
which shall consist of our net income (as
determined pursuant to GAAP) adjusted for certain
non-cash charges (as determined pursuant to
GAAP).
IV. Shared services expenses Our Advisor is reimbursed by us for (i) the
actual costs to the Advisor of goods, materials
and services used for and by us obtained from
unaffiliated parties, (ii) the costs of certain
personnel employed by the Advisor and directly
involved in the organization and business of
our company and for legal, accounting transfer
agent, reinvestment and redemption plan
administration, data processing, duplication
and investor communications services performed
by employees of officers of the Advisor.
64
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
V. Termination The Advisor can terminate the agreement without
penalty, but we are subject to a termination
fee, except in certain instances, for
termination or non-renewal, equal to four times
the asset management fee and four times the
incentive management fee that our Advisor would
have been entitled to receive from us during the
four calendar quarter period immediately
proceeding the effective date of such
termination. Termination would be effective upon
60 days prior written notice to the
non-terminating party. If our Advisor terminates
our agreement, we may not be able to find an
adequate replacement advisor.
The costs paid or payable to our Advisor were as follows:
(in thousands) Years Ended December 31,
----------------------------------
2006 2005 2004
------ ------ ------
Asset management fees $1,810 $1,545 $1,274
Incentive management fee -- 1,855 --
Shared service expenses 1,673 947 682
------ ------ ------
$3,483 $4,347 $1,956
====== ====== ======
Prior to the March 2006 Amendment to the Amended Advisory Agreement, the
following fees were paid to the Advisor differently that they are currently
paid.
o ASSET MANAGEMENT FEES - We paid asset management fees to our Advisor
calculated on a set percentage for each asset class.
o LOAN ORIGINATION FEES - origination points paid by borrowers were
first paid to our Advisor for amounts up to 1.0% of the principal
amount of each note and we received any excess origination points paid
by borrowers, if any, above the 1.0%.
Other Related Party Transactions
--------------------------------
In September 2005, we sold a mortgage loan, at par, to CharterMac.
During April 2006, we purchased a first mortgage loan from CharterMac (see Note
2). Including this loan, during 2006 we partially or fully funded 58 first
mortgage loans and subordinated notes, with a carrying amount totaling
approximately $500.1 million, originated by CharterMac Mortgage Capital
Corporation ("CMC"), an affiliate of our Advisor. Additionally, CharterMac
subsidiaries may act as a broker on our behalf from time to time in origination
transactions. CMC received approximately $2.0 million in loan origination fees
related to these originations, all of which were paid by the borrowers.
In 2006, included in the origination activity above, we funded:
o two first mortgage loans aggregating $39.7 million to properties
developed by a company controlled by the chairman of CharterMac;
o a first mortgage loan ($31.0 million) to a property of which a fund
managed by a subsidiary of CharterMac is the 99.98% limited partner of
the borrower; and
o a first mortgage loan ($22.0 million) to a property that has a
preferred equity interest in it made by CharterMac Urban Capital Fund
I LLC, a fund managed by a subsidiary of CharterMac.
In the opinion of management, the terms of these transactions are consistent
with those transactions with independent third parties (see also Note 2 for
detailed terms of loans).
65
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (see Note 12).
During September 2006, a subsidiary of CharterMac funded a first mortgage note
in the amount of approximately $27.3 million as part of a refinancing of one of
our loans (see Note 2).
During August 2006, we entered into a co-investment agreement with ARCap Real
Estate Special Situations Mortgage Fund, L.L.C. ("ARESS"); a fund managed by a
subsidiary of CharterMac, whereby we and ARESS will participate equally in
investment opportunities that are originated by affiliates and which meet the
investment criteria of both companies.
During March 2007, a $32.5 million mezzanine loan was funded to a special
purpose entity controlled by the chairman of CharterMac, who also controls a
separate special purpose entity that is guaranteeing the loan (see Note 23).
