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 MARCH 31, 2006
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)
(212) 317-5700
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Large Accelerated filer [X] Accelerated filer [ ] Non-accelerated
filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of April 28, 2006, there were 52,096,063 outstanding shares of the
registrant's shares of beneficial interest.
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 26
Item 3. Quantitative and Qualitative Disclosures about Market Risks 36
Item 4. Controls and Procedures 37
PART II
Item 1. Legal Proceedings 38
Item 1A. Risk Factors 38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
Item 3. Defaults Upon Senior Securities 38
Item 4. Submission of Matters to a Vote of Security Holders 38
Item 5. Other Information 38
Item 6. Exhibits 38
SIGNATURES 39
See accompanying notes to condensed consolidated financial statements.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31, December 31,
2006 2005
----------- -----------
(UNAUDITED)
ASSETS
Mortgage revenue bonds-at fair value $ 2,310,468 $ 2,294,787
Other investments 185,825 298,590
Cash and cash equivalents 171,704 161,295
Restricted cash 34,119 34,025
Goodwill and intangible assets, net 443,341 439,175
Other assets 166,725 144,670
Investments held by consolidated partnerships 3,058,796 3,025,762
Other assets of consolidated partnerships 602,532 580,524
----------- -----------
Total assets $ 6,973,510 $ 6,978,828
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Financing arrangements $ 1,521,959 $ 1,429,692
Preferred shares of subsidiary (subject to mandatory
repurchase) 273,500 273,500
Notes payable 200,325 304,888
Accounts payable, accrued expenses and other liabilities 164,726 179,275
Notes payable and other liabilities of consolidated
partnerships 1,528,615 1,627,556
----------- -----------
Total liabilities 3,689,125 3,814,911
----------- -----------
Minority interests in consolidated subsidiaries 258,999 262,274
----------- -----------
Preferred shares of subsidiary (not subject to mandatory 104,000 104,000
repurchase)
----------- -----------
Partners' interests in consolidated partnerships 1,895,395 1,747,808
----------- -----------
Commitments and contingencies
Shareholders' equity:
Beneficial owners equity:
4.4% Convertible CRA preferred shares; no par value; 2,160
shares issued and outstanding in 2006 and 2005 104,498 104,498
Convertible CRA shares; no par value; 6,552 shares issued
and outstanding in 2006 and 2005 103,125 104,369
Special preferred voting shares; no par value (14,865
shares issued and outstanding in 2006 and 14,885 shares
issued and outstanding in 2005) 149 150
Common shares; no par value (100,000 shares authorized;
52,388 issued and 52,047 outstanding in 2006 and 52,309
issued and 51,988 outstanding in 2005) 739,956 752,042
Restricted shares granted -- (4,193)
Treasury shares of beneficial interest - common, at cost
(341 shares in 2006 and 321 shares in 2005) (7,571) (7,135)
Accumulated other comprehensive income 85,834 100,104
----------- -----------
Total shareholders' equity 1,025,991 1,049,835
----------- -----------
Total liabilities and shareholders' equity $ 6,973,510 $ 6,978,828
=========== ===========
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
March 31,
---------------------
2006 2005
-------- --------
Revenues:
Mortgage revenue bond interest income $ 36,522 $ 36,367
Other interest income 5,939 3,563
Fee income 16,071 9,584
Other revenues 4,321 3,530
Revenues of consolidated partnerships 8,245 4,902
-------- --------
Total revenues 71,098 57,946
-------- --------
Expenses:
Interest expense 17,107 10,580
Interest expense of consolidated partnerships 6,946 6,889
Interest expense - distributions to preferred shareholders
of subsidiary 4,724 4,725
General and administrative 31,768 26,212
Depreciation and amortization 8,913 7,696
Other expenses of consolidated partnerships 15,281 11,047
-------- --------
Total expenses 84,739 67,149
-------- --------
Loss before other income (13,641) (9,203)
Equity and other income 752 524
Gain on sale of loans and repayment of mortgage revenue bonds 5,430 1,696
Loss on investments held by consolidated partnerships (62,149) (49,939)
-------- --------
Loss before allocations and income taxes (69,608) (56,922)
Income allocated to preferred shareholders of subsidiary (1,556) (1,556)
Minority interests in consolidated subsidiaries, net of tax (5,879) (6,065)
Loss allocated to partners of consolidated partnerships 88,781 70,963
-------- --------
Income before income taxes 11,738 6,420
Income tax benefit 2,919 8,365
-------- --------
Net income $ 14,657 $ 14,785
======== ========
Allocation of net income to:
4.4% Convertible CRA preferred shareholders $ 1,188 $ --
Common shareholders 11,962 13,110
Convertible CRA shareholders 1,507 1,675
-------- --------
Total $ 14,657 $ 14,785
======== ========
Net income per share:
Basic $ 0.23 $ 0.26
======== ========
Diluted $ 0.23 $ 0.25
======== ========
Weighted average shares outstanding:
Basic 58,578 57,821
======== ========
Diluted 58,895 58,236
======== ========
Dividends declared per share $ 0.42 $ 0.41
======== ========
See accompanying notes to condensed consolidated financial statements.
4
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
-----------------------
2006 2005
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,657 $ 14,785
Adjustments to reconcile net income to net cash provided by operating
activities:
(Gain) loss on repayment of mortgage revenue bonds (891) 9
Depreciation and amortization 8,913 7,696
Equity in income of unconsolidated entities (510) (524)
Income allocated to preferred shareholders of subsidiary 1,556 1,556
Income allocated to minority interests in consolidated subsidiaries 5,879 6,065
Non-cash compensation expense 2,035 1,823
Other non-cash expense 1,342 1,148
Deferred taxes -- (2,880)
Distributions received from equity investees 1,374 555
Changes in operating assets and liabilities:
Mortgage servicing rights (3,951) (3,115)
Mortgage loans held for sale 95,412 (20,251)
Loan to affiliate -- 4,600
Deferred revenues (2,502) (13,268)
Other assets (29,558) 11,578
Accounts payable, accrued expenses and other liabilities (12,766) (3,777)
--------- ---------
Net cash provided by operating activities 80,990 6,000
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal amortization and repayments of mortgage revenue bonds 31,509 10,499
Mortgage revenue bond acquisitions and fundings (60,675) (111,751)
Investments in notes receivable (1,250) --
Repayments of notes receivable 667 2,700
Acquisitions, net of cash acquired 113 8,558
Loans to Capri Capital -- (6,000)
Advances to partnerships (28,103) (29,304)
Collection of advances to partnerships 38,120 25,749
Deferred investment acquisition costs (46) (1,175)
Increase in cash and cash equivalents - restricted (94) (380)
Other investing activities (1,172) (9,813)
--------- ---------
Net cash used in investing activities (20,931) (110,917)
--------- ---------
(continued)
See accompanying notes to condensed consolidated financial statements.
