SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
Commission File Number 1-13237
CHARTERMAC
(Exact name of Registrant as specified in its Trust Agreement)
Delaware 13-3949418
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 317-5700
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
----- -----
As of October 31, 2005, 51,625,863 shares of the Registrant's shares of
beneficial interest were outstanding.
TABLE OF CONTENTS
CHARTERMAC
FORM 10-Q
PAGE
PART I
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures about Market Risks 37
Item 4. Controls and Procedures 38
PART II
Item 1. Legal Proceedings 39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 39
Item 3. Defaults Upon Senior Securities 39
Item 4. Submission of Matters to a Vote of Security Holders 39
Item 5. Other Information 39
Item 6. Exhibits 40
SIGNATURES 41
See accompanying notes to condensed consolidated financial statements.
2
ITEM 1. FINANCIAL STATEMENTS
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
September 30, December 31,
2005 2004
------------- -------------
ASSETS
Mortgage revenue bonds - at fair value $ 2,074,786 $ 2,100,720
Other investments 174,841 187,506
Cash and cash equivalents - including restricted cash of $35,107 and $25,879 140,947 97,166
Deferred costs - net of amortization of $16,436 and $11,566 21,219 28,559
Goodwill and intangible assets, net 474,887 416,282
Other assets 140,804 46,392
Loan to affiliate -- 4,600
Investments held by consolidated partnerships 2,851,625 2,527,455
Other assets of consolidated partnerships 564,552 328,559
----------- -----------
Total assets $ 6,443,661 $ 5,737,239
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Financing arrangements $ 1,228,394 $ 1,068,428
Preferred shares of subsidiary (subject to mandatory repurchase) 273,500 273,500
Notes payable 173,372 174,454
Accounts payable, accrued expenses and other liabilities 180,279 154,104
Notes payable and other liabilities of consolidated partnerships 1,487,394 1,307,093
----------- -----------
Total liabilities 3,342,939 2,977,579
----------- -----------
Minority interests in consolidated subsidiaries 270,888 271,419
----------- -----------
Preferred shares of subsidiary (not subject to mandatory repurchase) 104,000 104,000
----------- -----------
Partners' interests in consolidated partnerships 1,725,319 1,501,519
----------- -----------
Commitments and contingencies
Shareholders' equity:
Beneficial owners' equity:
4.4% Convertible CRA preferred shares; no par value (2,160 shares issued
and outstanding in 2005 and none issued and outstanding in 2004) 104,726 --
Convertible CRA shares; no par value (6,552 shares issued and
outstanding in 2005 and 2004) 106,481 108,745
Special preferred voting shares; no par value (14,960 shares issued
and outstanding in 2005 and 15,172 shares issued and outstanding in
2004) 150 152
Common shares; no par value (100,000 shares authorized; 51,842 shares
issued and 51,601 outstanding in 2005 and 51,363 shares issued and
51,229 outstanding in 2004) 762,421 773,165
Restricted shares granted (5,389) (7,922)
Treasury shares of beneficial interest - common, at cost (241 shares in
2005 and 134 shares in 2004) (5,449) (2,970)
Accumulated other comprehensive income 37,575 11,552
----------- -----------
Total shareholders' equity 1,000,515 882,722
----------- -----------
Total liabilities and shareholders' equity $ 6,443,661 $ 5,737,239
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Revenues:
Mortgage revenue bond interest income $ 36,482 $ 33,027 $ 110,221 $ 97,365
Other interest income 4,856 3,599 12,425 5,528
Fee income 24,369 16,529 58,952 46,445
Other revenues 5,985 2,463 15,504 6,809
Revenues of consolidated partnerships 7,349 3,766 19,403 6,556
--------- --------- --------- ---------
Total revenues 79,041 59,384 216,505 162,703
--------- --------- --------- ---------
Expenses:
Interest expense 14,758 8,297 40,598 22,424
Interest expense of consolidated partnerships 6,342 6,569 19,364 13,258
Interest expense - distributions to preferred shareholders of subsidiary 4,724 4,724 14,173 14,173
General and administrative 29,348 26,253 88,168 71,236
Depreciation and amortization 16,302 7,864 33,467 22,553
Loss on impairment of assets 803 610 1,902 610
Other expenses of consolidated partnerships 14,435 10,917 40,062 19,398
--------- --------- --------- ---------
Total expenses 86,712 65,234 237,734 163,652
--------- --------- --------- ---------
Loss before other income (7,671) (5,850) (21,229) (949)
Equity and other income 612 611 2,062 1,731
Gain on sale of loans and repayment of mortgage revenue bonds 3,962 566 10,886 5,863
Loss on investments held by consolidated partnerships (65,353) (46,434) (181,915) (95,111)
--------- --------- --------- ---------
Loss before allocations and income taxes (68,450) (51,107) (190,196) (88,466)
Income allocated to preferred shareholders of subsidiary (1,557) (1,556) (4,669) (2,386)
Minority interests in consolidated subsidiaries, net of tax (7,626) (7,432) (21,572) (20,252)
Loss allocated to partners of consolidated partnerships 91,295 70,174 255,628 141,992
--------- --------- --------- ---------
Income before income taxes 13,662 10,079 39,191 30,888
Income tax benefit 5,016 4,832 13,716 14,644
--------- --------- --------- ---------
Net income $ 18,678 $ 14,911 $ 52,907 $ 45,532
========= ========= ========= =========
Allocation of net income to:
4.4% Convertible CRA preferred shareholders $ 832 $ -- $ 832 $ --
Common shareholders 15,832 13,098 46,185 39,268
Convertible CRA shareholders 2,014 1,813 5,890 6,264
--------- --------- ========= ---------
Total $ 18,678 $ 14,911 $ 52,907 $ 45,532
========= ========= ========= =========
Net income per share:
Basic $ 0.31 $ 0.26 $ 0.90 $ 0.85
========= ========= ========= =========
Diluted $ 0.31 $ 0.26 $ 0.89 $ 0.84
========= ========= ========= =========
Weighted average shares outstanding:
Basic 58,059 57,708 57,927 53,794
========= ========= ========= =========
Diluted 61,040 58,112 59,135 54,220
========= ========= ========= =========
Dividends declared per share $ 0.41 $ 0.41 $ 1.23 $ 1.16
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
4
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine months Ended
September 30,
------------------------
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 52,907 $ 45,532
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on repayment of mortgage revenue bonds (1,930) (217)
Loss on impairment of assets 1,902 610
Depreciation and amortization 33,467 22,553
Income allocated to preferred shareholders of subsidiary 4,669 2,386
Income allocated to minority interests in consolidated
subsidiaries 21,572 20,252
Non-cash compensation expense 5,419 10,610
Other non-cash expense 3,344 2,102
Deferred taxes (12,312) (16,670)
Changes in operating assets and liabilities:
Mortgage servicing rights (9,719) (5,642)
Mortgage loans receivable (45,794) 6,333
Loan to affiliate 4,600 (15,361)
Deferred income 11,548 28,000
Other assets (35,599) (20,428)
Accounts payable, accrued expenses and other liabilities 956 85
--------- ---------
Net cash provided by operating activities 35,030 80,145
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Mortgage loans repaid 2,996 --
Repayments of mortgage revenue bonds and notes 84,210 36,245
Mortgage revenue bond acquisitions and fundings (225,159) (239,888)
Acquisitions, net of cash acquired (290) (919)
Loans to Capri Capital (8,011) (84,000)
Advances to partnerships (97,181) (133,078)
Collection of advances to partnerships 104,742 103,471
Deferred investment acquisition costs (1,312) (2,584)
Decrease (increase) in cash and cash equivalents -
restricted (8,552) 964
Other investing activities (10,625) 18,660
--------- ---------
Net cash used in investing activities (159,182) (301,129)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders (71,747) (59,997)
Distributions to preferred shareholders of subsidiary (4,739) (830)
Distributions to Special Common Unit and Special Membership
Unit holders (25,894) (19,869)
Proceeds from financing arrangements 315,310 147,085
Repayments of financing arrangements (155,360) (73,429)
Increase in notes payable (1,082) 23,388
Issuance of common shares (93) 110,802
Issuance of preferred subsidiary shares -- 104,000
Issuance of preferred shares 108,000 --
Proceeds from stock options exercised 248 309
Retirement of special preferred voting shares (2) (10)
Treasury stock purchases (2,479) (1,328)
Deferred financing costs (3,457) (9,697)
--------- ---------
Net cash provided by financing activities 158,705 220,424
--------- ---------
Net increase (decrease) in cash and cash equivalents 34,553 (560)
--------- ---------
Cash and cash equivalents at the beginning of the year 71,287 58,257
--------- ---------
Cash and cash equivalents at the end of the period $ 105,840 $ 57,697
========= =========
(continued)
See accompanying notes to condensed consolidated financial statements.
5
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine months Ended
September 30,
-----------------------------
2005 2004
----------- -----------
SUPPLEMENTAL INFORMATION:
Acquisition activity:
--------------------
Conversion of note receivable $ 70,000
Issuance of subsidiary equity 7,500
Decrease in minority interest (4,200)
Increase in mortgage servicing rights (40,974)
Increase in cash and cash equivalents - restricted (676)
Increase in other investments (7,787)
Increase in goodwill (31,641)
Increase in intangible assets (3,213)
Increase in other assets (6,239)
Increase in accounts payable, accrued expenses and other liabilities 5,549
Increase in deferred income 11,391
-----------
Net cash paid for acquisitions $ (290)
===========
Supplemental disclosure of non-cash activities relating to adoption of FIN 46R:
Decrease in mortgage revenue bonds $ 34,281
Increase in investments held by consolidated partnerships (2,394,398)
Increase in other assets of consolidated partnerships (287,410)
Increase in notes payable and other liabilities of consolidated partnerships 1,228,065
Increase in partners' interests of consolidated partnerships 1,419,462
-----------
$ --
===========
Restricted share grants $ 1,209 $ 59
=========== ===========
Conversion of SCUs to common shares $ 3,271 $ 17,789
=========== ===========
Issuance of SMUs in exchange for investment $ 11,576
===========
See accompanying notes to condensed consolidated financial statements.
6
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
CharterMac, its wholly owned and majority owned subsidiary statutory trusts,
other non-trust subsidiary companies it controls and entities consolidated
pursuant to the adoption of FASB Interpretation No. 46(R) ("FIN 46(R)"). All
intercompany accounts and transactions have been eliminated in consolidation.
Unless otherwise indicated, "the Company", "we" and "us", as used throughout
this document, refers to CharterMac and its consolidated subsidiaries. For the
entities identified throughout this document as "consolidated partnerships", the
financial information included is as of and for the periods ended June 30, 2005,
the latest practical date available. As we began consolidating such partnerships
upon our adoption of FIN 46(R) as of March 31, 2004, the operating results for
the first nine months of 2004 only include those of these consolidated
partnerships for a six-month period.
The accompanying interim financial statements have been prepared without audit.
In the opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial statements of the interim periods. However, given the highly
seasonal nature of our business, the operating results for the interim periods
may not be indicative of the results for the full year.
Certain information and footnote disclosures normally included in the annual
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") have been
condensed or omitted. It is suggested that these condensed consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in our Form 10-K for the year ended
December 31, 2004.
Our annual report on Form 10-K for the year ended December 31, 2004, contains a
summary of our significant accounting policies. There have been no material
changes to these items since December 31, 2004, nor have there been any new
accounting pronouncements pending adoption that would have a significant impact
on our condensed consolidated financial statements.
We are responsible for the unaudited condensed consolidated financial statements
included in this document. Our condensed consolidated financial statements are
prepared on the accrual basis of accounting in accordance with 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 2005
presentation, including the reclassification of deferred charges and deferred
revenue accounts associated with our mortgage revenue bond portfolio that are
now incorporated within the calculation of unrealized gain on investments. The
reclassification for December 31, 2004, reduced deferred charges by $27.9
million, reduced deferred revenues by $10.6 million, and reduced accumulated
other comprehensive income by $17.3 million (see Note 13).
NOTE 2 - ACQUISITIONS
In the first quarter of 2005, we purchased the remaining 13% of CharterMac
Mortgage Capital Corporation ("CMC") that we had not previously owned and made
the final payments under the terms of the original purchase agreement. The total
purchase price of these two items was $7.9 million, $7.5 million of which we
paid in cash. This transaction resulted in $3.6 million of additional goodwill.
Effective March 1, 2005, we purchased 100% of the ownership interests of Capri
Capital Limited Partnership ("CCLP"). The initial purchase price was $70.0
million plus $1.8 million of acquisition costs. Subsequently, the sellers earned
$15.0 million of additional consideration based on the 2004 financial results of
CCLP's mortgage banking business. The initial purchase price of $70.0 million
was paid via conversion into equity of an existing loan to CCLP and its
affiliates (collectively "Capri") (see Note 4). Of the additional $15.0 million
contingent consideration, we issued subsidiary equity units for half of the
amount (see Note 9), and paid all but approximately $1.7 million (subject to
contractual hold backs) of the balance in cash. Operations of CCLP were merged
into those of CMC.
The acquisition of CCLP was accounted for as a purchase and, accordingly, the
results of operations are included in the condensed consolidated financial
statements from the acquisition date. We allocated our cost of the acquisition
on the basis of the estimated fair values of the assets acquired and liabilities
assumed. The excess of the purchase price over the net of the amounts assigned
to the assets acquired and liabilities assumed was recognized as goodwill of
approximately $28.9 million. Certain allocations are preliminary as of September
30, 2005, and may be refined as we gather further information.
7
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
Pro forma financial results for CCLP are not presented, as the acquisition was
not material to our assets, revenues or net income.
NOTE 3 - MORTGAGE REVENUE BONDS
The following table summarizes our mortgage revenue bond portfolio:
September 30, December 31,
(In thousands) 2005 2004
------------------------------------------ ------------- -----------
Unamortized cost basis $ 2,247,966 $ 2,116,213
Gross unrealized gains 56,583 41,643
Gross unrealized losses (18,589) (22,849)
----------- -----------
Subtotal/fair value 2,285,960 2,135,007
Less: eliminations (1) (211,174) (34,287)
----------- -----------
Total fair value per balance sheet $ 2,074,786 $ 2,100,720
=========== ===========
(1) These bonds are either recorded as liabilities on the balance sheets of
certain consolidated partnerships or are recorded as liabilities of real
estate owned and are therefore eliminated in consolidation.