NOTE 21 - SELECTED QUARTERLY FINANCIAL DATA
(unaudited)
2006 Quarter Ended
----------------------------------------------------
(In thousands except per share amounts)
March 31 June 30 September 30 (1) December 31 (2)
-------- ------- ---------------- ---------------
Total revenues $7,416 $8,996 $10,213 $12,003
====== ====== ======= =======
Net income (loss) $2,169 $5,215 $ 1,234 $(5,931)
====== ====== ======= =======
Net income (loss) from continuing operations per
share (basic and diluted) $ 0.27 $ 0.60 $ 0.14 $ (0.74)
====== ====== ======= =======
Net income (loss) from discontinued operations per
share (basic and diluted) $(0.01) $ 0.03 $ 0.01 $ 0.04
====== ====== ======= =======
Net income per share (basic and diluted) $ 0.26 $ 0.63 $ 0.15 $ (0.70)
====== ====== ======= =======
2005 Quarter Ended
--------------------------------------------------
March 31 June 30 September 30 (3) December 31
-------- ------- ---------------- -----------
Total revenues $ 6,183 $7,276 $12,766 $7,638
======= ====== ======= ======
Net income $ 2,827 $3,069 $ 7,312 $2,027
======= ====== ======= ======
Net income from continuing operations per share
(basic and diluted) $ 0.30 $ 0.33 $ 0.83 $ 0.32
======= ====== ======= ======
Net income (loss) from discontinued operations per
share (basic and diluted) $ 0.04 $ 0.04 $ 0.05 $(0.08)
======= ====== ======= ======
Net income per share (basic and diluted) $ 0.34 $ 0.37 $ 0.88 $ 0.24
======= ====== ======= ======
(1) Includes a gain resulting from the sale of our ARCap membership
interests ($19.2 million), an expense related to changes in the fair
value of certain interest rate swaps to which we do not apply hedge
accounting ($8.4 million), losses relating to the sale of 20 FNMA
securities ($3.0 million) and impairment losses recorded on two notes
receivable and one mezzanine loan ($2.4 million).
(2) Includes impairment losses relating to three mezzanine loans ($12.9
million), and income recognized from increases in the fair value of
certain interest rate swaps ($2.9 million).
(3) Includes $5.6 million of fees relating to an early payoff of a debt
security and a mezzanine loan.
NOTE 22 - COMMITMENTS AND CONTINGENCIES
a) Legal
On October 27, 2003, prior to taking possession of the real estate collateral
supporting a loan investment, we were named in a lawsuit, Concord Gulfgate, Ltd.
vs. Robert Parker, Sunrise Housing Ltd., and American Mortgage Acceptance
Company, Cause No. 2003-59290 in the 133rd Judicial District Court of Harris
66
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
County, Texas. The suit alleged that the loan transaction was not properly
authorized by the borrower and was not for a legitimate borrower purpose. The
suit claimed, among other causes of action against the respective defendants,
wrongful foreclosure of the real estate collateral, tortious interference with
contract and civil conspiracy. The suit sought, among other relief, actual,
consequential, and exemplary damages, and a declaration that the loan documents
were unenforceable and constituted a cloud on title. The case went to trial in
September 2006 and was settled for $150,000. This amount is recognized in
general and administrative expenses in our consolidated statements of income.
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 December 31, 2006, was $3.2 million, although we expect that
we will not be called upon to fund these guarantees, and therefore, have not
recorded a liability.
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 mezzanine loans at December
31, 2006:
(dollars in thousands)
MAXIMUM AMOUNT OF
COMMITMENT
--------------------------
NO. OF APT. LESS THAN
ISSUE DATE PROJECT LOCATION UNITS TOTAL 1 YEAR
--------------------------------------------------------------------------------------------------
Apr-05 Atlantic Hearthstone Hillsborough, NJ 198 $1,022 $1,022
--------------------------------------
TOTAL FUTURE FUNDING COMMITMENTS 198 $1,022 $1,022
======================================
NOTE 23 - SUBSEQUENT EVENTS
During March 2007, a $32.5 million mezzanine loan was funded to a special
purpose entity controlled by the chairman of CharterMac. The guarantor on the
loan is also a special purpose entity controlled by the chairman of CharterMac
(see Note 20).