5
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
-----------------------
2006 2005
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders (25,914) (23,896)
Distributions to preferred shareholders of subsidiary (1,556) (1,556)
Distributions to Special Common Unit and Special Membership Unit (8,916) (8,663)
holders
Proceeds from financing arrangements 96,968 247,792
Repayments of financing arrangements (4,701) (112,715)
(Decrease) increase in notes payable (105,531) 28,692
Proceeds from stock options exercised -- 8
Deferred financing costs -- (796)
--------- ---------
Net cash (used in) provided by financing activities (49,650) 128,866
--------- ---------
Net increase in cash and cash equivalents 10,409 23,949
Cash and cash equivalents at the beginning of the year 161,295 71,287
--------- ---------
Cash and cash equivalents at the end of the period $ 171,704 $ 95,236
========= =========
Acquisition activity:
Redemption of preferred stock and advances $ 7,170 $ --
Conversion of note receivable -- 70,000
Assets acquired (8,421) (73,989)
Liabilities assumed 1,364 12,547
--------- ---------
Net cash received in acquisitions $ 113 $ 8,558
========= =========
Non-cash investing and financing activities:
Share grants $ 3,662 $ 1,439
--------- ---------
Conversion of SCUs to common shares $ 358 $ --
--------- ---------
Treasury stock purchases via employee withholding $ 435 $ 1,946
--------- ---------
See accompanying notes to condensed consolidated financial statements.
6
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited 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", "our" 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 December 31, 2005, the latest practical date available.
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 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 unaudited 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, 2005.
Our annual report on Form 10-K for the year ended December 31, 2005, contains a
summary of our significant accounting policies. There have been no material
changes to these items since December 31, 2005, nor have there been any new
accounting pronouncements pending adoption that would have a significant impact
on our unaudited condensed consolidated financial statements, except as
indicated below.
We are responsible for the unaudited condensed consolidated financial statements
included in this document. Our unaudited 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 2006
presentation.
NEW ACCOUNTING PRONOUNCEMENTS
During the first quarter of 2006, we adopted Statement of Financial Accounting
Standards No. 123(R), SHARE-BASED PAYMENT, which replaces SFAS No. 123. The
impact of adopting this Standard was not material to us, as we had been
accounting for share-based payments following the fair value provisions of SFAS
No. 123.
In March 2006, the FASB issued Statement of Financial Accounting Standards No.
156, ACCOUNTING FOR SERVICING OF FINANCIAL Assets ("SFAS No. 156"). This
statement stipulates the accounting for mortgage servicing rights ("MSRs") and
requires that they be recorded initially at fair value. The statement also
permits, but does not require, that we may subsequently record those MSRs at
fair value with changes in fair value recognized in the statement of operations.
Alternatively, we may continue to amortize the MSRs over their projected service
periods. We will adopt SFAS No. 156, as required, in the first quarter of 2007.
We are currently determining the impact, if any, on our financial statements.
NOTE 2 - ACQUISITIONS
Effective March 1, 2006, we acquired Capri Real Estate Services from Capri
Capital Advisors LLC ("CCA"), and renamed it CharterMac Real Estate Securities
("CRES"). CRES is a manager of hedge funds and other funds concentrating on
investing in securities of publicly traded real estate operating companies.
The consideration paid was approximately $7.2 million, subject to additional
consideration based on growth of assets under management by CRES. The initial
consideration included the redemption of the preferred interest we held in CCA,
valued at $4.1 million, plus approximately $3.1 million of costs and advances we
had made to CCA with respect to this business.
We accounted for the acquisition as a purchase and, accordingly, we included the
results of operations in the condensed consolidated financial statements from
the acquisition date. We allocated our cost of the acquisition on the basis of
7
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
the estimated fair values of the assets 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 $7.9
million. Certain allocations are preliminary as of March 31, 2006, including the
allocation to goodwill, and will be refined as we gather further information on
fair value and determine the fair values of intangible assets acquired.
Pro forma information is not presented, as this acquisition is not material to
our revenues, net income or assets.
NOTE 3 - MORTGAGE REVENUE BONDS
The following table summarizes our mortgage revenue bond portfolio:
March 31, December 31,
(In thousands) 2006 2005
---------------------------------- ----------- -----------
Amortized cost basis $ 2,446,023 $ 2,417,185
Gross unrealized gains 104,405 116,541
Gross unrealized losses (16,331) (11,424)
----------- -----------
Subtotal/fair value 2,534,097 2,522,302
Less: eliminations (1) (223,629) (227,515)
----------- -----------
Total fair value per balance sheet $ 2,310,468 $ 2,294,787
=========== ===========
(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, is summarized in the table below:
Less than 12 Months
(Dollars in thousands) 12 Months or More Total
---------------------- --------- --------- ---------
MARCH 31, 2006
Number of bonds 51 65 116
Fair value $341,392 $357,840 $699,232
Gross unrealized loss $ 10,702 $ 5,629 $ 16,331
--------------------------------------
DECEMBER 31, 2005
Number 36 55 91
Fair value $253,063 $327,183 $580,246
Gross unrealized loss $ 6,775 $ 4,649 $ 11,424
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.