The fair value and gross unrealized losses of our mortgage revenue bonds,
aggregated by length of time that individual bonds have been in a continuous
unrealized loss position, at September 30, 2005, is summarized in the table
below:
Less than 12 Months
(Dollars in thousands) 12 Months or More Total
----------------------- ----------- ----------- ----------
Number of bonds 58 76 134
Fair value $326,893 573,768 900,661
Gross unrealized loss $ 7,253 11,336 18,589
The unrealized losses related to these mortgage revenue bonds are due primarily
to changes in interest rates, in that we calculate present values based upon
future cash flows from the bonds and discount these cash flows at the current
rate on our recent bond issuances; as rates rise, the fair value of our
portfolio decreases. We have the intent and ability to hold these bonds to
recovery and have therefore concluded that these declines in value are
temporary.
The following summarizes the maturity dates of our mortgage revenue bonds, all
of which have fixed interest rates:
Weighted
Outstanding Average
(In thousands) Bond Amount Fair Value Interest Rate
---------------------------------- ----------- ---------- -------------
Due in less than one year $ 13,611 $ 12,031 8.52%
Due between one and five years 19,602 19,443 6.20
Due after five years 2,215,288 2,254,486 6.64
---------- ---------- ----
Total / Weighted Average 2,248,501 2,285,960 6.65%
====
Less: eliminations (1) (223,125) (211,174)
---------- ----------
Total $2,025,376 $2,074,786
========== ==========
(1) These bonds are either recorded as liabilities on the balance sheets of
certain consolidated partnerships or are recorded as liabilities of real
estate owned and are therefore eliminated in consolidation.
8
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
The following table summarizes our acquisition activity and additional fundings
to previously acquired mortgage revenue bonds for the nine months ended
September 30, 2005.
Weighted Weighted
Average Average
Outstanding Construction Permanent
(In thousands) Bond Amount Interest Rate Interest Rate
---------------------------------- ----------- ------------- -------------
Construction/rehabilitation properties $ 213,608 5.68% 6.42%
Additional funding of existing bonds $ 11,551 5.42% 6.61%
During the nine months ended September 30, 2005, eleven mortgage revenue bonds
were repaid generating net proceeds of approximately $65.5 million. The bonds
had an aggregate net book value of approximately $63.6 million, resulting in a
gain of approximately $1.9 million.
At September 30, 2005, $2.2 billion of mortgage revenue bonds were securitized
or pledged as collateral for our borrowing facilities. Fourteen of these bonds,
with a fair value of approximately $177.5 million, are eliminated in
consolidation as noted in the tables above.
In May 2005, an affiliate of ours foreclosed upon the properties underlying
three of our mortgage revenue bonds which had an aggregate carrying value of
$34.5 million as of September 30, 2005. We have obtained valuations as of the
foreclosure date indicating that the fair values of the properties are in excess
of our carrying amounts. As a result, management has concluded that there was no
impairment related to these foreclosures. We are actively marketing the
properties for sale and, as such, the properties are classified as Real Estate
Owned - Held for Sale within Other Assets on the condensed consolidated balance
sheet.
In the third quarter of 2005, we agreed in principle to revise the terms of a
mortgage revenue bond. In connection with this agreement, we recognized an
impairment of the asset and recorded a charge of $803,000.
See also Note 12 regarding the status of other mortgage revenue bonds in our
portfolio for which we have assumed the general partner interest in the
associated property-level partnership and the impairment charge related to one
of those bonds.
NOTE 4 - OTHER INVESTMENTS
Investments other than mortgage revenue bonds consisted of:
September 30, December 31,
(In thousands) 2005 2004
-------------------------------------------------- ------------ -----------
Investment in equity interests in LIHTC properties $ 32,331 $ 40,132
Investment in properties under development 3,397 3,157
Investment in ARCap 19,054 19,054
Capri loans and preferred stock 26,092 84,000
Mortgage loans receivable 73,274 27,480
Other investments 20,693 13,683
-------- --------
Total other investments $174,841 $187,506
======== ========
In July 2004, our subsidiary provided an interim loan of $84.0 million ("Interim
Loan") to Capri, which bore interest at a rate of 11.5% per year and matured on
January 15, 2005. In the first quarter of 2005, we extended and converted the
loan, adding $6.0 million to the loan amount. Upon conversion, we held two
participating loans, one of which allowed us to participate in the cash flows
of, and in turn was convertible into a 100% ownership interest in, CCLP. The
other allows us to participate in the cash flows of, and is convertible into a
49% ownership interest in, Capri Capital Advisors ("CCA"), a pension fund
advisory business. In the first quarter of 2005, we converted the CCLP loan and
acquired the business as an addition to our Mortgage Banking segment (see Note
2). Management currently expects to convert the CCA loan into an equity
ownership prior to the end of the loan term, no later than August 2006.
9
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
In August 2005, in connection with an acquisition CCA consummated, we issued
approximately $4.1 million of subsidiary equity (see Note 9) and received a
preferred interest in CCA. In addition, we have advanced approximately $2.0
million to CCA through September 30, 2005, in connection with this acquisition.
The preferred interest and advances earn a 10.0% rate of return.
"Other investments" includes $5.0 million invested in a fund sponsored by CCA.
NOTE 5 - GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consisted of the following:
September 30, December 31,
(In thousands) 2005 2004
------------------------------ ------------ -----------
Goodwill $237,378 $206,397
Mortgage servicing rights, net 69,413 32,366
Other intangible assets, net 168,096 177,519
-------- --------
Total $474,887 $416,282
======== ========
A. GOODWILL
The following table provides information regarding goodwill by segment:
Fund Mortgage
(In thousands) Management Banking Total
----------------------------- ---------- --------- ---------
Balance at December 31, 2004 $ 200,153 $ 6,244 $ 206,397
Additions (see Note 2) -- 32,486 32,486
Reductions (1,505) -- (1,505)
--------- --------- ---------
Balance at September 30, 2005 $ 198,648 $ 38,730 $ 237,378
========= ========= =========
The reduction in Fund Management goodwill pertained to the conversion of SCUs
(see Note 9), the deferred tax impact of which served to effectively lower the
purchase price of Related Capital Company LLC ("RCC").
The increase in Mortgage Banking goodwill relates to the acquisition of CCLP and
the purchase of the remainder of CMC (see Note 2).
10
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
B. OTHER INTANGIBLE ASSETS
The components of other identified intangible assets are as follows:
Estimated
Useful
Life Gross Accumulated
(In thousands) (in Years) Carrying Amount Amortization Net
----------------------------------------- --------- ------------------------- ------------------------- -------------------------
September 30, December 31, September 30, December 31, September 30, December 31,
2005 2004 2005 2004 2005 2004
------------ ----------- ------------ ----------- ------------ -----------
Amortized identified intangible assets:
Trademarks and trade names 21.0 $ 25,100 $ 25,100 $ 2,234 $ 1,338 $ 22,866 $ 23,762
Partnership service contracts 9.4 47,300 47,300 9,453 5,661 37,847 41,639
Transactional relationships 16.7 103,000 103,000 15,757 9,436 87,243 93,564
General partner interests 9.0 5,100 5,100 1,059 634 4,041 4,466
Joint venture developer relationships 5.0 4,800 4,800 1,795 1,075 3,005 3,725
Mortgage banking broker relationships 5.0 1,080 -- 126 -- 954 --
Other identified intangibles 9.3 4,427 4,427 3,060 2,703 1,367 1,724
---- -------- -------- -------- -------- -------- --------
Subtotal/weighted average life 14.7 190,807 189,727 33,484 20,847 157,323 168,880
====
Unamortized identified
intangible assets:
Mortgage banking licenses and approvals 10,773 8,639 -- -- 10,773 8,639
-------- -------- -------- -------- -------- --------
Total identified intangible assets $201,580 $198,366 $ 33,484 $ 20,847 $168,096 $177,519
======== ======== ======== ======== ======== ========
2005 2004
-------- --------
Amortization expense recorded
for the nine months ended September 30, $ 12,637 $ 12,511
======== ========
The amortization of "other identified intangibles" (approximately $477,000 per
year) is included as a reduction to mortgage revenue bond interest income as
they pertain to the acquisition of such bond investments.
NOTE 6 - FINANCING ARRANGEMENTS AND NOTES PAYABLE
In March 2005, we terminated our $100.0 million fixed-rate securitization and
remarketed the borrowings under the Merrill Lynch P-FLOATs/RITESSM program.
Our $75.0 million secured revolving tax-exempt bond warehouse line expired on
March 31, 2005. There were no outstanding borrowings when it expired.
Our RCC warehouse line was extended until October 2006. The terms of the renewed
line are similar to previous terms except that the rate was reduced to LIBOR
plus 1.70% from LIBOR plus 2.00%.
Our $91.0 million Capri acquisition line was extended pending its replacement
with a new facility from the same lender.
NOTE 7 - DERIVATIVE INSTRUMENTS
As of September 30, 2005, we had interest rate swaps with an aggregate notional
amount of $589.3 million, which are designated as cash flow hedges on the
variable interest payments on our floating rate securitizations. These swaps are
recorded at fair market value, with changes in fair market value recorded in
accumulated other comprehensive income to the extent the hedges are effective in
achieving offsetting cash flows.
We entered into our first swap with a notional amount of $50.0 million in 2001.
We entered into several additional swap agreements during 2003 and 2004, which
had inception dates of January 2005 and notional amounts totaling $450.0
million. We also entered into seven swaps with aggregate notional amounts of
approximately $89.3 million during 2004 and 2005, which went into effect in the
same periods. During the period between the dates we entered into the swaps and
the effective dates, we measured their effectiveness using the hypothetical swap
method. There was no ineffectiveness in the hedging relationship of any of our
swaps during the nine months ended September 30, 2005.
11
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
We expect all of the swaps will be highly effective in achieving offsetting
changes in cash flows throughout their terms.
At September 30, 2005, those interest rate swaps for which we were in a net
liability position were recorded in accounts payable, accrued expenses and other
liabilities in the amount of $5.6 million. Those swaps for which we are in a net
asset position are recorded in other assets in the amount of $4.6 million.
Interest expense includes approximately $2.0 million and $4.9 million for the
three and nine months ended September 30, 2005, respectively, and approximately
$356,000 and $1.4 million for the three and nine months ended September 30,
2004, respectively, for amounts paid or payable under the swap agreements.
We estimate that approximately $2.3 million of the net unrealized loss included
in accumulated other comprehensive income will reduce interest expense within
the next twelve months.
NOTE 8 - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities consisted of the
following:
September 30, December 31,
(In thousands) 2005 2004
--------------------------------- ------------ ------------
Deferred income $ 69,309 $ 48,157
Distributions payable 39,771 38,859
Deferred taxes 14,463 29,898
Other 56,736 37,190
-------- --------
Total $180,279 $154,104
======== ========
NOTE 9 - MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES
Minority interests in consolidated subsidiaries consisted of the following:
September 30, December 31,
(In thousands) 2005 2004
--------------------------------- ------------ -------------
Convertible Special Common Units
("SCUs") of a subsidiary $259,362 $267,025
Convertible Special Membership
Units ("SMUs") of a subsidiary 11,526 --
CMC -- 4,394
-------- --------
Total $270,888 $271,419
======== ========
Income allocated to minority interests was as follows:
Three Months Nine months
Ended Ended
September 30, September 30,
---------------------- ----------------------
(in thousands) 2005 2004 2005 2004
-------- -------- -------- --------
Convertible SCUs $ 7,467 $ 7,577 $ 21,358 $ 20,032
Convertible SMUs 159 -- 214 --
CMC -- (145) -- 220
-------- -------- -------- --------
Total $ 7,626 $ 7,432 $ 21,572 $ 20,252
======== ======== ======== ========
A majority of the convertible SMUs were issued in connection with the CCLP
acquisition and the minority interest in CMC was purchased during the first
quarter of 2005 (See Note 2). Additional SMUs were issued in connection with a
preferred investment in CCA (see Note 4).
12
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
In the first nine months of 2005, the holders of approximately 252,000 SCUs
converted the units to an equivalent number of common shares, and the related
special preferred voting shares were redeemed at par.
NOTE 10 - SHAREHOLDERS' EQUITY
In July 2005, we issued approximately 2.2 million 4.4% Cumulative Perpetual
Convertible Community Reinvestment Act Preferred Shares ("4.4% Convertible CRA
Preferred Shares") for gross proceeds of $108.0 million. Net of underwriters
fees and expenses, our net proceeds were approximately $104.7 million. The
shares carry a cumulative preferred 4.4% return based upon the liquidation
amount of $50 per share and have no stated maturity. Beginning July 2008,
holders of the shares may convert them into approximately 3.9 million common
shares, and we may also redeem the shares at our option. The shares are also
subject to remarketing provisions beginning in July 2015. These shares have no
voting rights. Meridian Investments acted as placement agent for this offering.
NOTE 11 - RELATED PARTY TRANSACTIONS
General and administrative expense includes shared services fees paid or payable
to The Related Companies, L.P. ("TRCLP"), a company controlled by our chairman.
These fees totaled $122,000 and $392,000 for the three and nine months ended
September 30, 2005, respectively, and $1.2 million and $3.1 million for the
three and nine months ended September 30, 2004, respectively.
In addition, a subsidiary of TRCLP earned fees for performing property
management services for various properties held in investment funds which we
manage. These fees, which are included in other expenses of consolidated
partnerships, totaled approximately $839,000 and $2.2 million for the three and
nine months ended September 30, 2005, respectively, and approximately $604,000
and $1.2 million for the three and nine months ended September 30, 2004,
respectively.
We collect asset management, incentive management and expense reimbursement fees
from American Mortgage Acceptance Company ("AMAC"), an affiliated, publicly
traded real estate investment trust that we manage. These fees, which are
included in fund sponsorship income, totaled approximately $2.0 million and $3.5
million for the three and nine months ended September 30, 2005, respectively,
and approximately $611,000 and $1.8 million for the three and nine months ended
September 30, 2004, respectively.
In June 2004, we entered into an unsecured revolving credit facility (the
"Revolving Facility") with AMAC to provide it up to $20.0 million, bearing
interest at LIBOR plus 3.0%, which is to be used by AMAC to purchase new
investments. The Revolving Facility expires in June 2006. In the opinion of
management, the terms of this facility are consistent with those of loan
transactions with independent third parties. As of September 30, 2005, there
were no outstanding advances to AMAC under this facility. Interest income earned
from this facility for the nine months ended September 30, 2005, was
approximately $73,000, all of which was recorded in the first quarter of 2005
and for the three and nine months ended September 31, 2004, there was
approximately $26,000 in income earned.