During March 2007, one of our non-independent trustees has retired.
67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rule
13a-15(e) or Rule 15a-15(e) under the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) as of the end of the period covered
by this annual report. Based on such evaluation, such officers have
concluded that our disclosure controls and procedures as of the end of
the period covered by this annual report were effective to ensure that
information required to be disclosed by the Company in the reports
that the Company files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified
in the SEC rules and forms, and to ensure that such information is
accumulated and communicated to the Company's management, including
the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
(b) INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any
significant changes in our internal control over financial reporting
during the fiscal year to which this report relates that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
68
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Incorporated by reference to the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act").
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Incorporated by reference to the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
Incorporated by reference to the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Incorporated by reference to the Company's definitive proxy statement
to be filed pursuant to Regulation 14A under the Exchange Act.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Sequential
Page
----------
(a) 1. Financial Statements
Report of Independent Registered Public Accounting Firm 35
Consolidated Balance Sheets as of December 31, 2006 and 2005 36
Consolidated Statements of Income for the years ended December 31,
2006, 2005 and 2004 37
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2006, 2005 and 2004 38
Consolidated Statements of Cash Flows for the years ended December 31,
2006, 2005 and 2004 39
Notes to Consolidated Financial Statements 41
(a) 2. Financial Statement Schedules
All schedules have been omitted because they are not required or
because the required information is contained in the consolidated
financial statements or notes thereto.
69
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (CONTINUED)
Sequential
Page
----------
(a) 3. Exhibits
--------
3.1 Third Amended and Restated Declaration of Trust, dated June 8, 2005
(incorporated by reference to Appendix A to Proxy Statement filed with
the Commission on April 28, 2005).
3.2 Amended and Restated Bylaws of American Mortgage Acceptance Company, a
real estate investment trust (incorporated by reference to Exhibit to
Appendix B to Proxy Statement filed with the Commission on April 28,
2005).
3.3 Amendment to the Amended and Restated Bylaws of American Mortgage
Acceptance Company (incorporated by reference to Exhibit 10(a) to the
Company's December 31, 2005 Annual Report on Form 10-K).
3.4 Amendment No. 2 to the Amended and Restated Bylaws of American
Mortgage Acceptance Company, a real estate investment trust
(incorporated by reference to our Current Report on Form 8-K filed on
November 6, 2006).
10(a) Second Amended and Restated Advisory Service Agreement between the
Company and CharterMac AMI Associates Inc. (incorporated by reference
to Exhibit 10(a) to the Company's December 31, 2005 Annual Report on
Form 10-K).
10(b) Amendment to the Second Amended and Restated Advisory Services
Agreement, dated July 26, 2006, by and between American Mortgage
Acceptance Company, a Massachusetts real estate investment trust and
CharterMac AMI Associates, Inc., a Delaware corporation (incorporated
by reference to our Current Report on Form 8-K filed on July 31,
2006).
10(c) Form of Non-Qualified Share Option Award Agreement (incorporated by
reference to Exhibit 10(g) to the Company's December 31, 2005 Annual
Report of Form 10-K).
10(d) Amended and Restated Incentive Share Option Plan of the Company
(incorporated by reference to our Current Report on Form 8-K filed on
August 26, 2004).
10(e) First Amendment to the Amended and Restated Incentive Share Option
Plan of the Company, dated June 9, 2004 (incorporated by reference to
Exhibit 10(e) to the Company's June 30, 2004 Amended Quarterly Report
on Form 10-Q/A).