8
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
The following summarizes the maturity dates of mortgage revenue bonds we held as
of March 31, 2006:
Weighted
Outstanding Average
(In thousands) Bond Amount Fair Value Interest Rate
------------------------------ ----------- ---------- -------------
Due in less than one year $ 719 $ 672 8.08%
Due between one and five years 9,344 9,265 6.12
Due after five years 2,432,063 2,524,160 6.63
---------- ---------- ----
Total / weighted average 2,442,126 2,534,097 6.63%
====
Less: eliminations (1) (226,696) (223,629)
---------- ----------
Total $2,215,430 $2,310,468
========== ==========
(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 following table summarizes our acquisition activity for the three months
ended March 31, 2006:
Weighted Weighted
Average Average
Face Construction Permanent
(In thousands) Amount Interest Rate Interest Rate
-------------------------------------- -------- ------------- -------------
Construction/rehabilitation properties $ 60,675 5.82% 5.82%
The following table summarizes mortgage revenue bonds repaid for three months
ended March 31, 2006:
Net Book Realized
(In thousands) Value Proceeds Gains (Losses)
--------------------------------- -------- -------- --------------
Participating, stabilized $12,755 $13,652 $ 897
Non-participating, stabilized 11,814 11,808 (6)
Non-participating, not stabilized 1,450 1,450 --
------- ------- -------
Total $26,019 $26,910 $ 891
======= ======= =======
At March 31, 2006, mortgage revenue bonds with an aggregate fair value of $2.3
billion were securitized or pledged as collateral in relation to financing
arrangements. Of these, 21 bonds with a fair value of approximately $223.6
million are eliminated in consolidation as noted in the tables above.
See also Note 17 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.
9
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE 4 - OTHER INVESTMENTS
Investments other than mortgage revenue bonds consisted of:
March 31, December 31,
(In thousands) 2006 2005
-------------------------------------------------- -------- -----------
Investment in equity interests in LIHTC properties $ 36,997 $ 46,985
Investment in properties under development 4,271 4,300
Investment in ARCap 18,811 19,874
CCA loans and preferred stock 20,150 26,884
Mortgage loans held for sale 57,956 153,277
Notes receivable 32,003 32,670
Other investments 15,637 14,600
-------- --------
Total other investments $185,825 $298,590
======== ========
The balance of "CCA loans and preferred stock" at December 31, 2005, included
$4.1 million of preferred stock that was redeemed and $2.7 million of advances
that were forgiven as part of the purchase price of CRES (see Note 2).
"Notes receivable" includes a $26.0 million investment in a mortgage loan in
which we have co-invested with American Mortgage Acceptance Company ("AMAC"), an
affiliated, publicly traded real estate investment trust we manage (which
invested $5.0 million pursuant to a Subordinated Participation Agreement). We
sold the investment at par to AMAC in April 2006 (see Note 18).
"Other investments" includes $5.0 million invested in a fund sponsored by CRES,
which is not consolidated in our financial statements.
NOTE 5 - OTHER ASSETS
The components of other assets were as follows:
March 31, December 31,
(In thousands) 2006 2005
---------------------------------------------------- --------- -----------
Deferred financing and other costs $ 37,298 $ 38,059
Less: Accumulated amortization (14,860) (14,031)
--------- --------
Net deferred costs 22,438 24,028
Real estate owned 36,431 35,608
Interest receivable 17,153 16,964
Fees receivable, net 34,985 30,774
Due from unconsolidated partnerships, net 13,568 7,668
Furniture, fixtures and leasehold improvements, net 9,014 8,178
Income tax receivable 6,063 4,276
Interest rate swap at fair value 6,276 4,857
Deferred taxes 857 1,849
Other 19,940 10,468
--------- --------
Total $ 166,725 $144,670
========= ========
10
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following:
March 31, December 31,
(In thousands) 2006 2005
------------------------------ -------- -----------
Goodwill $243,375 $235,684
Other intangible assets, net 137,377 141,301
Mortgage servicing rights, net 62,589 62,190
-------- --------
Total $443,341 $439,175
======== ========
A. GOODWILL
The following table provides information regarding goodwill by segment:
Fund Mortgage
(In thousands) Management Banking Total
---------------------------- ---------- --------- ----------
Balance at December 31, 2005 $ 197,937 $ 37,747 $ 235,684
Additions 7,888 -- 7,888
Reductions (197) -- (197)
--------- --------- ---------
Balance at March 31, 2006 $ 205,628 $ 37,747 $ 243,375
========= ========= =========
The increase in Fund Management goodwill relates to the acquisition of CRES (see
Note 2). The reduction in Fund Management goodwill pertained to the conversion
of SCUs, the deferred tax impact of which served to effectively lower the
purchase price of CharterMac Capital LLC ("CharterMac Capital").
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
--------------------------------------- ---------- ---------------------- ---------------------- ----------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2006 2005 2006 2005 2006 2005
-------- ------------ -------- ------------ -------- ------------
Amortized identified intangible assets:
Partnership service contracts 9.4 $ 47,300 $ 47,300 $ 11,982 $ 10,718 $ 35,318 $ 36,582
Transactional relationships 16.7 103,000 103,000 19,971 17,864 83,029 85,136
General partner interests 9.0 5,100 5,100 1,343 1,201 3,757 3,899
Joint venture developer relationships 5.0 4,800 4,800 2,275 2,035 2,525 2,765
Mortgage banking broker relationships 5.0 1,080 1,080 234 180 846 900
Other identified intangibles 9.3 4,427 4,427 3,298 3,181 1,129 1,246
---- -------- -------- -------- -------- -------- --------
Subtotal/weighted average life 13.8 165,707 165,707 39,103 35,179 126,604 130,528
====
Unamortized identified intangible assets:
Mortgage banking licenses and approvals
with no expiration 10,773 10,773 -- -- 10,773 10,773
-------- -------- -------- -------- -------- --------
Total identified intangible assets $176,480 $176,480 $ 39,103 $ 35,179 $137,377 $141,301
======== ======== ======== ======== ======== ========
2006 2005
-------- --------
Amortization expense recorded for the
three months ended March 31, $ 3,924 $ 4,170
======== ========
11
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
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 7 - FINANCING ARRANGEMENTS AND NOTES PAYABLE
Our CharterMac Capital 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%.
The CharterMac Mortgage Capital ("CMC") warehouse line was reduced from $250.0
million to $175.0 million in 2006 pursuant to terms arranged with Bank of
America. This facility matures in May 2006 and is subject to annual renewal.
NOTE 8 - DERIVATIVE INSTRUMENTS
As of March 31, 2006, we had interest rate swaps with varying expiration dates
and an aggregate notional amount of $450.0 million, which are designated as
hedging instruments in cash flow hedges with the hedged item being 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. There was no ineffectiveness in the hedging relationships
during the periods reported. Amounts in accumulated other comprehensive income
will be reclassified into earnings in the same period and during which the
hedged forecasted transaction affects earnings. Since we are hedging the
variable interest payments in our floating rate securitizations, the forecasted
transactions are the interest payments.