NOTE 12 - PRS / CRG
PRS Companies ("PRS") and Capitol Realty Group ("CRG") are sponsors of certain
Low-Income Housing Tax Credit ("LIHTC") partnerships for which we hold mortgage
revenue bonds and/or to which investment funds we sponsor have contributed
equity. Information with respect to these partnerships is set forth in the table
below. A construction company affiliate of PRS also served as general contractor
for those partnerships.
After PRS approached us to discuss financial difficulties in its construction
company, we conducted a thorough review regarding its financial condition (and
that of its guarantors) and determined that the PRS construction company was
experiencing significant financial difficulties, so that the transfer of control
of the PRS and CRG general partnership interests to entities affiliated with us
- and the orderly termination of unfulfilled construction contracts - was in our
best interest. We could then install new general contractors to complete
construction and capable property managers to complete leasing. We determined
that, if we did not obtain control of the partnerships, a bankruptcy filing by
or against PRS would be adverse to our interests as it would likely result in
the reduction or cessation of bond payments, could possibly endanger our various
tax credit equity investments, and would result in delays in construction
completion, the financial impact of which could not be quantified.
In April 2005, affiliates of ours acquired by assignment the general partnership
interests owned by PRS in seven of the "PRS Partnerships" indicated in the table
below. We sought control of the PRS Partnerships because PRS' financial
difficulties caused construction finance shortfalls that created liquidity
problems for those partnerships. As a result, settlement agreements were entered
into by and amongst the PRS Partnerships, the PRS project owners, the
guarantors, various affiliates of ours and other third parties (the "PRS
13
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
Settlements"). The PRS Settlements provide for, among other things:
o the termination of the PRS construction contracts;
o the settlement of construction claims and release of liens;
o the termination of management agreements for the PRS projects;
o the assignment of the development agreements to our affiliates;
o the assignment of the interest in the general partner of each of the PRS
Partnerships to our affiliates;
o the termination of PRS' obligations under the payment and performance bonds
for each project; and
o mutual releases by and amongst the PRS Settlement parties.
The PRS Settlement Agreements are, in essence, a complete cessation of business
between us and PRS.
Also in April, affiliates of ours acquired by assignment the general partnership
interests owned by CRG in five of the "CRG Partnerships" indicated in the table
below. We sought control of the CRG Partnerships because PRS was the
construction general contractor for those partnerships and PRS' financial
difficulties caused construction finance shortfalls that have created liquidity
problems for those partnerships. We entered into settlement agreements by and
amongst the CRG Partnerships, the CRG project owners, the guarantors, various
affiliates of ours and other third parties (the "CRG Settlements"). The CRG
Settlement Agreements provide for, among other things:
o the termination of the PRS construction contracts;
o the assignment of each of the CRG project's development agreements to an
affiliate of CRG subject to reassignment to CRG as discussed below;
o a $5.0 million non-revolving line of credit from us to be used to stabilize
the CRG Partnerships which is collateralized by contractual rights to
development fees to CRG and its affiliates to receive fees and other
consideration. This includes interim loans to satisfy amounts due to
subcontractors, material suppliers and other vendors providing materials
and/or services on the CRG projects through September 30, 2005, we had
advanced $2.2 million on this line of credit;
o reaffirmation of various guarantee agreements;
o the assignment of the interests in the CRG Partnerships to our affiliates;
o an operating agreement, whereby an affiliate of CRG will operate the CRG
projects subject to our discretion; and
o various releases by and amongst the CRG Settlement parties, excluding any
reaffirmation of guaranty agreements and any other exclusions set forth in
the CRG Settlement Agreements.
The CRG Settlement Agreements also provide that the general partnership
interests will be returned to CRG if they provide us with a letter of credit to
secure advances made and/or such advances are paid in full by a date certain.
Additionally, there were two other projects, for which PRS was the construction
company--O'Fallon and Peine Lakes (the "GCG Partnerships"). With respect to the
O'Fallon project, in August 2005 the Gundaker Commercial Group, Inc and its
affiliates ("GCG") and our affiliates negotiated a letter of intent which
provides for:
o additional mortgage debt financing by an affiliate of ours;
o the assignment of a portion of our affiliates interest in the O'Fallon
Partnership to an affiliate of GCG;
o the execution of a new construction contract; and
o amendments to several fee agreements.
With respect to the Peine Lakes project, it continues to move along its
construction phase and is now approximately 90% complete. GCG has agreed to fund
approximately $1.0 million into the Peine Partnership to aid in any cost
overruns and any amounts due and owing as a result of the action of PRS on the
project.
In addition to the PRS Partnerships, CRG Partnerships and CGC Partnerships
described above, we own bonds that finance other partnerships in which PRS was
the general partner or in which CRG is the general partner and PRS was the
construction general contractor. These partnerships are also summarized in the
table below. On those deals in which our funds are not the equity sponsor, we
will look to the respective equity investor to take control, complete
construction and stabilize the partnerships. Absent a satisfactory resolution,
we may exercise our available remedies to protect our investments. In those
situations, there is substantial equity in the form of LIHTCs in addition to the
real estate, both of which are our collateral.
There can be no assurance that a bankruptcy by or against PRS or its affiliates
may not give rise to additional claims concerning these partnerships.
14
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
Our potential exposure falls into three categories as follows:
o CASH REQUIRED TO BRING THE PROPERTIES TO BREAK-EVEN OPERATION - Our current
estimate of the maximum amount of cash that we may need to provide to bring
the properties to break-even operation, taking into account delays in
construction, is approximately $10.0 million. This estimate is based upon
our initial analyses and information provided by the developer, and may
increase due to unforeseen construction delays and other factors, while the
amount may be reduced by additional contributions by investors (which may
generate additional tax credits), reserves at the property level,
syndication of state tax credits or other factors. Through September 30,
2005, we had advanced $5.4 million to the partnerships. These advances, and
additional loans, will be assessed periodically for collectibility and the
impact on the potential impairment of existing mortgage revenue bonds.
Given existing loan-to-value ratios and the variability of the likelihood
of funding, we can not yet determine the ultimate amount of any such loans.
At present, we do not anticipate that any such loans would require a charge
to expense.
o POTENTIAL IMPACT ON MORTGAGE REVENUE BONDS - Our current estimate, based on
available information, is that expected cash flows from the underlying
properties are sufficient to provide debt service. As a result, we do not
believe that there is other-than-temporary impairment of any of the
affected bonds, except as noted below.
o POTENTIAL COST TO PROVIDE SPECIFIED YIELDS - As noted in the table below,
11 of the partnerships in question are part of equity funds for which we
are obligated to provide specified yields. As construction delays are
likely to reduce the expected yields of the properties themselves,
performance of the funds is likely to be impacted as well. The obligations,
however, provide for expected yields on pools of properties, some of which
are performing above expected levels and the funds themselves often provide
for adjustors that may mitigate the negative impact that would arise from
the construction delays over the guarantee period covered by the
agreements. Our current estimate given these factors, and assuming that the
property level partnerships meet their obligations under existing
partnership agreements, is that no exposure under these agreements is
probable at this time.
As a result of our analysis of the affected properties, we determined that the
development of one property in the early stages of construction should not be
continued. We plan to exercise our right to foreclosure as holder of the first
mortgage and will be able to recover much of the funds advanced through the
mortgage revenue bond as well as take ownership of the underlying land. Based
upon the funds available to recover and the estimated value of the land, we
recognized a write-down of approximately $1.1 million in the second quarter of
2005. This property was included in a credit enhanced RCC sponsored fund, and we
exercised a right of substitution to remove it from that fund and replaced it
with other properties.
We have consolidated the partnerships for which we have assumed the general
partnership interests (except for the GCG Partnerships, which do not give our
affiliates operational control of the partnerships) effective April 2005.
15
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
The partnerships in question are summarized as follows:
(In thousands)
Fair Value of
CharterMac Mortgage
Holds or RCC Loan Revenue
Will Hold Sponsored Included in Third Amounts Bonds
Mortgage Fund is Credit RCC Parties Upon Full Oustanding at
Revenue Equity Enhanced Holds GP Provided Draw September 30,
Number Bond Partner Funds Interest Equity Down 2005
-------- ---------- ---------- ------------ -------- -------- ---------- -------------
PRS
PARTNERSHIPS
Construction 3 3 2 2 2 1 $ 30,700 $ 23,007
Lease-Up 8 7 4 2 4 4 91,400 89,144
Rehab 2 2 1 1 1 1 30,400 30,251
Stabilized 2 2 -- -- -- 2 18,835 18,822
----------------------------------------------------------------------------------------------------------
Subtotal PRS
Deals 15 14 7 5 7 8 171,335 161,224
----------------------------------------------------------------------------------------------------------
CRG
PARTNERSHIPS
Construction 2 2 2 -- 2 -- 17,680 --
Lease-Up 3 3 3 2 -- -- 8,300 7,897
Rehab 3 3 3 3 3 -- 71,650 69,496
Stabilized -- -- -- -- -- -- -- --
----------------------------------------------------------------------------------------------------------
Subtotal CRG
Deals 8 8 8 5 5 -- 97,630 77,393
----------------------------------------------------------------------------------------------------------
GCG
PARTNERSHIPS
Construction 2 2 2 1 -- -- 27,770 15,010
Lease-Up -- -- -- -- -- -- -- --
Rehab -- -- -- -- -- -- -- --
Stabilized -- -- -- -- -- -- -- --
----------------------------------------------------------------------------------------------------------
Subtotal GCG
Deals 2 2 2 1 -- -- 27,770 15,010
----------------------------------------------------------------------------------------------------------
Total 25 24 17 11 12 8 $296,735 $253,627
==========================================================================================================
NOTE 13 - COMPREHENSIVE INCOME
Comprehensive income for the nine months ended September 30, 2005 and 2004, was
as follows:
Nine months Ended
September 30,
----------------------
(In thousands) 2005 2004
------------------------------------------------------------------ -------- --------
Net income $ 52,907 $ 45,532
Net unrealized gain (loss) on interest rate derivatives 2,296 (4,113)
Net unrealized gain on marketable securities 29 --
Net unrealized gain (loss) on mortgage revenue bonds:
Unrealized gain(loss) during the period 25,629 (15,714)
Reclassification adjustment for net gain included in net income (1,930) (217)
-------- --------
Comprehensive income $ 78,931 $ 25,488
======== ========
16
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
NOTE 14 - EARNINGS PER SHARE
For basic EPS, the number of shares includes common and Convertible Community
Reinvestment Act Preferred Shares ("Convertible CRA Shares"), as the Convertible
CRA Shares have the same economic benefits as common shares, and income
represents net income less dividends for the 4.4% Convertible CRA Preferred
Shares.
Diluted EPS 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 and unvested
share grants is calculated using the treasury stock method. The dilutive effect
of 4.4% Convertible CRA Preferred Shares and our subsidiaries' SCUs and SMUs is
calculated using the "if-converted method". The SCUs and SMUs are antidilutive,
because while the shares are convertible on a one-to-one basis, the dividends
paid are greater than the dividends paid per common share.
Three Months Ended September 30, 2005 Nine months Ended September 30, 2005
------------------------------------- ------------------------------------
(In thousands, except per share amounts) Income Shares Per Share Income Shares Per Share
---------------------------------------- -------- ------ --------- -------- ------ ---------
Basic EPS $17,846 58,059 $ 0.31 $52,075 57,927 $ 0.90
======== ========
Assumed conversion of 4.4% 832 2,674 832 901
Convertible CRA Preferred Shares
Effect of other dilutive securities -- 307 -- 307
------- ------ ------- ------
Diluted EPS $18,678 61,040 $ 0.31 $52,907 59,135 $ 0.89
======= ====== ======== ======= ====== ========
Three Months Ended September 30, 2005 Nine months Ended September 30, 2005
------------------------------------- ------------------------------------
Income Shares Per Share Income Shares Per Share
-------- ------ --------- -------- ------ ---------
Basic EPS $14,911 57,708 $ 0.26 $45,532 53,794 $ 0.85
======== ========
Effect of other dilutive securities -- 404 -- 426
------- ------ ------- ------
Diluted EPS $14,911 58,112 $ 0.26 $45,532 54,220 $ 0.84
======= ====== ======== ======= ====== ========
NOTE 15 - BUSINESS SEGMENTS
We operate in four business segments:
1. Portfolio Investing, which includes subsidiaries that invest in primarily
tax-exempt first mortgage revenue bonds issued by various state or local
governments, agencies or authorities and other investments designed to
produce federally tax-exempt income. The mortgage revenue bonds are used to
finance the new construction, substantial rehabilitation, acquisition, or
refinancing of affordable multifamily housing throughout the United States.
2. Fund Management, which includes:
o Subsidiaries that sponsor real estate equity investment funds that
primarily invest in LIHTC properties. In exchange for sponsoring and
managing these funds, we receive fee income for providing acquisition,
asset management, underwriting, origination and other services;
o A subsidiary which provides advisory services to AMAC, an affiliated,
publicly traded real estate investment trust; and
o Subsidiaries that participate in credit enhancement transactions, including
providing credit enhancement for mortgage loans and providing specified
returns to investors in LIHTC equity funds, in exchange for fees.
3. Mortgage Banking, which includes subsidiaries that originate and service
primarily multifamily mortgage loans on behalf of third parties, primarily:
o Fannie Mae;
o the Federal Home Loan Mortgage Corporation ("Freddie Mac");
o the Federal Housing Administration ("FHA"); and
o insurance companies and conduits.
In exchange for these origination and servicing activities, we receive
origination and servicing fees.
4. Consolidated Partnerships, primarily the LIHTC equity funds we sponsor
through the Fund Management segment's subsidiaries and which we are
required to consolidate in accordance with FIN 46(R), as well as other
partnerships we control but in which we have virtually no equity interest.
17
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
Segment results include all direct and contractual revenues and expenses of each
segment and allocations of indirect expenses based on specific methodologies.
These reportable segments are strategic business units that primarily generate
revenue streams that are distinctly different and are generally managed
separately.
In prior periods we had eliminated intersegment transactions from the results of
the segment earning profits from such transactions. We have adjusted our
presentation to reflect the full operations of each segment to better reflect
the true operations of each business. We have reclassified prior years' segment
results accordingly.