10(f) Loan Agreement between CharterMac and American Mortgage Acceptance
Company as of June 30, 2004 (incorporated by reference to Exhibit
10(d) to the Company's December 31, 2005 Annual Report on Form 10-K).
10(g) Master Repurchase Agreement, dated March 29, 2006, among AMAC CDO
Funding I, as seller and Bank of America, N.A. together with Banc of
America Securities LLC, as buyer (incorporated by reference to our
Current Report on Form 8-K filed on April 4, 2006).
10(h) Amendment No. 1 to Master Repurchase Agreement, dated September 14,
2006, by and among AMAC CDO Funding I, as seller and Bank of America,
N.A. together with Banc of America Securities LLC, as buyer
(incorporated by reference to our Current Report on Form 8-K filed on
September 19, 2006).
70
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (CONTINUED)
Sequential
Page
----------
10(i) Custodial Agreement, dated March 29, 2006, by and among AMAC CDO
Funding I, a Cayman Islands exempted company, as seller, and Bank of
America, N.A., a national banking association organized under the laws
of the United States together with Banc of America Securities LLC, a
limited liability company organized under the laws of Delaware, as
buyer and Lasalle Bank National Association, as custodian
(incorporated by reference to our Current Report on Form 8-K filed on
April 4, 2006).
10(j) Guarantee, dated March 29, 2006, by American Mortgage Acceptance
Company, as guarantor, in favor of Bank of America, N.A. and Banc of
America Securities LLC, as buyer (incorporated by reference
(incorporated by reference to our Current Report on Form 8-K filed on
April 4, 2006).
10(k) First Amendment to the Loan Agreement, dated June 30, 2005, between
American Mortgage Acceptance Company, as borrower and CharterMac, as
lender (incorporated by reference to our Current Report on Form 8-K
filed on April 26, 2006).
10(l) Second Amendment to the Loan Agreement, dated as of April 19, 2006,
between American Mortgage Acceptance Company, as borrower and
CharterMac, as lender (incorporated by reference to our Current Report
on Form 8-K filed on April 26, 2006).
10(m) Amended and Restated Credit Note, dated April 19, 2006, in favor of
CharterMac lender (incorporated by reference to our Current Report on
Form 8-K filed on April 26, 2006).
10(n) Securities Purchase Agreement, dated August 15, 2006, by and among
CharterMac, Charter Mac Corporation, CM Arcap Investors LLC, The
Common Members listed on Schedule I thereto, The Preferred Members
listed on Schedule I thereto, Arcap Investors, L.L.C., Arcap Reit,
Inc. and AI Sellers Representative, L.L.C. (incorporated by reference
to our Current Report on Form 8-K filed on August 21, 2006).
10(o) Pledge And Security Agreement, dated September 14, 2006, by American
Mortgage Acceptance Company, a Massachusetts business trust, as
pledgor for the benefit of Bank of America, N.A., a national banking
association and Banc of America Securities LLC, a limited liability
company organized under the laws of Delaware, as buyer (incorporated
by reference to our Current Report on Form 8-K filed on September 19,
2006).
21 Subsidiaries of our Company*
23 Consent of Independent Registered Public Accounting Firm*
23(a) Consent of Ernst & Young LLP with respect to incorporation by
reference of its report relating to the financial statements of ARCap
Investors, LLC in the Company's Registration Statement on form S-3 and
Form S-8 (incorporated by reference to Exhibit 23(a) to the Company's
December 31, 2004, Annual Report on Form 10-K/A).
24.1 Power of Attorney (Included on signature page hereto)
31.1 Chief Executive Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
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*
71
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (CONTINUED)
Sequential
Page
----------
99. Additional Exhibits
99(a) The 2004 Financial Statements of ARCap Investors, LLC which invests
primarily in subordinated commercial mortgage-backed securities, as
required by Regulation S-X, Rule 3-09 (Incorporated by reference to
Exhibit 99(a) to the Company's December 31, 2004, Annual Report on
Form 10-K/A).