We expect all of the swaps will be highly effective in achieving offsetting
changes in cash flows throughout their terms.
As of March 31, 2006, we also had an interest rate swap with a notional amount
of $26.0 million that is hedging the change in the fair value of a $26.0 million
investment. We did not elect to apply hedge accounting to this fair value swap.
Any change in the fair value of this swap is therefore included in current
period net income. This swap will be terminated in the second quarter as the
related investment was sold to AMAC subsequent to March 31, 2006 (see Note 18).
Interest rate swaps for which we were in a net settlement liability position are
recorded in accounts payable, accrued expenses and other liabilities and those
for which we are in a net settlement asset position are recorded in other
assets. The amounts recorded at March 31 were as follows:
(In thousands) 2006 2005
-------- --------
Net liability position $ -- $ 502
Net asset position $ 6,276 $ 2,909
Interest expense included the following related to our swaps:
Interest expense $ 96 $ 1,382
Interest income (181) --
Change in fair value of free standing swap (750) --
------- -------
Total $ (835) $ 1,382
======= =======
We estimate that approximately $1.3 million of the net unrealized gain included
in accumulated other comprehensive income will reduce interest expense within
the next twelve months.
12
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE 9 - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities consisted of the
following:
March 31, December 31,
(In thousands) 2006 2005
------------------------------------ -------- -----------
Deferred revenues $ 67,684 $ 70,025
Distributions payable 41,106 41,080
Accounts payable 24,835 22,314
Salaries and benefits 8,161 15,816
Other 22,940 30,040
-------- --------
Total $164,726 $179,275
======== ========
NOTE 10 - MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES
Minority interests in consolidated subsidiaries consisted of the following:
March 31, December 31,
(In thousands) 2006 2005
------------------------------------ -------- -----------
Convertible Special Common Units
("SCUs") of a subsidiary $247,674 $250,866
Convertible Special Membership
Units ("SMUs") of a subsidiary 11,325 11,408
-------- --------
Total $258,999 $262,274
======== ========
Income allocated to minority interests was as follows:
Three Months Ended
March 31,
----------------------------
(in thousands) 2006 2005
-------- --------
Convertible SCUs $ 5,729 $ 6,065
Convertible SMUs 150 --
-------- --------
Total $ 5,879 $ 6,065
======== ========
In the first three months of 2006, the holders of 20,000 SCUs converted the
units to an equivalent number of common shares, and the related special
preferred voting shares were redeemed at par.
13
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE 11 - CONSOLIDATED PARTNERSHIPS
Assets and liabilities of consolidated partnerships consisted of:
March 31, December 31,
(In thousands) 2006 2005
------------------------------------ ---------- ----------
Investments in property partnerships $3,058,796 $3,025,762
Land, buildings and improvements,
net of accumulated depreciation 323,602 329,869
Cash 189,442 172,622
Other assets 89,488 78,033
---------- ----------
Subtotal 602,532 580,524
---------- ----------
Total assets $3,661,328 $3,606,286
========== ==========
Notes payable $ 567,777 $ 565,877
Due to property partnerships 830,543 896,031
Other liabilities 130,295 165,648
---------- ----------
Total liabilities $1,528,615 $1,627,556
========== ==========
Of the notes payable balance, $459.2 million are 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 $108.6 million is collateralized with the underlying
properties of the consolidated operating partnerships. All of this debt is
non-recourse to the Company.
NOTE 12 - 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 $163,000 for the three months ended March 31, 2006, and
$138,000 for the three months ended March 31, 2005.
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 $1.0 million for the three months ended
March 31, 2006, and approximately $963,000 for the three months ended March 31,
2005.
We collect asset management, incentive management and expense reimbursement fees
from AMAC, an affiliated, publicly traded real estate investment trust. These
fees, which are included in fund sponsorship income, totaled approximately
$952,000 for the three months ended March 31, 2006, and approximately $648,000
for the three months ended March 31, 2005. We entered into a new agreement,
effective as of April 2006 whereby the basis of certain of the fees we will earn
will be changed, although we do not expect the fees we earn to differ
significantly from the existing agreement absent the effect of AMAC's growth.
In June 2004, we entered into an unsecured revolving credit 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 and for general corporate
purposes. In the opinion of management, the terms of this facility are
consistent with those of loan transactions with independent third parties. As of
March 31, 2006, there were no outstanding advances to AMAC under this facility.
No interest income was earned from this facility for the three months ended
March 31, 2006, and approximately $73,000 was recorded for the three months
ended March 31, 2005. In April 2006, we extended and increased the facility (see
Note 18).
14
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE 13 - COMPREHENSIVE INCOME
Comprehensive income was as follows:
Three months Ended
March 31,
---------------------
(In thousands) 2006 2005
------------------------------------------------------------------------- -------- --------
Net income $ 14,657 $ 14,785
Net unrealized gain on interest rate derivatives 591 4,174
Net unrealized gain on marketable securities and equity investments (285) --
Net unrealized gain on mortgage revenue bonds:
Unrealized loss during the period (13,685) (4,021)
Reclassification adjustment for net (gain) loss included in net income (891) 9
-------- --------
Comprehensive income $ 387 $ 14,947
======== ========
NOTE 14 - SHARE BASED COMPENSATION
A. THE PLAN
As approved by shareholders in 1997 and amended and restated in 2003, we have an
Amended and Restated Incentive Share Plan (the "Plan"), the purpose of which is
to:
o attract and retain qualified persons as trustees and officers; and
o provide incentive and more closely align the financial interests of our
employees, officers and trustees with the interests of our shareholders by
providing them with a financial interest in our success.
The Compensation Committee of our board of trustees administers the Plan.
Pursuant to the Plan, the maximum number of common shares that may be awarded is
the lesser of:
o 10% of the number of total shares outstanding as of December 31 preceding
issuances of such awards; and
o the limits prescribed by the national security exchange or national
quotation system on which the shares may then be listed.
The Plan allows for the issuance of share options, restricted share grants,
share appreciation rights, restricted and deferred shares, performance units and
performance shares.
B. SHARE OPTIONS
All options granted have an exercise price equal to or greater than the market
price of our common shares on the grant date. The maximum option term is ten
years from the date of grant and options granted pursuant to the Plan may vest
immediately upon issuance or over a period determined by our compensation
committee.