The following table provides more information regarding our segments:
Three Months Ended Nine months Ended
September 30, September 30,
------------------------ ------------------------
(In thousands) 2005 2004 2005 2004
--------- --------- --------- ---------
REVENUES
Portfolio Investing $ 43,509 $ 36,558 $ 126,007 $ 103,324
Fund Management 32,080 25,729 83,104 63,573
Mortgage Banking (1) 13,424 4,979 30,856 15,515
Consolidated Partnerships (2) 7,349 3,765 19,403 6,555
Elimination of intersegment transactions (17,321) (11,647) (42,865) (26,264)
--------- --------- --------- ---------
Consolidated $ 79,041 $ 59,384 $ 216,505 $ 162,703
========= ========= ========= =========
NET INCOME BEFORE ALLOCATIONS TO EQUITY HOLDERS
Portfolio Investing $ 22,740 $ 25,745 $ 73,278 $ 73,688
Fund Management 5,972 120 5,284 (5,704)
Mortgage Banking (1) (731) (1,203) 2,975 2,236
Consolidated Partnerships (2) (8) -- (8) --
Elimination of intersegment transactions (404) (871) (1,924) (2,521)
--------- --------- --------- ---------
Consolidated 27,569 23,791 79,605 67,699
Income allocated to minority interests (7,626) (7,432) (21,572) (20,252)
Income allocated to preferred shareholders (6,281) (6,280) (18,842) (16,559)
Income tax benefit 5,016 4,832 13,716 14,644
--------- --------- --------- ---------
Consolidated net income $ 18,678 $ 14,911 $ 52,907 $ 45,532
========= ========= ========= =========
DEPRECIATION AND AMORTIZATION
Portfolio Investing $ 2,941 $ 841 $ 5,094 $ 2,592
Fund Management 4,694 4,616 13,906 13,855
Mortgage Banking (1) 8,667 2,407 14,467 6,106
Consolidated Partnerships (2) -- -- -- --
Elimination of intersegment transactions -- -- -- --
--------- --------- --------- ---------
Consolidated $ 16,302 $ 7,864 $ 33,467 $ 22,553
========= ========= ========= =========
September 30, December 31,
2005 2004
------------ ------------
IDENTIFIABLE ASSETS AT END OF PERIOD
Portfolio Investing $ 5,219,732 $ 4,808,449
Fund Management 799,339 767,339
Mortgage Banking (1) 238,040 90,851
Consolidated Partnerships (2) 3,416,177 2,856,014
Elimination of intersegment balances (3,229,627) (2,785,414)
----------- -----------
Consolidated $ 6,443,661 $ 5,737,239
=========== ===========
(1) Includes CCLP beginning March 1, 2005.
(2) Consolidated beginning March 31, 2004.
18
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
NOTE 16 - COMMITMENTS AND CONTINGENCIES
FORWARD TRANSACTIONS
At September 30, 2005, our Mortgage Banking subsidiaries had forward commitments
of approximately $271.0 million for mortgages to be funded in 2005 and later. As
each lending commitment has an associated sale commitment, the fair values of
these commitments offset each other and, as a result, we record no asset or
liability. In addition, those subsidiaries had commitments to sell mortgages
totaling $197.9 million. Approximately $73.3 million of this amount was funded
as of September 30, 2005, and is included in Other Investments as Mortgage Loans
Receivable. The balance of approximately $124.6 million is to be funded later in
2005, with the exception of two construction loans of $9.4 million, which will
be funded in 2006.
We have entered into transactions to purchase mortgage revenue bonds at
predetermined prices and interest rates, but only if construction of the
property is completed. These forward commitments create derivative instruments
under SFAS No. 133, which have been designated as a cash flow hedge of the
anticipated funding of the mortgage revenue bonds and are recorded at fair
value, with changes in fair value recorded in other accumulated comprehensive
income until the mortgage revenue bonds are funded. The total potential amount
we could be required to fund is $165.2 million.
Additionally, we have certain other bonds that we fund on an as needed basis.
The remaining balance to be funded on these drawdown bonds is approximately $2.8
million at September 30, 2005.
MORTGAGE BANKING LOSS SHARING AGREEMENT
Under a master loss sharing agreement with Fannie Mae, we assume responsibility
for a portion of any loss that may result from borrower defaults, based on
Fannie Mae loss sharing formulas. At September 30, 2005, all of our loans sold
to Fannie Mae consisted of Level I loans, meaning, in most cases, that we are
responsible for the first 5% of the unpaid principal balance and a portion of
any additional losses to a maximum of 20% of the original principal balance;
Fannie Mae bears any remaining loss. Pursuant to this agreement, we are
responsible for funding 100% of mortgagor delinquency (principal and interest)
and servicing (taxes, insurance and foreclosure costs) advances until the
amounts advanced exceed 5% of the unpaid principal balance at the date of
default. Thereafter, we may request interim loss sharing adjustments which allow
us to fund 25% of such advances until final settlement under the agreement.
Our maximum exposure at September 30, 2005, pursuant to this agreement, was
approximately $941.5 million (representing what we would owe in accordance with
the loss sharing percentages described above if every loan defaulted), although
this amount is not indicative of our actual potential losses. We maintain an
allowance for loan losses for loans originated under the Fannie Mae DUS product
line at a level that, in management's judgment, is adequate to provide for
estimated losses. At September 30, 2005, that reserve was approximately $9.7
million, which we believe represents our actual potential losses at that time.
At the current time, unlike loans originated for the Fannie Mae DUS program, we
do not share the risk of loss for loans we originate for Freddie Mac or FHA. We
have, however, been approved to participate in a new Freddie Mae program, which
also involves risk sharing.
Our Mortgage Banking subsidiaries maintained, as of September 30, 2005, treasury
notes of approximately $13.5 million and a money market account of approximately
$2.2 million, which is included in cash and cash equivalents, including
restricted cash, in the condensed consolidated balance sheet, to satisfy the
Fannie Mae collateral requirements of $13.0 million.
MORTGAGE POOL CREDIT INTERMEDIATION
In December 2001, we completed a credit intermediation transaction with Merrill
Lynch Capital Services, Inc. ("MLCS"). Pursuant to the terms of the transaction,
we assumed MLCS's first loss position on a pool of tax-exempt weekly variable
rate multifamily mortgage loans. TRCLP has provided us with an indemnity
covering 50% of any losses that we incur as part of this transaction. As the
loans mature or prepay, the first loss exposure and the fees we receive are
reduced. The latest maturity date on any loan in the portfolio occurs in 2009.
The remainder of the real estate exposure after the first loss position has been
assumed by Fannie Mae and Freddie Mac. In connection with the transaction, we
have posted collateral, initially in an amount equal to 50% of the first loss
amount, which may be reduced to 40% if certain post closing conditions are met.
Our maximum exposure under the terms of the transaction as of September 30,
2005, is approximately $12.9 million.
We performed due diligence on each property in the pool, including an
examination of loan-to-value and debt service coverage both on a current and
"stressed" basis. We analyzed the portfolio on a "stressed" basis by increasing
capitalization rates and assuming an increase in the low floater bond rate. As
of September 30, 2005, the credit enhanced properties are performing according
to their contractual obligations and we do not anticipate any losses to be
incurred on this guarantee. Should our analysis of risk of loss change in the
19
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
future, a provision for probable loss might be required pursuant to SFAS No. 5,
ACCOUNTING FOR CONTINGENCIES.
YIELD TRANSACTIONS
We have entered into several agreements with either IXIS Financial Products,
Inc. ("IXIS") or Merrill Lynch (each a "Primary Obligor") to provide agreed-upon
rates of return for pools of multifamily properties each owned by a local
partnership which in turn, is majority-owned by a fund sponsored by our
subsidiary, Related Capital Company LLC ("RCC"). In return, we have or will
receive fees, generally at the start of each obligation period. There are nine
agreements to provide the specified returns through the construction and
lease-up phases of the properties and there are nine other agreements to provide
the specified returns from the completion of the construction and lease-up
phases through the operating phase of the properties.
Total potential exposure pursuant to these transactions is approximately $646.2
million, assuming the funds achieve no return whatsoever. We have analyzed the
expected operations of the underlying properties and believe there is no risk of
loss at this time as we have never yet been called upon to make payments under
the guarantees. Should our analysis of risk of loss change in the future, a
provision for possible losses might be required pursuant to SFAS No. 5. The fair
value of these obligations, representing the deferral of the fee income over the
obligation periods, was $21.4 million as of September 30, 2005. This amount is
included in deferred income on our condensed consolidated balance sheet. Refer
to Note 12 regarding potential exposure under existing obligations.
Some of the property-level partnerships have financed their properties with the
proceeds of our mortgage revenue bonds. In these cases, the Primary Obligor has
required that those mortgage revenue bonds be deposited into a trust pursuant to
which the mortgage revenue bonds were divided into senior and subordinated
interests with approximately 50% of each mortgage revenue bond being
subordinated. We have financed the senior trust interest and a portion of
certain of the subordinate trust interests using credit enhancement from the
Primary Obligor as part of the Merrill Lynch P-FLOATs/RITESSM program. We use
the remaining subordinate trust interests as collateral in the Merrill Lynch
P-FLOATs/RITESSM program. In connection with these transactions, we have posted
$64.4 million as collateral with a Primary Obligor in the form of either cash or
mortgage revenue bonds.
OTHER
We have entered into several transactions pursuant to the terms of which we will
provide credit support to construction lenders for project completion and Fannie
Mae conversion. In some instances, we have also agreed to acquire subordinated
bonds to the extent the construction period bonds do not fully convert. We also
provide payment, operating deficit, recapture and replacement reserve guarantees
as business requirements for developers to obtain construction financing.
Our maximum aggregate exposure relating to these transactions is approximately
$153.0 million.
To date, we have had minimal exposure to losses under these transactions and
anticipate no material liquidity requirements in satisfaction of any guarantee
issued.
OTHER CONTINGENCIES
We are subject to routine litigation and administrative proceedings arising in
the ordinary course of business. Management does not believe that such matters
will have a material adverse impact on our financial position, results of
operations or cash flows.
NOTE 17 - SUBSEQUENT EVENTS
During October 2005, Hurricane Wilma struck the state of Florida. We have
identified 12 properties in our equity sponsorship portfolio that sustained what
is expected to be major damage. We hold mortgage revenue bonds on three of the
properties, and the bonds had a carrying value of approximately $23.1 million as
of September 30, 2004. None of these properties are in funds for which we
provide a specified rate of return.
In addition, we identified 40 other properties that did or may have suffered
minor damage (although we have not been able to access 12 of those properties).
Eleven of the 40 are properties for which we hold a mortgage revenue bond.
In our mortgage banking risk-sharing portfolio, there are nine properties
identified as affected, six of which are estimated to have damage in excess of
$25,000.
20
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
As with the storms that occurred during the third quarter of 2005 (see
Management's Discussion and Analysis - IMPACT OF HURRICANES DURING THE QUARTER
ENDED SEPTEMBER 30, 2005), we are unable to assess the potential impact on the
Company at this time.
On November 8, 2005, we announced that Stuart J. Boesky will step down from his
position as our Chief Executive Officer and as a member of our Board of
Trustees, effective November 15, 2005. The Board of Trustees has appointed our
Chairman, Stephen M. Ross, as interim Chief Executive Officer, and has begun a
search for a new CEO. The Board will consider both internal and external
candidates. In connection with Mr. Boesky's departure, our President, Marc D.
Schnitzer, and Alan P. Hirmes, our Chief Financial Officer and Chief Operating
Officer, will assume certain of his duties.
Pursuant to a definitive separation and consulting agreement, Mr. Boesky will
serve as a consultant to the Company for a period of one year, and his
consulting contract may be terminated by either party. The separation and
consulting agreement also contains non-compete provisions.
We will pay Mr. Boesky approximately $2.8 million in connection with the
separation and consulting agreement as follows: we will pay $1.5 million in cash
and issue common shares worth $0.8 million during the fourth quarter of 2005,
with the balance paid in cash during the first quarter of 2006. The full amount
will be recorded as an expense in the fourth quarter of 2005.
Pursuant to the terms of Mr. Boesky's separation and consulting agreement, we
will also pay him approximately $64,000 in the fourth quarter of 2004 and
approximately $175,000 in 2006 for the consulting services. These expenses will
be recorded as incurred.
In addition, we will accelerate the vesting on restricted shares and share
options we had previously granted to Mr. Boesky, resulting in a non-cash charge
of $0.4 million during the fourth quarter of 2005, and the lockup agreement with
respect to his SCUs will terminate upon his departure.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
--------------------------
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements are not historical facts, but rather our
beliefs and expectations and are based on our current expectations, estimates,
projections, beliefs and assumptions about our Company and industry. Words such
as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors, some of which are beyond our
control, are difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking statements.
Some of these risks include, among other things:
o adverse changes in the real estate markets including, among other things,
competition with other companies;
o interest rate fluctuations;
o general economic and business conditions, which will, among other things,
affect the availability and credit worthiness of prospective tenants, lease
rents and the terms and availability of financing for properties financed
by mortgage revenue bonds owned by us;
o risk of real estate development and acquisition;
o environment/safety requirements;
o changes in applicable laws and regulations;
o our tax treatment, the tax treatment of our subsidiaries and the tax
treatment of our investments; and
o risk of default associated with the mortgage revenue bonds and other
securities held by us or our subsidiaries.
These risks are more fully described in our Form 10-K for the year ended
December 31, 2004. We caution you not to place undue reliance on these
forward-looking statements, which reflect our view only as of the date of this
report.
Factors Affecting Comparability
-------------------------------
Primarily due to our adoption of FIN 46(R) as of March 31, 2004, we consolidate
more than 110 partnerships (predominantly investment funds we sponsor) in our
financial statements. The operating results for the three and nine months ended
September 30, 2005, include those of these entities, as well as the elimination
of transactions between the entities and our subsidiaries. In 2004, only the
operating results for the three months ended September 30 include comparable
operations as we adopted this accounting standard as of March 31 of that year.
In addition, we acquired CCLP in March 2005. Operating results in our portfolio
investing segment prior to the acquisition date include interest income on a
loan made in July 2004. Following the acquisition, operating results of CCLP are
included in our Mortgage Banking segment.