* Filed herewith
72
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the registrant and in the capacities and dates indicated.
AMERICAN MORTGAGE ACCEPTANCE COMPANY
(Registrant)
Date: March 15, 2007 By: /s/ James L. Duggins
--------------------
James L. Duggins
Chief Executive Officer
(Principal Executive Officer)
Date: March 15, 2007 By: /s/ Robert L. Levy
------------------
Robert L. Levy
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
73
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints James
L. Duggins and Robert L. Levy, and each or either of them, his true and lawful
attorney-in-fact with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report, and to cause the same to be filed, with all
exhibits thereto and other documents in connection therewith, with the
Securities Exchange Commission, hereby granting to said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing whatsoever requisite or desirable to be done in and about
the premises, as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all acts and things that
said attorneys-in-fact and agents, or either of them, or their substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated:
Signature Title Date
---------------------- ---------------- ----------------
/s/ Jeff T. Blau
----------------
Jeff T. Blau Managing Trustee March 15, 2007
/s/ James L. Duggins
--------------------
James L. Duggins Managing Trustee March 15, 2007
/s/ George P. Jahn
------------------
George P. Jahn Managing Trustee March 15, 2007
/s/ Harry Levine
----------------
Harry Levine Managing Trustee March 15, 2007
/s/ Scott M. Mannes
-------------------
Scott M. Mannes Managing Trustee March 15, 2007
/s/ Stanley R. Perla
--------------------
Stanley R. Perla Managing Trustee March 15, 2007
/s/ Richard M. Rosan
--------------------
Richard M. Rosan Managing Trustee March 15, 2007
/s/ Marc D. Schnitzer
---------------------
Marc D. Schnitzer Chairman March 15, 2007
74
Exhibit 21
Subsidiaries of the Company as of December 31, 2006
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AMAC Credit Facility, LLC, a Delaware limited liability company
AMAC Capital Financing I, a Delaware statutory trust
AMAC CDO Funding I, a Cayman Islands exempt company
AMAC CDO Equity, LLC, a Delaware limited liability company
AMAC CDO I Advancing, LLC, a Delaware limited liability company
AMAC CRE Funding II, LTD, a Cayman Islands exempt company
75
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No.
333-87440 of American Mortgage Acceptance Company and subsidiaries on Form S-3
and in Registration Statement No. 333-118572 of American Mortgage Acceptance
Company and subsidiaries on Form S-8 of our reports dated March 15, 2007
relating to the consolidated financial statements of American Mortgage
Acceptance Company and management's report on the effectiveness of internal
control over financial reporting appearing in the Annual Report on Form 10-K of
American Mortgage Acceptance Company and subsidiaries for the year ended
December 31, 2006.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 15, 2007
76
Exhibit 31.1
CERTIFICATION
I, James L. Duggins, hereby certify that:
1. I have reviewed this annual report on Form 10-K of American Mortgage
Acceptance Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual 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
principals;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this annual 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 officers 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: March 15, 2007 By: /s/ James L. Duggins
-------------- --------------------
James L. Duggins
Chief Executive Officer
77
Exhibit 31.2
CERTIFICATION
I, Robert L. Levy, hereby certify that:
1. I have reviewed this annual report on Form 10-K of American Mortgage
Acceptance Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual 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
principals;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this annual 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 officers 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: March 15, 2007 By: /s/ Robert L. Levy
-------------- ------------------
Robert L. Levy
Chief Financial Officer
78
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 Annual Report of American Mortgage Acceptance Company
(the "Company") on Form 10-K for the year ending December 31, 2006, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, James L. Duggins, Chief Executive Officer of the Company and I, Robert L.
Levy, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
By: /s/ James L. Duggins By: /s/ Robert L. Levy
-------------------- ------------------
James L. Duggins Robert L. Levy
Chief Executive Officer Chief Financial Officer
March 15, 2007 March 15, 2007
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
79