We granted the following options pursuant to the Plan:
Weighted Average Vesting
Year Number Exercise Price Term Period
------------------------------------------------------------------------------
2005 656,515 $24.35 10 years 3 years
2006 384,490 $22.03 10 years 3 years
15
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
We used the following assumptions in the Black-Scholes option pricing model to
determine fair values of options granted:
2006 2005
-------- --------
Risk free interest rate 4.50% 3.01%
Expected years until exercise 2.00 2.00
Expected stock volatility 24.09% 20.38%
Dividend yield 7.63% 6.71%
The following table summarizes share option activity for the three months ended
March 31, 2006:
Weighted
Average
Exercise
Options Price
--------- ----------
Outstanding at beginning of year 1,510,341 $20.42
Granted 384,490 22.03
Forfeited -- --
Exercised -- --
---------- ------
Outstanding at end of period 1,894,831 $20.75
========== ======
Exercisable at end of period 613,174 $21.16
========== ======
Fair value of options granted
during the period (in thousands) $ 800
=========
Compensation cost recorded (in thousands) $ 226
=========
The following table summarizes information about share options outstanding and
exercisable at March 31, 2006:
Weighted
Average
Remaining
Number Contractual Life Number
Exercise Price Oustanding (in Years) Exercisable
-------------- ---------- ---------------- -----------
$11.56 51,576 4.1 51,576
$17.56 2,250 6.5 2,250
$17.78 800,000 7.6 200,000
$21.61 20,000 9.2 --
$24.44 636,515 8.8 359,348
$22.03 384,490 9.8 --
--------- ---- -------
1,894,831 8.4 613,174
========= ==== =======
As of March 31, 2005, there were approximately 4.3 million options or share
grants available for issuance under the Plan.
16
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
C. NONVESTED SHARES AND SCUS
The following table summarizes information about nonvested shares and SCUs for
the three months ended March 31, 2006:
Weighted
Average Weighted
Grant Average
Nonvested Date Fair Nonvested Grant Date
shares Value SCUs Fair Value
--------- --------- --------- ----------
Nonvested at January 1, 2006 241,194 $20.25 310,400 $17.92
Granted 165,906 21.32 -- --
Vested 58,872 20.96 -- --
Forfeited 36 23.48 -- --
------- ------ ------- ------
Nonvested at March 31, 2006 348,192 $20.64 310,400 $17.92
======= ====== ======= ======
NOTE 15 - 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 4.4% Convertible
CRA Preferred Shares and our subsidiaries' SCUs and SMUs are not included in the
calculation as their assumed conversions would be antidilutive.
Three Months Ended Three Months Ended
March 31, 2006 March 31, 2005
------------------------------ ------------------------------
(In thousands, except per share amounts) Income Shares Per Share Income Shares Per Share
------------------------------------------------- ------- ------- --------- ------- ------- ---------
Net income $14,657 $14,785
Preferred dividends 1,188 --
------- -------
Net income allocable to shareholders (Basic EPS) 13,469 58,578 $ 0.23 14,785 57,821 $ 0.26
======= ======
Effect of dilutive securities -- 317 -- 415
------- ------- ------- -------
Diluted EPS $13,469 58,895 $ 0.23 $14,785 58,236 $ 0.25
======= ======= ======= ======= ======== ======
17
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE 16 - 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 proceeds of the mortgage revenue
bonds are used to finance the new construction, substantial rehabilitation,
acquisition, or refinancing of affordable multifamily housing throughout
the United States.
Through this segment, we also invest in other entities, such as our
preferred and common investments in ARCap, our participating loan to CCA,
our preferred investment in CCA prior to the acquisition of CRES, and our
investments in funds that CCA and CRES sponsor.
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 asset management,
underwriting, origination and other services;
o A subsidiary that provides advisory services to AMAC;
o Subsidiaries that participate in credit intermediation transactions,
including those for pools of mortgage loans and providing specified returns
to investors in LIHTC equity funds, in exchange for fees; and
o A subsidiary that provides pension advisory services.
3. Mortgage Banking, which includes subsidiaries that originate and service
primarily multifamily mortgage loans on behalf of third parties, including:
o Fannie Mae;
o Freddie Mac;
o the FHA;
o AMAC; 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 little or no equity interest.
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.
The table below includes Cash Available for Distribution ("CAD"), and a
reconciliation from CAD to net income, as the performance measure used by our
chief decision-maker to allocate resources among the segments.
18
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
The following table provides more information regarding our segments:
THREE MONTHS ENDED
MARCH 31,
-----------------------
(In thousands) 2006 2005
-------- --------
REVENUES
Portfolio Investing $ 44,300 $ 39,481
Fund Management 22,923 16,417
Mortgage Banking 13,251 5,871
Consolidated Partnerships 8,245 4,902
Elimination of intersegment transactions (17,621) (8,725)
-------- --------
Consolidated $ 71,098 $ 57,946
======== ========
CAD
Portfolio Investing $ 23,214 $ 27,857
Fund Management 1,452 3,163
Mortgage Banking 4,012 38
-------- --------
Total Segment CAD 28,678 31,058
Preferred dividends (1,188) --
Subsidiary equity distributions (8,905) (8,640)
Dividends on subsidiary preferred stock (6,281) (6,281)
Current tax benefit 2,951 --
-------- --------
Consolidated CAD 15,255 16,137
Fees deferred for GAAP (1) 837 (4,430)
Depreciation and amortization expense (8,913) (7,696)
Mortgage revenue bond yield adjustments (2) (163) 490
Gain on sale of loans (3) 4,623 1,637
Tax adjustment (4) (32) 8,365
Non-cash compensation (5) (2,035) (1,958)
Difference between subsidiary equity
distributions and income allocated to
subsidiary equity holders (6) 3,025 2,575
Preferred dividends 1,188 --
Other, net 872 (335)
-------- --------
Consolidated Net Income $ 14,657 $ 14,785
======== ========
DEPRECIATION AND AMORTIZATION
Portfolio Investing $ 788 $ 961
Fund Management 4,383 4,598
Mortgage Banking 3,742 2,137
Consolidated Partnerships -- --
Elimination of intersegment transactions -- --
-------- --------
Consolidated $ 8,913 $ 7,696
======== ========
(1) Represents the net difference between fees received at the time of a
transaction that are recognized immediately for CAD but are deferred and
recognized over time for GAAP accounting (e.g.: fund sponsorship fees
recognized over the relevant service periods) or upon a later event (such
as mortgage origination fees recognized upon settlement of a loan sale).