Results of Operations
---------------------
Three Months Ended September 30, 2005
-------------------------------------
The following is a summary of our operations for the three months ended
September 30, 2005 and 2004:
% of % of % of
(In thousands) 2005 Revenues 2004 Revenues Change
--------------------------- -------- -------- -------- -------- --------
Revenues $ 79,041 100.0% $ 59,384 100.0% 33.1%
Income before income taxes $ 13,662 17.3% $ 10,079 17.0% 35.5%
Net income $ 18,678 23.6% $ 14,911 25.1% 25.3%
Compared to 2004, the third quarter of 2005 benefited from the continued
expansion of all of our businesses and the acquisition of CCLP in the Mortgage
Banking segment. In addition, revenues in 2005 include $7.3 million generated by
consolidated partnerships compared to $3.8 million in 2004. Offsetting the
revenue gains is the elimination of revenues earned by our subsidiaries in
transactions with partnerships we have consolidated beginning April 1, 2004.
Although the amounts are eliminated in consolidation, the net losses recognized
by those partnerships in connection with these transactions are absorbed by
their equity partners; as such, the elimination in consolidation has an
insignificant impact on our net income.
The revenue gains and the relatively smaller increase in expenses led to an
increase in income before income taxes and an increase in net income.
22
REVENUES
Our revenues were as follows:
For the Three Months Ended September 30,
----------------------------------------
(In thousands) 2005 2004 % Change
-------------------------------------- -------- -------- --------
Mortgage revenue bond interest income $ 36,482 $ 33,027 10.5%
Other interest income 4,856 3,599 34.9
Fee income:
Mortgage banking 7,711 3,321 132.2
Fund sponsorship 14,472 10,493 37.9
Credit enhancement 2,186 2,715 (19.5)
-------- -------- -----
Total fee income 24,369 16,529 47.4
Other revenues:
Construction service fee 1,185 454 161.0
Service fees 1,012 536 88.8
Prepayment penalties 2,515 474 430.6
Other 1,273 999 27.4
-------- -------- -----
Total other revenues 5,985 2,463 143.0
Revenues of consolidated partnerships 7,349 3,766 95.1
-------- -------- -----
Total revenues $ 79,041 $ 59,384 33.1%
======== ======== =====
The increase in mortgage revenue bond interest income stems from ongoing
investment activity in the Portfolio Investing segment. Fee income variances are
detailed in the discussions of results for the Fund Management and Mortgage
Banking segments. Results of Consolidated Partnerships are also discussed below.
See RESULTS BY SEGMENT.
Other interest income includes income from temporary investments, interest
earned on Mortgage Banking escrow balances and interest earned on our loans to
Capri (see Note 4 to the condensed consolidated financial statements). The
increase from the 2004 period relates to:
o the rapid expansion of the Mortgage Banking business due to the acquisition
of CCLP and the increase in origination volume; and
o higher cash balances coupled with increasing market interest rates for
temporary investments.
Offsetting these increases is a decrease in interest on loans to Capri as a
large portion of the balance was converted to an equity interest in the first
quarter of 2005 (see Note 2 to the condensed consolidated financial statements).
The increase in prepayment penalties is principally due to higher refinancing
volume in the Mortgage Banking business while the increase in "other" relates to
higher administrative fees in the Fund Management segment.
In the third quarter of 2005, the following amounts were eliminated, as they
represented transactions between consolidated partnerships and our other
component businesses:
For the Three Months Ended September 30,
----------------------------------------
(In thousands) 2005 2004 % Change
------------------------------------- -------- -------- --------
Mortgage revenue bond interest income $ 1,136 $ 447 154.1%
Fund sponsorship fees 10,318 8,594 20.1
Other revenues 1,067 979 9.0
------- ------- -----
Total $12,521 $10,020 25.0%
======= ======= =====
23
EXPENSES
Our expenses were as follows:
For the Three Months Ended September 30
---------------------------------------
(In thousands) 2005 2004 % Change
------------------------------------------------- -------- -------- --------
Interest expense $14,758 $ 8,297 77.9%
Interest expense - preferred shares of subsidiary 4,724 4,724 --
Salaries and benefits 17,105 13,474 26.9
General and administrative 12,243 12,779 (4.2)
------- ------- -----
Subtotal 29,348 26,253 11.8
------- ------- -----
Depreciation and amortization 16,302 7,864 107.3
Loss on impairment of assets 803 610 31.6
------- ------- -----
Subtotal 65,935 47,748 38.1
Interest expense of consolidated partnerships 6,342 6,569 (3.5)
Other expenses of consolidated partnerships 14,435 10,917 32.2
------- ------- -----
Total expenses $86,712 $65,234 32.9%
======= ======= =====
The increase in interest expense reflects the higher amount of debt to fund
continuing mortgage revenue bond and LIHTC investments and mortgage
originations. In addition, our average borrowing rate increased as a result of
increases in Bond Market Association Municipal Swap Index ("BMA") and LIBOR
rates in 2004 and 2005, as well as the impact of interest rate swap transactions
that went into effect in 2005. The incremental impact of the swap transactions
has decreased from prior quarters, however, as the swapped rates received for
certain of the contracts now exceed the rates paid. Our average borrowing rate
increased to 3.6% in the 2005 quarter as compared to 2.7% in the 2004 period.
The increases in salaries and benefits expense relates to the growth of our
component businesses as well as the acquisition of CCLP in the first quarter of
2005, which doubled the size of our Mortgage Banking business.
General and administrative expenses in many categories increased due to the
expansion of our businesses and the acquisition of CCLP, particularly with
regard to increased occupancy needs and professional fees. Despite these
increases, total expenses declined for the quarter as compared to last year as a
result of lower organization expenses related to the lower level of fund
sponsorship activity and the recovery of a large amount of costs from prior
periods. While we recognize the billing of these costs in the period a fund
closes as revenue, we record estimates of the expenses that offset the revenue
amounts. To the extent that such estimated costs are not ultimately incurred, we
reverse the reserves accordingly.
Depreciation and amortization expenses were higher in the 2005 period, primarily
due to higher amortization of mortgage servicing rights following the CCLP
acquisition. In addition, we recognized amortization of CCLP acquired
intangibles retroactively to the acquisition date upon the final valuation of
those assets in the third quarter of 2005.
The asset impairment charge pertains to an agreement in principle we reached to
restructure the terms of a mortgage revenue bond, as was the charge in the 2004
period.
Interest expense of consolidated partnerships declined from the 2004 level due
to the repayment of fund debt upon collection of equity subscriptions. Other
expenses of these partnerships increased due to the increase in the population
of consolidated entities due to additional fund sponsorship activity. Virtually
all of the expenses of the consolidated partnerships are absorbed by their
equity partners.
24
OTHER ITEMS
For the Three Months Ended September 30,
--------------------------------------------
(In thousands) 2005 2004 % Change
-------------------------------------------------- -------- -------- --------
Equity and other income $ 612 $ 611 0.2 %
Gain on sale of loans $ 2,935 $ 572 413.1 %
Gain (loss) on repayment of mortgage revenue bonds 1,027 (6) --
-------- -------- -------
Gain on repayment of mortgage revenue bonds and $ 3,962 $ 566 600.0 %
sale of loans
Income allocated to preferred shareholders of
subsidiary $ (1,557) $ (1,556) 0.1 %
Income allocated to SCUs $ (7,467) $ (7,577) (1.5)%
Income allocated to SMUs (159) -- --
Income allocated to CMC -- 145 --
-------- -------- -------
Total income allocated to minority interests $ (7,626) $ (7,432) 2.6 %
Loss allocated to partners of consolidated
partnerships $ 91,295 $ 70,174 30.1 %
Gains related to mortgage revenue bonds and loans fluctuate in relation to
relative activity levels in the Portfolio Investing and Mortgage Banking
businesses. See RESULTS BY SEGMENT below.
Equity and other income includes dividends from our investment in ARCap
Investors, LLC, in both years, property operations of real estate owned in 2005,
offset in 2005 by losses from tax advantaged investment vehicles similar to
those we sponsor.
The income allocated to preferred shareholders of a subsidiary relates to shares
we issued in 2004 that differ from previously issued shares in that they are not
subject to mandatory redemption; as such, the distributions are classified as an
expense outside of operating earnings.
The income allocation to SCUs and SMUs of subsidiaries represents the
proportionate share of after-tax income attributable to holders of subsidiary
equity as if they were all converted to common shares. There was no income
allocated to SMUs in 2004, as the units were first issued in May 2005.
The loss allocation to partners of consolidated partnerships represents the
operating losses of the partnerships, of which we have absorbed an insignificant
portion (approximately $8,000).
Results by Segment
PORTFOLIO INVESTING
The table below shows selected information regarding our Portfolio Investing
activities:
For the Three Months Ended September 30,
----------------------------------------
(In thousands) 2005 2004 % Change
----------------------------------------------------- ---------- ---------- -----------
Mortgage revenue bond acquisitions and fundings $ 58,378 $ 89,980 (35.1)%
Weighted average permanent interest rate of bonds
acquired 6.26% 6.53%
Mortgage revenue bonds repaid $ 46,118 $ 392 --
Average portfolio balance (fair value) $2,247,522 $1,956,338 14.9 %
Weighted average yield of portfolio 6.49% 6.75%
Average BMA rate 2.40% 1.21%
Mortgage revenue bond interest income (1) $ 37,801 $ 33,474 12.9 %
Other interest income (1) 4,578 2,395 91.1
Prepayment penalties (1) 317 -- --
Other revenues (1) 813 689 18.0
---------- ---------- -----
$ 43,509 $ 36,558 19.0 %
========== ========== =====
Interest expense and securitizations fees (1) $ 14,758 $ 8,297 77.9 %
Gain (loss) on repayments of mortgage revenue bonds $ 1,027 $ (6) --
(1) Prior to intersegment eliminations.
25
The increase in mortgage revenue bond interest income is primarily due to the
increased investment base resulting from new bonds funded during later quarters
of 2004 and during 2005, although the volume of investment and the decline in
the interest rate of bonds acquired reflects the challenging market conditions
experienced since 2004, such as increased competition and some potential
investments not meeting our underwriting standards.
While the decline in interest rates has gradually lowered the average yield of
our portfolio, from a profit perspective, the low interest rate environment has
been favorable for us. Although increasing lately, the BMA rate, the short-term
tax-exempt index, continues to be low, and our weighted average cost of debt
associated with these investments, taking our hedging into effect continues to
allow us to recognize healthy spreads between our cost of borrowing and the
interest rates earned.
Other interest income increased due to a higher level of intercompany funding
(which income is eliminated in consolidation) offset by a decline in income from
loans to Capri following the conversion of a large portion of our loan into
equity.
FUND MANAGEMENT
The table below shows selected information regarding our Fund Management
activities:
For the Three Months Ended September 30,
----------------------------------------
(In thousands) 2005 2004 % Change
----------------------------------- -------- -------- ---------
Equity raised $275,534 $355,648 (22.5)%
Equity invested by investment funds $321,050 $258,908 24.0 %
Fund sponsorship fees (1) $ 25,498 $ 20,220 26.1 %
Credit enhancement fees (1) 2,185 2,715 (19.5)
Other revenues (1) 4,397 2,794 57.4
-------- -------- ----
Total $ 32,080 $ 25,729 24.7 %
======== ======== ====
(1) Prior to intersegment eliminations.
Our Fund Management activities generate origination and acquisition fees
associated with sponsoring tax-credit equity investment funds and for assisting
the funds in acquiring assets, which we recognize when the equity is invested by
the investment fund. We also receive asset management fees for the services we
perform for the funds once they are operating, which we recognize over the
service periods. As many of our revenues are recognized over time following the
sponsorship of a new fund, many of the 2005 increases relate to the funds closed
throughout 2004 and the first nine months of 2005.
We earn Organization and Offering ("O&O") service and partnership management
fees based upon the level of equity we raise for tax-credit equity funds. Fees
earned for O&O services decreased approximately 24.3% to $2.3 million compared
to $3.0 million in the 2004 quarter primarily due to the decrease in equity
raised and a decrease in the fee rate realized. Fees earned for partnership
management services are amortized over a five-year period. These fees increased
approximately 147.2% to $1.1 million compared to $441,000 for the same period in
2004. This increase is primarily the result of ongoing revenues for fund
sponsorships completed after the third quarter of 2004.
We earn property acquisition fees and acquisition allowance fees based upon the
level of fund equity invested. Fees earned for property acquisition and equity
origination services associated with tax credit equity fund sponsorship
increased to approximately $13.0 million in 2005, representing an approximate
19.9% increase compared to the prior year results. The increase is due to the
increase in equity invested in 2005 as compared to 2004.
Also during 2005, RCC acted as advisor for $96.8 million of investment
originations by CharterMac entities and others, compared to $133.7 million of
such originations for the three months ended September 30, 2004. We recognize
acquisition fees in this segment for such services, which amounted to
approximately $641,000, declining from the fees recognized for the three months
ended September 30, 2004 by approximately 42.1%. The decrease exceeded the
change in investment originations due to a decrease in the rate of fees realized
in 2005 as compared to 2004.
Partnership and asset management fees increased to $8.5 million for the three
months ended September 30, 2005, representing an increase of approximately 76%
over the 2004 quarter, attributable to the higher level of assets under
management, an increase in the incentive management fee received from AMAC of
$1.2 million and the improvement of the cash position of certain investment
funds allowing us to collect management fees in 2005 which we did not previously
recognize until collectibility was determined.
The decrease in credit enhancement fees relates to the timing and relative size
of the credit enhancement transactions. Fees for the three months ended
September 30, 2004 included recognition of fees for several large transactions
for which the credit enhancement period ended prior to the current year quarter.
Both periods, however, include fees for smaller transactions, the fees for which
26
are recognized over periods of up to 20 years.
Other revenues in this segment consist largely of service fees charged to
entities managed by these subsidiaries (including consolidated partnerships) and
fluctuate with the growth of the number of those entities and their cash flows.
MORTGAGE BANKING
The table below shows selected information regarding our Mortgage Banking
activities:
For the Three Months Ended September 30,
----------------------------------------
(In thousands) 2005 2004 % Change
-------------------------------- ---------- ---------- ---------
Originations $ 382,158 $ 113,243 237.5%
Mortgage portfolio at September 30 $9,217,640 $4,181,130 120.5%
Mortgage servicing fees $ 5,188 $ 2,444 112.3%
Mortgage origination fees 2,523 878 187.4
Interest income 3,205 967 231.4
Prepayment penalties 2,198 474 363.7
Other revenues 310 216 43.5
---------- ---------- -----
$ 13,424 $ 4,979 169.6%
========== ========== =====
Gain on sale of mortgages $ 2,935 $ 571 414.0%
The increase in the servicing portfolio and servicing fees is a result of the
CCLP acquisition. Adjusting for the impact of the acquisition, servicing fee
income in 2005 declined approximately 6% as compared to the same period in 2004.
The decline was caused by a higher level of payoffs and amortization as compared
to service-retained originations that led to a decrease in the comparable-basis
servicing portfolio.
The higher volume of originations in 2005 resulted from a significant increase
in Fannie Mae originations, due to the CCLP acquisition (whereby CCLP has
traditionally conducted a large portion of its business through Fannie Mae
originations) and a pricing change that allowed us to garner greater market
share. Conduit originations also increased sharply as we continue to pursue
business that does not warrant agency execution. The current year also includes
a significantly higher level of assumption lending for which we receive
assumption fees rather than origination fees.
Originations for the three months ended September 30 are broken down as follows:
(In thousands) 2005 % of total 2004 % of total
------------------- -------- ---------- -------- ----------
Fannie Mae $131,486 34.4% $ 36,456 32.2%
Freddie Mac 66,075 17.3 44,375 39.2
Conduit and other 152,100 39.8 24,115 21.3
Assumptions 32,497 8.5 8,297 7.3
-------- ----- -------- -----
Total $382,158 100.0% $113,243 100.0%
======== ===== ======== =====
Interest income relates primarily to that earned on escrow balances. The
increase in 2005 was due to higher origination volume and increased market rates
earned. The increase in prepayment penalties relates to a higher level of
refinancing activity in the current year. Both categories also increased due to
the CCLP acquisition.
Gain on sale of mortgages pertains primarily to sales of mortgages for which we
retain servicing rights. The increase in 2005 as compared to 2004 is due to the
increased origination volume.
CONSOLIDATED PARTNERSHIPS
The results of consolidated partnerships reflected in our financial statements
are for entities we are considered to control according to the definitions of
FIN 46(R), and other partnerships we control, but in which we have no equity
interest or, in the case of 18 partnerships, an insignificant equity interest.
Our Fund Management segment earns fees from many of the entities, however, and
our Portfolio Investing business earns interest on mortgage revenue bonds for
which these partnerships are the obligors. The consolidated partnerships are
primarily tax credit equity investment funds we sponsor and manage, while the
others are property level partnerships for which we have assumed the role of
general partner.
The increased revenue amounts in 2005 are due to the origination of seven funds
27
and the assumption of the general partner interests in 18 property level
partnerships in the past year.
As third party investors hold virtually all of the equity partnership interests
in these entities, we allocate all results of operations to those partners
except for approximately $8,000, representing our nominal ownership. As a
result, the consolidation of these partnerships has an insignificant impact on
our net income.
Nine months Ended September 30, 2005
The following is a summary of our operations for the nine months ended September
30, 2005 and 2004:
% of % of
(In thousands) 2005 Revenues 2004 Revenues % Change
-------------------------- -------- -------- -------- -------- --------
Revenues $216,505 100.0% $162,703 100.0% 33.1%
Income before income taxes $ 39,191 18.1% $ 30,888 19.0% 26.9%
Net income $ 52,907 24.4% $ 45,532 28.0% 16.2%
Compared to 2004, the first nine months of 2005 benefited from the continued
expansion of our component businesses and the acquisition of CCLP in the
Mortgage Banking segment. In addition, revenues in 2005 include $19.4 million
generated by consolidated partnerships as compared to $6.6 million in 2004,
which included only six months of results for those partnerships. Offsetting the
revenue gains is the elimination of revenues earned by our subsidiaries in
transactions with the consolidated partnerships. Although the amounts are
eliminated in consolidation, the net losses recognized by those partnerships in
connection with these transactions are absorbed almost entirely by their equity
partners; as such, the elimination in consolidation has an insignificant impact
on our net income.
The revenue gains and the relatively smaller increase in expenses led to an
increase in income before income taxes and an increase in net income.
REVENUES
Our revenues were as follows:
For the Nine months Ended September 30,
---------------------------------------
(In thousands) 2005 2004 % Change
-------------------------------------- -------- -------- ---------
Mortgage revenue bond interest income $110,221 $ 97,365 13.2%
Other interest income 12,425 5,528 124.8
Fee income:
Mortgage banking 19,203 11,124 72.6
Fund sponsorship 32,503 27,780 17.0
Credit enhancement 7,246 7,541 (3.9)
-------- -------- -----
Total fee income 58,952 46,445 26.9
Other revenues:
Construction service fees 3,017 861 250.4
Service fees 3,742 1,950 91.9
Prepayment penalties 4,314 1,441 199.4
Other 4,431 2,557 73.3
-------- -------- -----
Total other revenues 15,504 6,809 127.7
Revenues of consolidated partnerships 19,403 6,556 196.0
-------- -------- -----
Total revenues $216,505 $162,703 33.1%
======== ======== =====
The increase in mortgage revenue bond interest income stems from ongoing
investment activity in the Portfolio Investing segment. Fee income variances are
detailed in the discussions of results for the Fund Management and Mortgage
Banking segments. Results of Consolidated Partnerships are also discussed below.
See RESULTS BY SEGMENT.
Other interest income includes income from temporary investments, interest
earned on Mortgage Banking escrow balances and interest earned on our loans to
Capri (see Note 4 to the condensed consolidated financial statements). The
increase from the 2004 period relates to:
o the rapid expansion of the Mortgage Banking business due to the acquisition
of CCLP and the increase in origination volume; and
28
o higher cash balances coupled with increasing market interest rates for
temporary investments.
Offsetting these increases is a decrease in interest on loans to Capri as a
large portion of the balance was converted to an equity interest in the first
quarter of 2005 (see Note 2 to the condensed consolidated financial statements).
The increase in construction service fees relates to the relative volume of
deals supported in each period.
The increase in prepayment penalties is principally due to higher refinancing
volume in the Mortgage Banking business while the increase in "other" relates to
higher administrative fees in the Fund Management segment.
In the first nine months of each year, the following amounts were eliminated, as
they represented transactions between consolidated partnerships and our other
component businesses:
For the Nine months Ended September 30,
---------------------------------------
(In thousands) 2005 2004 % Change
------------------------------------- -------- -------- --------
Mortgage revenue bond interest income $ 2,915 $ 694 320.0%
Fund sponsorship fees 28,935 18,155 59.4
Other revenues 1,847 1,932 (4.4)
------- ------- -----
Total $33,697 $20,781 62.2%
======= ======= =====
EXPENSES
Our expenses were as follows:
For the Nine months Ended September 30
--------------------------------------
(In thousands) 2005 2004 % Change
------------------------------------------------- -------- -------- --------
Interest expense $ 40,598 $ 22,424 81.0%
Interest expense - preferred shares of subsidiary 14,173 14,173 --
Salaries and benefits 50,714 40,406 25.5
General and administrative 37,454 30,830 21.5
-------- -------- -----
Subtotal 88,168 71,236 23.8
Depreciation and amortization 33,467 22,553 48.4
Loss on impairment of assets 1,902 610 211.8
-------- -------- -----
Subtotal 178,308 130,996 36.1
Interest expense of consolidated partnerships 19,364 13,258 46.1
Other expenses of consolidated partnerships 40,062 19,398 106.5
-------- -------- -----
Total expenses $237,734 $163,652 45.3%
======== ======== =====
The increase in interest expense reflects the higher amount of debt to fund
continuing mortgage revenue bond and short-term investments in LIHTC
partnerships and mortgage originations. In addition, our average borrowing rate
increased as a result of increases in BMA and LIBOR rates in 2004 and 2005, as
well as the impact of new interest rate swap transactions that went into effect
in the first quarter of 2005. The incremental impact of the swap transactions
has decreased during the course of the 2005 period, however, as the swapped
rates received for certain of the contracts now exceed the rates paid. Our
average borrowing rate increased to 3.5% in the first nine months of 2005
quarter as compared to 2.5% in the 2004 period.
The increases in salaries and benefits expense relates to the growth of our
component businesses as well as the acquisition of CCLP in the first quarter of
2005, which doubled the size of our Mortgage Banking business.
The increase in general and administrative expenses is also due to the expansion
of our businesses and the acquisition of CCLP, particularly with regard to
increased occupancy needs and professional fees. Partially offsetting this
increase was a decline in organization expenses related to the lower level of
fund sponsorship activity as compared to the prior year period and the recovery
of a large amount of costs from prior periods as noted in the discussion of
results for the third quarter.
Depreciation and amortization expenses were higher in the 2005 period, primarily
due to higher amortization of mortgage servicing rights following the CCLP
acquisition. In addition, we recognized amortization of CCLP acquired
intangibles retroactively to the acquisition date upon the final valuation of
those assets in the third quarter of 2005.
29
The asset impairment charge in 2005 relates in large part to management's
decision to discontinue construction of a property in connection with the
financial difficulties of the property developer (see Note 12 to the condensed
consolidated financial statements). The balance of the 2005 amount and the
entire charge in the prior year period pertained to the restructuring of terms
for mortgage revenue bond and mezzanine loan investments.
We did not record the expenses of the consolidated partnerships prior to April
1, 2004. The increase in the expenses generated by these entities is a result of
the non-comparable consolidation periods as well as the increase in the number
of such partnerships consolidated. Virtually all of the expenses of the
consolidated partnerships are absorbed by their equity partners.
OTHER ITEMS
For the Nine months Ended September 30,
---------------------------------------
(In thousands) 2005 2004 % Change
------------------------------------------- --------- --------- ----------
Equity and other income $ 2,062 $ 1,731 19.1%
Gain on sale of loans $ 8,956 $ 5,647 58.6%
Gain on repayment of mortgage revenue bonds 1,930 216 793.5
--------- --------- ------
Gain on repayment of mortgage revenue
bonds and sale of loans $ 10,886 $ 5,863 85.7%
Income allocated to preferred shareholders
of subsidiary $ (4,669) $ (2,386) 95.7%
Income allocated to SCUs $ (21,358) $ (20,032) 6.6%
Income allocated to SMUs (214) -- --
Income allocated to CMC -- (220) --
--------- --------- ------
Total income allocated to minority interests $ (21,572) $ (20,252) 6.5%
Loss allocated to partners of
consolidated partnerships $ 255,628 $ 141,992 80.0%
Gains and losses related to mortgage revenue bonds and loans fluctuate in
relation to relative activity levels in the Portfolio Investing and Mortgage
Banking businesses. See RESULTS BY SEGMENT below.
Equity and other income includes dividends from our investment in ARCap
Investors, LLC, in both years, property operations of real estate owned in 2005,
offset in 2005 by losses from tax advantaged investment vehicles similar to
those we sponsor.
Income allocated to preferred shareholders of subsidiary relates to shares we
issued in 2004 that differ from previously issued shares in that they are not
subject to mandatory redemption; as such, the distributions are classified as an
expense outside of operating earnings. Total income allocated to preferred
shareholders for the nine months ended September 30, 2005, including the portion
classified as interest expense, increased as compared to the nine months ended
September 30, 2004, due to the additional preferred offering consummated in May
2004.
The income allocation to SCUs and SMUs of subsidiaries represents the
proportionate share of after-tax income attributable to holders of subsidiary
equity as if they were all converted to common shares. There was no income
allocated to SMUs in 2004 as the units were first issued in May 2005.
The loss allocation to partners of consolidated partnerships represents the
operating losses of the partnerships, of which we have absorbed an insignificant
portion (approximately $8,000).
30
Results by Segment
------------------
PORTFOLIO INVESTING
The table below shows selected information regarding our Portfolio Investing
activities:
For the Nine months Ended September 30,
------------------------------------------
(In thousands) 2005 2004 % Change
----------------------------------------------- ---------- ----------- -----------
Mortgage revenue bond acquisitions and fundings $ 225,159 $ 239,948 (6.2)%
Weighted average permanent interest rate
of bonds acquired 6.43% 6.55%
Mortgage revenue bonds repaid $ 65,499 $ 26,870 143.8 %
Average portfolio balance (fair value) $2,197,421 $1,911,257 15.0 %
Weighted average yield of portfolio 6.69% 6.79%
Average BMA rate 2.30% 1.10%
Mortgage revenue bond interest income (1) $ 113,708 $ 98,059 16.0 %
Other interest income (1) 8,801 4,108 114.2
Prepayment penalties (1) 441 31 --
Other revenues (1) 3,057 1,126 171.5
---------- ---------- -------
$ 126,007 $ 103,324 22.0 %
========== ========== =======
Interest expense and securitizations
fees (1) $ 40,598 $ 22,394 81.3 %
Gain on repayments of mortgage revenue
bonds $ 1,930 $ 217 789.4 %
(1) Prior to intersegment eliminations.
The increase in mortgage revenue bond interest income is primarily due to the
increased investment base resulting from new bonds funded during later quarters
of 2004 and during 2005, although the volume of investment and the decline in
the interest rate of bonds acquired reflects the challenging market conditions
experienced since 2004, such as increased competition and some potential
investments not meeting our underwriting standards.
While the decline in interest rates has gradually lowered the average yield of
our portfolio, from a profit perspective, the low interest rate environment has
been favorable for us. Although increasing lately, the BMA rate, the short-term
tax-exempt index, continues to be low, and our weighted average cost of debt
associated with these investments, taking our hedging into effect, continues to
allow us to recognize healthy spreads between our cost of borrowing and the
interest rates earned.
Other interest income increased due to a higher level of intercompany funding
(which income is eliminated in consolidation) offset by a decline in income from
loans to Capri following the conversion of a large portion of our loan into
equity.
FUND MANAGEMENT
The table below shows selected information regarding our Fund Management
activities:
For the Nine months Ended September 30,
---------------------------------------
(In thousands) 2005 2004 % Change
----------------------------------- -------- -------- ---------
Equity raised $711,918 $754,481 (5.6)%
Equity invested by investment funds $752,049 $632,749 18.9 %
Fund sponsorship fees (1) $ 64,052 $ 48,894 31.0 %
Credit enhancement fees (1) 7,246 7,541 (3.9)
Other revenues (1) 11,806 7,138 65.4
-------- -------- ----
Total $ 83,104 $ 63,573 30.7 %
======== ======== ====
(1) Prior to intersegment eliminations.
Our Fund Management activities generate origination and acquisition fees
associated with sponsoring tax credit equity investment funds and for assisting
the funds in acquiring assets, which we recognize when the equity is invested by
the investment fund. We also receive asset management fees for the services we
31
perform for the funds once they are operating, which we recognize over the
service periods. As many of our revenues are recognized over time following the
sponsorship of a new fund, many of the 2005 increases relate to the funds closed
throughout 2004 and the first nine months of 2005.