(2) Represents the adjustment for amortization of bond discounts or premiums
that are recognized immediately for CAD but are deferred and recognized
over time for GAAP accounting, as well as the difference between actual
interest income received and income recognized under the effective yield
method.
(3) Represents non-cash gain recognized on sale of mortgage loans when
servicing rights are retained and gains on sales of mortgage revenue bonds.
(4) Represents the difference between the tax benefit recorded and the net cash
amount we expect to pay or receive in relation to the current period.
(5) Represents the add-back of amortization of costs recognized for share-based
compensation.
(6) Represents the difference between actual distributions to SCU and SMU
holders (which is based on the common share distribution rate) and
accounting allocation of earnings, which is based on the represented
portion of combined common, CRA and subsidiary equity in allocating GAAP
net income.
19
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE 17 - COMMITMENTS AND CONTINGENCIES
PRS/CRG
PRS Companies ("PRS") and Capitol Realty Group ("CRG") were sponsors of certain
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.
Due to financial difficulties experienced by PRS, we ceased our business
dealings with them and, among other provisions of an agreement reached in April
2005, assumed the general partner interest in certain of the "PRS Partnerships"
indicated in the table below.
Also in April 2005, 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 that
provided for, among other things:
o a 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;
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 substantially complete. GCG has assumed the full
general partner interest and 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. Should cost overruns exceed $1.0
million, we will share in the excess in return for a partial general partner
interest.
In addition to the PRS Partnerships, CRG Partnerships and GCG 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.
20
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
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.
Our potential exposure falls into three categories as follows:
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 $15.0 million $20.0 million.
This estimate is based upon our ongoing analyses 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. As of March 31,
2006, advances outstanding totaled approximately $17.2 million either
to the partnerships or through the revolving line of credit to the CRG
partnerships. These advances, and additional loans, are 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 cannot 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.
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.
Potential cost to provide specified yields - As noted in the table below,
10 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.
With respect to one property in early stages of construction, we halted
construction and have since exercised our right to foreclosure as holder of the
first mortgage and plan to sell the property at our current carrying value after
recognizing a write-down in the second quarter of 2005.
With respect to another property in the early stages of construction, we have
likewise determined that construction should not be continued. We do not hold a
bond with respect to this property, but a fund we sponsored provided equity. We
have received preliminary bids to sell our general partner and limited partner
interests that would allow us to fully recover the fund's investment. As such,
we expect no loss with respect to this property.
We 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.
21
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
The partnerships in question are summarized as follows:
(In thousands)
Fair Value of
CharterMac CharterMac Mortgage
Holds or Capital Loan Revenue
Will Hold Sponsored Included CharterMac Third Amounts Bonds
Mortgage Fund is in Credit Capital Parties Upon Full Outstanding
Revenue Equity Intermediated Holds GP Provided Draw at March 31,
Number Bond Partner Funds Interest Equity Down 2006
-------- ---------- ---------- ------------- ---------- -------- --------- -----------
PRS
PARTNERSHIPS
Construction 2 2 1 1 1 1 $ 21,900 $ 22,307
Lease-Up 8 7 4 2 4 4 89,900 90,369
Rehab 2 2 1 1 1 1 30,400 31,599
Stabilized 2 2 -- -- -- 2 18,595 18,859
-------- -------- -------- -------- -------- -------- -------- --------
Subtotal 14 13 6 4 6 8 160,795 163,134
-------- -------- -------- -------- -------- -------- -------- --------
CRG
PARTNERSHIPS
Construction 1 1 1 -- 1 -- 7,130 --
Lease-Up 3 1 3 2 1 -- 10,532 10,628
Rehab 3 3 3 3 3 -- 71,564 72,463
Stabilized -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Subtotal 7 5 7 5 5 -- 89,226 83,091
-------- -------- -------- -------- -------- -------- -------- --------
GCG
PARTNERSHIPS
Construction 2 2 2 1 -- -- 27,770 14,600
Lease-Up -- -- -- -- -- -- -- --
Rehab -- -- -- -- -- -- -- --
Stabilized -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Subtotal 2 2 2 1 -- -- 27,770 14,600
-------- -------- -------- -------- -------- -------- -------- --------
Total 23 20 15 10 11 8 $277,791 $260,825
======== ======== ======== ======== ======== ======== ======== ========
Total eliminated in consolidation $155,475 $150,343
======== ========
FORWARD TRANSACTIONS
At March 31, 2006, our Mortgage Banking subsidiaries had forward commitments of
approximately $217.4 million for mortgages to be funded in 2006 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 $109.9 million. Approximately $31.5 million of this amount was funded
as of March 31, 2006, and is included in Other Investments as Mortgage Loans
Held for Sale. The balance of approximately $78.4 million is to be funded later
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 $102.1 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 $6.8
million at March 31, 2006.
22
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
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 March 31, 2006, all but one 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.
We also participate in loss sharing transactions under Freddie Mac's Delegated
Underwriting Initiative ("DUI") program whereby we originate loans that are
purchased by Freddie Mac. The aggregate of all loans we can originate under this
program shall not exceed $100.0 million.
Under the terms of our master agreement with Freddie Mac, we are obligated to
reimburse Freddie Mac for a portion of any loss that may result from borrower
defaults on DUI transactions. For such loans, if a default occurs, our share of
the loss will be the first 5% of the unpaid principal balance and 25% of the
next 20% of the remaining unpaid principal balance to a maximum of 10% of the
unpaid principal balance. The loss on a defaulted loan is calculated as the
unpaid principal amount due, unpaid interest due and default resolutions costs
(taxes, insurance, operation and foreclosure costs) less recoveries.
Our maximum exposure at March 31, 2006, pursuant to these agreements, was
approximately $868.9 million (representing what we would owe in accordance with
the loss sharing percentages with Fannie Mae and Freddie Mac 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 these product lines at a level that, in management's judgment, is adequate
to provide for estimated losses. At March 31, 2006, that reserve was
approximately $12.7 million, which, we believe, represents our actual potential
losses at that time.
Our Mortgage Banking subsidiaries maintained, as of March 31, 2006, collateral
consisting of treasury notes, and Fannie Mae and Freddie Mac securities of
approximately $11.4 million and a money market account of approximately $3.2
million, which is included in cash and cash equivalents, including restricted
cash, in the consolidated balance sheet, to satisfy the Fannie Mae and Freddie
Mac collateral requirements of $12.7 million.