We earn O&O service and partnership management fees based upon the level of
equity we raise for tax-credit equity funds. Fees earned for O&O services
decreased approximately 5.1% to $6.1 million compared to $6.4 million in the
2004 period primarily due to the decrease in equity raised, offset by a marginal
increase in the fee rate realized. Fees earned for partnership management
services are amortized over a five-year period. These fees increased
approximately 225% to $2.9 million compared to $891,000 for the same period in
2004. This increase is primarily the result of ongoing revenues for fund
sponsorships completed in 2004 and 2005.
We earn property acquisition fees and acquisition allowance fees based upon the
level of fund equity invested. Fees earned for property acquisition and equity
origination services associated with tax credit equity fund sponsorship
increased to approximately $31.6 million in 2005, representing an approximate
16.1% increase compared to the prior year results. The increase in fees is lower
than the increase of equity invested from 2005 to 2004 because of a decrease in
the fee rate realized. The lower fee rate stemmed from changes in the mix of
funds originated in the current year period.
Also during 2005, RCC acted as advisor for $310.2 million of investment
originations by CharterMac entities and others, compared to $354.5 million of
such originations for the nine months ended September 30, 2004. We recognize
acquisition fees in this segment for such services, which decreased
approximately 9.4% to $2.6 million as compared to $2.9 million in the 2004
period. The decrease was less than the change in investment originations due to
an increase in the rate of fees realized in 2005 as compared to 2004.
Partnership and asset management fees increased to $19.7 million for the nine
months ended September 30, 2005, representing an increase of approximately 71%
over the 2004 period, attributable to the higher level of assets under
management, an increase in the incentive management fee received from AMAC of
$1.2 million and the improvement of the cash position of certain investment
funds allowing us to collect management fees in 2005 which we did not previously
recognize until collectibility was determined.
The increase in credit enhancement fees for the nine months ended September 30,
2005, as compared to the 2004 period is due to additional credit enhancement
transactions completed over the course of 2004 and 2005, the fees for which are
recognized over periods of up to 20 years.
Other revenues in this segment consist largely of service fees charged to
entities managed by these subsidiaries (including consolidated partnerships) and
fluctuate with the growth of the number of those entities and their cash flows.
MORTGAGE BANKING
The table below shows selected information regarding our Mortgage Banking
activities:
For the Nine months Ended September 30,
---------------------------------------
(In thousands) 2005 2004 % Change
-------------------------------- ---------- ---------- ---------
Originations $1,164,150 $ 664,292 75.2%
Mortgage portfolio at September 30 $9,217,640 $4,181,130 120.5%
Mortgage servicing fees $ 13,890 $ 7,165 93.9%
Mortgage origination fees 5,313 3,960 34.2
Interest income 6,511 2,441 166.7
Prepayment penalties 3,873 1,410 174.7
Other revenues 1,269 539 135.4
---------- ---------- -----
$ 30,856 $ 15,515 98.9%
========== ========== =====
Gain on sale of mortgages $ 8,956 $ 5,646 58.6%
The increase in the servicing portfolio and servicing fees is a result of the
CCLP acquisition. Adjusting for the impact of the acquisition, servicing fee
income in 2005 declined approximately 3% as compared to the first nine months of
2004. The decline was caused by a higher level of payoffs and amortization as
compared to service-retained originations that led to a decrease in the
comparable-basis servicing portfolio.
The higher volume of originations in 2005 resulted from a significant increase
in Fannie Mae originations, due to the CCLP acquisition (whereby CCLP has
traditionally conducted a large portion of its business through Fannie Mae
originations) and a pricing change that allowed us to garner greater market
share. Conduit originations also increased sharply as we continue to pursue
business that does not warrant agency execution. These increases were partially
offset by a sharp decline in Freddie Mac business, as the 2004 period reflects a
large single-borrower pool transaction, with no comparable transaction in the
32
current year period. The current year also includes a significantly higher level
of assumption lending for which we receive assumption fees rather than
origination fees.
Originations for the nine months ended September 30 are broken down as follows:
(In thousands) 2005 % of total 2004 % of total
---------------- ---------- ---------- ---------- ----------
Fannie Mae $ 596,976 51.3% $ 235,731 35.5%
Freddie Mac 99,980 8.6 282,006 42.4
FHA 6,372 0.5 27,714 4.2
Conduit - Bank 291,485 25.0 78,588 11.8
Assumptions 169,338 14.6 40,253 6.1
---------- ----- ---------- -----
Total $1,164,151 100.0% $ 664,292 100.0%
========== ===== ========== =====
Interest income relates primarily to that earned on escrow balances. The
increase in 2005 was due to higher origination volume and increased market rates
earned. The increase in prepayment penalties relates to a higher level of
refinancing activity in the current year. Both categories also increased due to
the CCLP acquisition.
Gain on sale of mortgages pertains primarily to sales of mortgages for which we
retain servicing rights. The increase in 2005 as compared to 2004 is due to the
increased origination volume.
CONSOLIDATED PARTNERSHIPS
The results of consolidated partnerships reflected in our financial statements
are for entities we are considered to control according to the definitions of
FIN 46(R), and other partnerships we control, but in which we have no equity
interest or, in the case of 18 partnerships, an insignificant equity interest.
Our Fund Management segment earns fees from many of the entities, however, and
our Portfolio Investing business earns interest on mortgage revenue bonds for
which these partnerships are the obligors. The consolidated partnerships are
primarily tax credit equity investment funds we sponsor and manage, while the
others are property level partnerships for which we have assumed the role of
general partner.
The results we reported in 2005 reflect nine months of operations for the
partnerships we consolidate while the nine months ended September 30, 2004,
includes only six months of results, as we consolidated these entities as of
March 31, 2004. The increased amounts in 2005 are also due to the origination of
seven funds and the assumption of the general partner interests in 18 property
level partnerships in the past year, all of which are included in the
population.
As third party investors hold virtually all of the equity partnership interests
in these entities, we allocate all results of operations to those partners
except for approximately $8,000, representing our nominal ownership. As a
result, the consolidation of these partnerships has an insignificant impact on
our net income.
IMPACT OF HURRICANES DURING THE QUARTER ENDED SEPTEMBER 30, 2005
During the third quarter of 2005, two hurricanes struck the Gulf Coast region of
the United States. All of our businesses are involved in properties in the areas
affected by the storms.
Due to limited access to certain affected properties, as well as the
complications and bureaucracy involved in the determination of insurance
coverage, we are still evaluating the extent of our financial exposure on
several properties. Based upon the information available to date, our financial
exposure is expected to be immaterial. However, it will take some time to assess
the full ramifications of the hurricanes. Other than insurance considerations
(discussed below), examples of situations that are too early to assess include:
o the effects of the likely increase in repair and construction costs;
o whether the increase in physical occupancy in our properties in the
southwest and southeast will be permanent in nature;
o any changes that the government agencies propose for some of the financing
programs that we offer (i.e. whether the IRS will make any proposed
temporary changes to the tax code for the LIHTC program) which if enacted
could make additional capital available to the affected properties; and
o what resources the local general partner will bring to bear.
We have identified 46 affected properties located in Texas, South Florida, the
Florida Panhandle, Alabama, Louisiana and Mississippi for which we have mortgage
revenue bond investments and/or one or more funds we have sponsored have
provided equity, as detailed in the table below. Currently we do not expect that
there will be financial exposure related to these properties as we believe that
the properties have adequate insurance coverage, but in virtually all cases
determinations are ongoing as to:
33
o how the insurance companies involved will address damage with respect to
that caused by wind versus that caused by flooding;
o the level of deductibles, which is dependent upon the category
determinations;
o whether outside parties (such as state agencies) will mediate in disputes
regarding insurance; and
o the financial resources of the insurers.
The affected properties are summarized below:
(In thousands)
CharterMac Loan Fair Value of
Holds or RCC Amounts Mortgage
Will Hold Sponsored Upon revenue bonds
Mortgage Fund is Included in Full Oustanding at
revenue Equity Guaranteed Draw September 30,
Number bond Partner Funds Down 2005
------ ---------- --------- ----------- -------- -------------
MINOR DAMAGE
Construction 2 2 2 -- $15,930 $ 700
Lease-Up 6 6 6 3 60,655 40,970
Stabilized 17 2 17 1 17,577 18,578
------------------------------------------------------------------------------
Subtotal 25 10 25 4 94,162 60,248
------------------------------------------------------------------------------
MAJOR DAMAGE
Construction 5 -- 5 1 -- --
Lease-Up 1 -- 1 -- -- --
Stabilized 6 -- 6 -- -- --
------------------------------------------------------------------------------
Subtotal 12 -- 12 1 -- --
------------------------------------------------------------------------------
Total 37 10 37 5 $94,162 $60,248
==============================================================================
MORTGAGE BANKING: Our mortgage banking subsidiary, identified seven properties
in its loan servicing portfolio that were in the paths of the storms. Five of
the seven properties involve a risk sharing commitment by the Company. One of
the five experienced minor damage, and four properties are believed to have
experienced major damage. Due to limited access granted by local authorities we
are in the process of completing our inspections. The remaining two properties,
do not involve a risk sharing commitment by the Company. In all cases, we are
unaware of any situation where the casualty insurance coverage is not expected
to cover the mortgage exposure and thus, while we continue to manage that risk,
cannot identify a circumstance where we think there is a likelihood of an
economic loss in which the Company would have to participate under its risk
sharing obligations.
Due to the uncertainties noted above, we are currently unable to estimate the
extent of our direct financial exposure, if any. With respect to exposure
regarding specified rates of return obligations, as storm damage may reduce the
expected yields of the properties themselves, performance of the funds is likely
to be impacted as well. The obligations, however, provide for expected yields on
pools of properties, some of which are performing above expected levels and the
funds themselves often provide for adjustors that may mitigate the negative
impact that would arise from the construction delays over the guarantee period
covered by the agreements.
Income Taxes
------------
A large majority of our pre-tax income is derived from our Portfolio Investing
businesses, which are structured as partnership entities; as such, income from
those investments is not subject to income taxes. The Fund Management and
Mortgage Banking businesses are conducted in corporations and are subject to
income taxes.
We provide for income taxes for these corporate subsidiaries in accordance with
SFAS No. 109, ACCOUNTING FOR INCOME TAXES ("SFAS No. 109") which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities.
The tax benefit disclosed relates to the book losses of the taxable businesses
and the tax deductible distributions on their subsidiary equity. As the
proportion of our pre-tax income contributed by the businesses generating
taxable income and losses changes, the resulting tax benefit or provision may
appear incongruous with our consolidated income before income taxes.
The effective tax rate on a consolidated basis for the nine months ended
September 30, 2005 and 2004 was (35.0)% and (47.4)%, respectively. The effective
rate for our corporate subsidiaries that were subject to taxes was 57.4% and
53.7% for the nine months ended September 30, 2005 and 2004, respectively.
34
Inflation
---------
Inflation did not have a material effect on our results for the periods
presented.
Subsequent Event
----------------
Refer to Note 17 of the condensed consolidated financial statements with respect
to costs associated with the resignation of our Chief Executive Officer.
Liquidity and Capital Resources
-------------------------------
We fund our short-term business needs (including investments) primarily with
cash provided by operations, securitization of investments and revolving or
warehouse credit facilities. Our primary sources of capital to meet long-term
liquidity needs (including acquisitions) are debt and various types of equity
offerings, including equity of our subsidiaries. We believe that our financing
capacity and cash flow from current operations are adequate to meet our current
and projected liquidity requirements. Nonetheless, as business needs warrant, we
may issue other types of debt or equity in the future.
Debt and Securitizations
------------------------
Short-term liquidity provided by operations comes primarily from interest income
from mortgage revenue bonds and promissory notes in excess of the related
financing costs, mortgage origination and servicing fees, and fund sponsorship
fees. We typically generate funds for investment purposes from corresponding
financing activities.
We have the following debt and securitization facilities to provide short-term
and long-term liquidity:
o $100.0 million, with a temporary additional $50.0 million available through
December 2005, used for mortgage banking needs, which is renewable
annually;
o $90.0 million, used to acquire equity interests in property ownership
entities prior to the inclusion of these equity interests into investments
funds, which matures in October 2006;
o $91.0 million, used to provide the interim loan to Capri, the maturity of
which has been extended pending its replacement with a new facility from
the same lender;
o $40.0 million, established in connection with the CMC acquisition, which
expires in December 2006;
o $650.0 million in MBIA credit enhancement through 2011, under which we can
complete up to $425.0 million of floating-rate securitizations and $225.0
million of auction-rate securitizations; and
o Securitization through the Merrill Lynch P-FLOATs/RITESSM program of a
specified percentage of the fair value of mortgage revenue bonds not
otherwise securitized or credit enhanced by either Merrill Lynch or IXIS.
o Securitization through the Goldman Sachs Tic/Toc program of a specified
percentage of the fair value of mortgage revenue bonds not otherwise
securitized or credit enhanced by Goldman Sachs, which matures in October
2028.
As of September 30, 2005, we had approximately $342.4 million available to
borrow under these debt and securitization facilities without exceeding limits
imposed by debt covenants and our trust agreement.
Equity
------
We have the ability to issue $100.0 million of equity securities pursuant to a
registration statement we have filed with the SEC. We currently have no plans to
issue any such securities.
Liquidity Requirements after September 30, 2005
-----------------------------------------------
During November 2005, equity distributions will be paid as follows:
(In thousands)
Common/CRA shareholders $24,700
SCU/SMU holders 8,700
4.4% CRA Preferred shareholders 800
Equity Issuer Preferred shareholders 6,300
------
Total $40,500
======
Other
-----
Management is 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.
35
Summary of Cash Flows
---------------------
The net increase in cash and cash equivalents during 2005 exceeded the increase
in 2004 despite decreased operating inflows due to a lower level of investing
activity in 2005 as compared to 2004.
Despite increased net income (including net income exclusive of non-cash income
and expense items), operating cash flows were lower in the 2005 period by a
margin of $45.1 million. This decrease resulted from a higher level of mortgage
loan fundings and the timing of subsequent sales of the loans. Additionally, the
timing of receipts and payments in operating asset and liability accounts
contributed to this decrease.