We are also required by the master agreement with Freddie Mac to provide a
letter of credit in the amount of 8% of the original principal balance as
collateral security for payment of the reimbursement obligation. A reimbursement
agreement with the Bank of America to provide a master letter of credit covering
the collateral requirement up to $8 million covers this letter of credit
requirement. At March 31, 2006, commitments under this reimbursement agreement
totaled $1.9 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.
Fannie Mae and Freddie Mac have assumed the remainder of the real estate
exposure after the first loss position. 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 March 31, 2006, is
approximately $7.4 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 March 31, 2006, the credit-intermediated 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
future, a provision for probable loss might be required pursuant to SFAS No. 5,
ACCOUNTING FOR CONTINGENCIES.
23
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
YIELD TRANSACTIONS
We have entered into several credit intermediation agreements with either IXIS
Financial Products, Inc. ("IXIS") or Merrill Lynch (each a "Primary
Intermediator") 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 CharterMac Capital. In return, we have or will receive fees,
generally at the start of each credit intermediation period. There are a total
of 11 outstanding agreements to provide the specified returns:
o through the construction and lease-up phases of the properties;
o for the period from the completion of the construction and lease-up phases
through the operating phase of the properties; or
o covering both periods.
Total potential exposure pursuant to these transactions is approximately $787.2
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
these agreements. 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 $22.1 million as of March 31, 2006. This amount is
included in deferred revenues on our consolidated balance sheet. Refer also to
PRS / CRG above, 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
Intermediator 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 intermediation from the
Primary Intermediator as part of the P-FLOATs/RITES and TIC/TOC securitization
programs. We use the remaining subordinate trust interests as collateral in
these programs. In connection with these transactions, we have posted $232.1
million as collateral with a Primary Intermediator in the form of either cash or
mortgage revenue bonds as of March 31, 2006.
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
$223.2 million as of March 31, 2006. The fair value of these obligations,
representing the deferral of the fee income over the obligation periods, was
$1.6 million as of March 31, 2006. 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
At March 31, 2006, we had unused letters of credit totaling $43.0 million,
including the $8.0 million described in the MORTGAGE BANKING LOSS SHARING
AGREEMENTS above.
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.
24
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE 18 - SUBSEQUENT EVENTS
During April 2006, we sold an investment to AMAC, at its approximate $26.0
million par value. We subsequently terminated the fair value hedge associated
with the investment.
During April 2006, we amended our loan agreement with AMAC on the unsecured
revolving credit facility to increase it's borrowing capacity to $50.0 million
(see Note 12). The maturity of the facility was also extended to June 2007.
During May 2006, we amended our Capri acquisition lines with Bank of America to
increase it's borrowing capacity to $110.0 million. The maturity date was also
extended to June 2006.
25
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 we own;
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;
o risk of default associated with the mortgage revenue bonds and other
securities held by us or our subsidiaries;
o the risk that relationships with key investors and developers may not
continue;
o our ability to generate fee income may not continue; and
o risks related to the form and structure of our financing arrangements.
These risks are more fully described in our Form 10-K for the year ended
December 31, 2005. 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
-------------------------------
We acquired Capri Capital Limited Partnership ("CCLP") in March 2005. Operating
results in our Portfolio Investing segment prior to the acquisition date include
interest income on a loan made to CCLP in July 2004. Following the acquisition,
operating results of CCLP are included in our Mortgage Banking segment.
Results of Operations
---------------------
The following is a summary of our operations for the three months ended March
31, 2006 and 2005:
% of % of
(In thousands) 2006 Revenues 2005 Revenues % Change
-------------------------- -------- -------- -------- -------- --------
Revenues $71,098 100.0% $57,946 100.0% 22.7 %
Income before income taxes $11,738 16.5% $ 6,420 11.1% 82.8 %
Net income $14,657 20.6% $14,785 25.5% (0.9)%
Compared to 2005, the first quarter of 2006 benefited from the continued
expansion of all of our businesses and a full quarter of operations for CCLP in
the Mortgage Banking segment as compared to only one month in 2005. In addition,
revenues in 2006 include $8.2 million generated by consolidated partnerships
compared to $4.9 million in 2005. Offsetting the revenue gains is the
elimination of revenues earned by our subsidiaries in transactions with
partnerships we have consolidated but in which we have virtually no equity
interest. 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.
Revenue gains and the overall growth of other income in our Mortgage Banking
business led to an increase in income before income taxes while a decrease in
the tax benefit recognized led to a slight decrease in net income.
26
REVENUES
Our revenues were as follows:
For the Three Months Ended March 31,
------------------------------------
(In thousands) 2006 2005 % Change
---------------------------------------- -------- -------- --------
Mortgage revenue bond interest income $36,522 $36,367 0.4 %
Other interest income 5,939 3,563 66.7
Fee income:
Mortgage banking 7,854 4,081 92.5
Fund sponsorship 6,514 3,779 72.4
Credit intermediation 1,703 1,724 (1.2)
------- ------- -----
Total fee income 16,071 9,584 67.7
Other revenues:
Construction service fee 1,148 870 32.0
Expense reimbursements 1,227 1,459 (15.9)
Administration fees 401 334 20.1
Prepayment penalties 812 254 219.7
Other 733 613 19.6
------- ------- -----
Total other revenues 4,321 3,530 22.4
Subtotal 62,853 53,044 18.5
------- ------- -----
Revenues of consolidated partnerships 8,245 4,902 68.2
------- ------- -----
Total revenues $71,098 $57,946 22.7 %
======= ======= =====
Mortgage revenue bond interest income increased due to an increase in the
average portfolio balance over comparable periods although the growth was
partially offset by a higher level of eliminations following the consolidation
of a group of property level partnerships in mid-2005. Fee income variances
primarily relate to continued growth of businesses and are detailed in the
discussions of results for the Fund Management and Mortgage Banking segments.
Other interest income includes income from temporary investments, interest
earned on Mortgage Banking escrow balances and interest earned on our loans to
Capri. The increase from the 2005 period relates to:
o the 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.
The increase in prepayment penalties is principally due to higher refinancing
volume in the Mortgage Banking business.
Revenue of consolidated partnerships increased due to an increase in the number
of those partnerships over the past year. Results of consolidated partnerships
are also discussed below.