Investing outflows were lower in 2005 as compared to 2004 by a margin of $141.9
million. The decrease was due to:
o a lower level of mortgage revenue bond acquisitions coupled with a higher
level of repayments;
o a net decrease in advances to partnerships as compared to a net investment
outflow in 2004;
o the acquisition of CCLP in 2005, the cash portion of which was mostly
funded via a loan in 2004 which converted to an equity interest in 2005.
These factors were offset in part by higher restricted cash requirements in
connection with our growing mortgage banking business. Additionally, 2004
inflows included the recapture of cash collateral balances related to our bond
securitization programs with no similar occurrence in the current year.
Financing inflows in the 2005 period were lower than in 2004 by $61.7 million.
The primary reason for the higher inflows in 2004 was the issuance of common and
preferred shares in the first half of the year, with only half as much in
comparable offerings in the current year. The higher level of securitization
activity in 2005 was due in part to the remarketing of borrowings under the
fixed rate securitization that terminated in the current year period.
Additionally, financing outflows increased due to distributions on the higher
level of equity outstanding.
Commitments, Contingencies and Off Balance Sheet Arrangements
-------------------------------------------------------------
Note 16 to the condensed consolidated financial statements contains a summary of
the Company's guarantees and off-balance sheet arrangements.
The following table reflects our maximum exposure and carrying amount as of
September 30, 2005, for guarantees we and our subsidiaries have entered into:
Maximum Carrying
(In thousands) Exposure Amount
-------------------------------------------- ----------- ----------
Payment guarantees (1) $ 45,471 $ --
Completion guarantees (1) 37,773 --
Operating deficit guarantees (1) 1,629 --
Recapture guarantees (1) 66,366 --
Replacement reserve (1) 1,792 --
Mortgage pool credit enhancement (2) 12,887 --
LIHTC guarantees (2) 646,176 21,427
Mortgage banking loss sharing agreement (3) 941,480 9,681
---------- ----------
$1,753,574 $ 31,108
========== ==========
(1) These guarantees generally relate to business requirements for developers to
obtain construction financing. As part of our role as co-developer of certain
properties, we issue these guarantees in order to secure properties as assets
for the funds we manage. To date, we have had minimal exposure to losses under
these guarantees and anticipate no material liquidity requirements in
satisfaction of any guarantee issued.
(2) We see these credit enhancement deals as opportunities to expand our Fund
Management business by offering broad capital solutions to customers. To date,
we have had minimal exposure to losses under these transactions and anticipate
no material liquidity requirements in satisfaction of any credit enhancement
provided. The carrying values disclosed above relate to the fees we earn for the
transactions, which we recognize as the fair value of the credit enhancement in
accordance with FIN 45.
(3) The loss sharing agreement with Fannie Mae is a normal part of the DUS
lender program and affords a higher level of fees than we earn for other
comparable funding sources. The carrying value disclosed above is our estimate
of potential exposure under the guarantees, although any funding requirements
for such exposure is based on the contractual requirements of the underlying
loans we sell to Fannie Mae, which vary as to amount and duration, up to a
maximum of 30 years.
The maximum exposure amount is not indicative of our expected losses under the
guarantees.
36
CONTRACTUAL OBLIGATIONS
The following table provides our commitments as of September 30, 2005, to make
future payments under our debt agreements and other contractual obligations:
Payments due by period
----------------------------------------------------------------------
Less than More than
(In thousands) Total 1 year 1-3 years 3-5 years 5 years
----------------------------------------- ---------- ---------- ---------- ----------- ----------
Notes payable (1) $ 173,372 $ 156,333 $ 5,452 $ 11,587 $ --
Notes payable of consolidated
partnerships (2) 556,425 85,697 209,020 35,800 225,908
Operating lease obligations, net of
subleases 71,999 6,550 13,374 12,870 39,205
Unfunded loan commitments 167,970 151,140 16,830 -- --
Financing arrangements (1) 1,228,394 1,228,394 -- -- --
Preferred shares of subsidiary (subject
to mandatory repurchase) 273,500 -- -- -- 273,500
---------- ---------- ---------- ---------- ----------
Total $2,471,660 $1,628,114 $ 244,676 $ 60,257 $ 538,613
========== ========== ========== ========== ==========
(1) The amounts reflect the current expiration, reset or renewal date of each
facility or security certificate. Management has the ability and intent to
renew, refinance or remarket the borrowings beyond their current due dates.
(2) Of the notes payable of consolidated partnerships, $438.3 million is
guaranteed by certain equity partners of the investment funds. Per
partnership agreements, the equity partners are also obligated to pay the
principal and interest on the notes. The remaining balance of $118.1
million is collateralized with the underlying properties of the
consolidated operating partnerships. All of this debt is non-recourse to
us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest in certain financial instruments, primarily mortgage revenue bonds and
other bond related investments that are subject to various forms of market risk,
including interest rate risk. We seek to prudently and actively manage such
risks to earn sufficient compensation to justify the undertaking of such risks
and to maintain capital levels which are commensurate with the risks we
undertake.
The assumptions related to the following discussion of market risk involve
judgments involving future economic market conditions, future corporate
decisions and other interrelating factors, many of which are beyond our control
and all of which are difficult or impossible to predict with accuracy. Although
we believe that the assumptions underlying the forward-looking information are
reasonable, any of the assumptions could be inaccurate and, therefore, there can
be no assurance that the forward-looking information included herein will prove
to be accurate. Due to the significant uncertainties inherent in forward-looking
information, the inclusion of such information should not be regarded as our
representation that our objectives and plans would be achieved.
INTEREST RATE RISK
------------------
The nature of our investments and the instruments used to raise capital for
their acquisition expose us to income and expense volatility due to fluctuations
in market interest rates. Market interest rates are highly sensitive to many
factors, including governmental policies, domestic and international economic
and political considerations and other factors beyond our control. Our exposure
to interest rates is twofold:
o the potential increase in interest expense on our variable-rate debt; and
o the impact of changes in interest rates on the value of our assets.
IMPACT ON EARNINGS
Our investments in mortgage revenue bonds generally bear interest at fixed
rates, or pay interest according to the cash flows of the underlying properties,
which do not fluctuate with changes in market interest rates.
In contrast, payments required under our floating-rate securitization programs
vary based on market interest rates based on the BMA and are re-set weekly or
every 35 days. In addition, we have floating-rate debt related to our
acquisition financing and our warehouse facilities. Other long-term sources of
capital, such as the preferred shares of our Equity Issuer subsidiary, carry a
fixed dividend rate and, as such, are not impacted by changes in market interest
rates.
37
Excluding $589.3 million of debt hedged via interest rate swap agreements, the
full amount of our liabilities labeled as Financing Arrangements and Notes
Payable are variable rate debts. We estimate that an increase of 1.0% in
interest rates would decrease our annual net income by approximately $8.6
million.
We manage this risk through the use of interest rate swaps, interest rate caps
and forward bond origination commitments, as described in the notes to our
financial statements. In addition, we manage our exposure by striving for
diversification in our businesses to include those not susceptible to interest
rate changes and by managing our leverage.
IMPACT ON VALUATION OF ASSETS
Changes in market interest rates would also impact the estimated fair value of
our portfolio of mortgage revenue bonds. We estimate the fair value for each
mortgage revenue bond as the present value of its expected cash flows, using a
discount rate for comparable tax-exempt investments. Therefore, as market
interest rates for tax-exempt investments increase, the estimated fair value of
our mortgage revenue bonds will generally decline, and a decline in interest
rates would be expected to result in an increase in their estimated fair values.
For example, we estimate, using the same methodology used to estimate the
portfolio fair market value under SFAS 115, that a 1% increase in market rates
for tax-exempt investments would decrease the estimated fair value of our
portfolio of mortgage revenue bonds from its September 30, 2005, value of
approximately $2.2 billion to approximately $2.1 billion. A 1% decline in
interest rates would increase the value of the September 30, 2005, portfolio to
approximately $2.4 billion. Changes in the estimated fair value of the mortgage
revenue bonds do not impact our reported net income, earnings per share,
distributions or cash flows, but are reported as components of other accumulated
comprehensive income and affect reported shareholders' equity, and may affect
our borrowing capability to the extent that collateral requirements are
sometimes based on our asset values.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains
disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that the Company files
or submits under the Securities and Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC's
rules and forms, and that such information is accumulated and communicated
to the Company's management, including its Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures.
As of the end of the period covered by this Quarterly Report on Form 10-Q,
the Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to the
Securities and Exchange Act Rule 13a-15. Based upon this evaluation as of
September 30, 2005, the Chief Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures are
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. To remediate the material
weaknesses in internal controls identified during the Company's evaluation
pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 as of the year
ended December 31, 2004, during the first nine months of 2005, we have:
(i) hired a director of taxation, a newly created position;
(ii) taken steps to remediate the errors in our tax accounting through
increased use of third-party tax service providers for the more
complex areas of our tax accounting and increased formality and rigor
of controls and procedures over accounting for income taxes;
(iii)strengthened our due diligence procedures in reviewing acquisition
candidates to ensure that any required recharacterizations are
identified on a timely basis; and
(iv) strengthened our analytical procedures with regard to the preparation
and review of all consolidation eliminations.
38
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to routine litigation and administrative proceedings
arising in the ordinary course of business. Management does not believe
that such matters will have a material adverse impact on our financial
position, results of operations or cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In July 2005, we issued approximately 2.2 million 4.4% Cumulative
Perpetual Convertible Community Reinvestment Act Preferred Shares
("4.4% Convertible CRA Preferred Shares") for $108.0 million. Net of
underwriters fees and expenses, our net proceeds were approximately
$104.6 million. The shares carry a cumulative preferred 4.4% return
based upon the liquidation amount of $50 per share and have no stated
maturity. Beginning July 2008, holders of the shares may convert them
into approximately 3.9 million common shares, and we may also redeem
the shares at our option. The shares are also subject to remarketing
provisions beginning in July 2015. These shares have no voting rights.
Meridian Investments acted as placement agent for this offering.
Securities purchased by us
--------------------------
The following table presents information related to our repurchases of
our equity securities during the third quarter of 2005 and other
information related to our repurchase program:
Purchases of Equity Securities
(a) (b) (c) (d)
Total number
of shares
Total purchased as part Maximum number
number of Average of publicly of shares that may yet
shares price paid announced plans be purchased under the
Period purchased (1) per share or programs plans or programs
-------------------- ------------- ----------- ----------------- ----------------------
July 1-31, 2005 24,299 $21.96 --
August 1-31, 2005 -- -- --
September 1-30, 2005 -- -- --
-------- ------ -------
Total 24,299 $21.96 -- 1,266,974
======== ====== ======= ==========
(1) These repurchases were in payment of tax withholding obligations
incurred by holders of newly vested restricted shares and were outside
of our share repurchase program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION
On November 8, 2005, CharterMac announced that Stuart J. Boesky will
step down from his position as CharterMac's Chief Executive Officer
and as a member of its Board of Trustees, effective November 15, 2005.
The Board of Trustees has appointed CharterMac's Chairman, Stephen M.
Ross, as interim Chief Executive Officer, and has begun a search for a
new Chief Executive Officer. The Board will consider both internal and
external candidates. In connection with Mr. Boesky's departure,
CharterMac's President, Marc D. Schnitzer, and its Chief Financial
Officer, Alan P. Hirmes, will assume certain of his duties.
Pursuant to the Agreement, Mr. Boesky will serve as a consultant to
CharterMac and its subsidiaries (collectively, the "Company") for a
period of one year, and his consulting contract may be terminated by
either party. The Company will pay Mr. Boesky approximately $2.8
million in connection with the Agreement; the Company will pay $1.5
million in cash and issue common shares worth $800,000 during the
fourth quarter of 2005, with the balance paid in cash during the first
39
PART II. OTHER INFORMATION
quarter of 2006. Pursuant to the terms of the Agreement, the Company
also will pay Mr. Boesky approximately $64,000 in the fourth quarter
of 2004 and approximately $175,000 in 2006 for consulting services.
In addition, CharterMac will accelerate the vesting on restricted
shares and share options it had previously granted to Mr. Boesky as
well as the common shares granted under the Agreement, and the lockup
agreement with respect to his special common units of a subsidiary of
CharterMac, which are exchangeable for common shares of CharterMac on
a one for one basis, will terminate upon his departure.
Pursuant to the Agreement, Mr. Boesky and the Company have mutually
released claims each may have against the other, if any. The Agreement
also contains non-compete provisions and provides that Mr. Boesky will
not solicit Company employees or clients for specified time periods.
Mr. Boesky also has agreed to a standstill with respect to the
acquisition of securities of American Mortgage Acceptance Company
("AMAC") or other specified actions with respect to AMAC. AMAC is a
Massachusetts real estate investment trust which is managed by an
affiliate of CharterMac.
ITEM 6. EXHIBITS
31.1 Chief Executive Officer certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
31.2 Chief Financial Officer certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
32.1 Chief Executive Officer and Chief Financial Officer certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
* Filed herewith
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARTERMAC
(Registrant)
Date: November 9, 2005 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Managing Trustee and Chief Executive Officer
Date: November 9, 2005 By: /s/ Alan P. Hirmes
------------------
Alan P. Hirmes
Managing Trustee, Chief Financial Officer and
Chief Operating Officer
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Stuart J. Boesky, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period
ending September 30, 2005 of CharterMac;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure the material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 9, 2005 By: /s/Stuart J. Boesky
-------------------
Stuart J. Boesky
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Alan P. Hirmes, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period
ending September 30, 2005 of CharterMac;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure the material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 9, 2005 By: /s/ Alan P. Hirmes
------------------
Alan P. Hirmes
Chief Financial Officer
Exhibit 32.1
CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(UNITED STATES CODE, TITLE 18, CHAPTER 63, SECTION 1350)
ACCOMPANYING QUARTERLY REPORT ON FORM 10-Q OF
CHARTERMAC FOR THE QUARTER ENDED SEPTEMBER 30, 2005
In connection with the Quarterly Report on Form 10-Q of CharterMac for the
quarterly period ending September 30, 2005, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), Stuart J. Boesky, as
Chief Executive Officer of our Company, and Alan P. Hirmes, as Chief Financial
Officer of our Company, each hereby certifies, pursuant to 18 U.S.C. Section
1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d), as applicable, 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 our Company.
By: /s/ Stuart J. Boesky By: /s/ Alan P. Hirmes
-------------------- ------------------
Stuart J. Boesky Alan P. Hirmes
Chief Executive Officer Chief Financial Officer
November 9, 2005 November 9, 2005