In the first quarter of 2006 and 2005, the following amounts were eliminated, as
they represented transactions between consolidated partnerships and our other
component businesses:
For the Three Months Ended March 31,
------------------------------------
(In thousands) 2006 2005 % Change
------------------------------------- -------- -------- --------
Mortgage revenue bond interest income $ 1,539 $ 259 494.2%
Fund sponsorship fees 9,014 6,503 38.6
Credit intermediation 812 715 13.6
Other revenues 1,287 512 151.4
------- ------- -----
Total $12,652 $ 7,989 58.4%
======= ======= =====
27
EXPENSES
Our expenses were as follows:
For the Three Months Ended March 31
-----------------------------------
(In thousands) 2006 2005 % Change
-------------------------------------------------- -------- -------- --------
Interest expense $17,107 $10,580 61.7%
Interest expense - preferred shares of subsidiary 4,724 4,725 --
Salaries and benefits 19,902 16,621 19.7
Fund origination and property acquisition expenses 2,406 899 167.6
General and administrative 9,460 8,692 8.8
------- ------- -----
Subtotal 31,768 26,212 21.2
------- ------- -----
Depreciation and amortization 8,913 7,696 15.8
------- ------- -----
Subtotal 62,512 49,213 27.0
Interest expense of consolidated partnerships 6,946 6,889 0.8
Other expenses of consolidated partnerships 15,281 11,047 38.3
------- ------- -----
Total expenses $84,739 $67,149 26.2%
======= ======= =====
The increase in interest expense reflects the higher amount of debt
(approximately $1.7 billion and $1.4 billion as of March 31, 2006 and 2005,
respectively) 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 2005 as compared to 2006. The effect of rate increases was
tempered, however, by the interest rate swaps we have in place as the majority
are now in the money although one swap in effect in the 2005 period has since
expired. Our average borrowing rate increased to 3.8% in the first quarter of
2006 as compared to 3.1% in the first quarter of 2005.
The increases in salaries and benefits and general and administrative expense
relates to the growth of our component businesses as well as the acquisition of
CCLP in March 2005, which doubled the size of our Mortgage Banking business and
is comparable to the increase in revenue. The 2006 period also includes
approximately $900,000 of severance related costs associated with the
realignment of certain functions in our businesses.
Fund origination and property acquisition expenses represent costs incurred in
connection with originating tax-credit equity investment funds and acquiring
properties for those investment funds (see FUND MANAGEMENT section below for
related revenue discussion). The increase compared to last year is the result of
a higher level of fund sponsorship activity in 2006 and the recovery of costs
which occurred in the first quarter of 2005 pertaining to 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 and the expansion of the Mortgage Banking business. This was
partially offset by the absence of amortization of a sizable intangible asset
that we wrote off at the end of 2005.
Expenses of the consolidated partnerships increased due to the increase in the
number of consolidated entities due to the incremental fund sponsorship
activity. Virtually all of the expenses of the consolidated partnerships are
absorbed by their equity partners.
28
OTHER ITEMS
For the Three Months Ended March 31,
-----------------------------------
(In thousands) 2006 2005 % Change
--------------------------------------------------- -------- -------- --------
Equity and other income $ 752 $ 524 43.5 %
Gain on sale of loans $ 4,539 $ 1,705 166.2 %
Gain (loss) on repayment of mortgage revenue bonds 891 (9) --
-------- -------- -------
Gain on repayment of mortgage revenue bonds and sale of loans $ 5,430 $ 1,696 220.2 %
Income allocated to preferred shareholders of subsidiary $ (1,556) $ (1,556) --
Income allocated to SCUs $ (5,729) $ (6,065) (5.5)%
Income allocated to SMUs (150) -- --
-------- -------- -------
Total income allocated to minority interests $ (5,879) $ (6,065) (3.1)%
Loss allocated to partners of consolidated partnerships $ 88,781 $ 70,963 25.1 %
Equity and other income primarily includes dividends from our investment in
ARCap Investors, LLC, and property operations of real estate owned, offset by
losses from tax advantaged investment vehicles similar to those we sponsor.
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.
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 the first quarter of 2005, 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 $3,000).
29
Results by Segment
------------------
PORTFOLIO INVESTING
The table below shows selected information regarding our Portfolio Investing
activities:
For the Three Months Ended March 31,
-------------------------------------
(In thousands) 2006 2005 % Change
-------------------------------------------------------- ---------- ---------- ---------
New mortgage revenue bond acquisitions $ 34,579 $ 102,000 (66.1)%
Funding of mortgage revenue bonds acquired in prior years -- 9,751 --
Acquisitions related to prior period forward commitments 26,096 -- --
---------- ---------- ------
Total acquisition and funding activity $ 60,675 $ 111,751 (45.7)%
Forward commitments issued but not funded $ -- $ 8,000 --
Mortgage revenue bonds repaid $ 26,908 $ 459 --
Average portfolio balance (fair value) $2,359,059 $2,191,793 7.6 %
Weighted average permanent interest rate of bonds
acquired 5.82 % 6.33 %
Weighted average yield of portfolio 6.19 % 6.65 %
Average borrowing rate (includes effect of swaps) 3.77 % 3.06 %
Average BMA rate 3.08 % 1.86 %
---------- ----------
Mortgage revenue bond interest income (1) $ 38,304 $ 36,626 4.6 %
Other interest income (1) 5,494 2,424 126.7
Prepayment penalties 5 63 (92.1)
Other revenues (1) 497 368 35.1
---------- ---------- ------
$ 44,300 $ 39,481 12.2 %
========== ========== ======
Interest expense and securitization fees (1) $ 16,146 $ 10,025 61.1 %
Gain (loss) on repayments of mortgage revenue bonds $ 891 $ (9) --
---------- ----------- ------
(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 2005 and first three months of 2006, 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, we continue to earn a positive spread on our portfolio.
Corresponding with an increase in the average portfolio balance, our level of
securitizations increased and along with a higher average borrowing rate
resulted in the increase in interest expense and securitization fees. While our
borrowing costs have been increasing along with market rates, we have been
exploring options to reduce the ancillary costs of our securitization programs.
Although there can be no assurance as to when it will commence operations, we
expect the involvement of our credit intermediation subsidiary in our
securitizations will reduce such costs.
30
FUND MANAGEMENT
The table below shows selected information regarding our Fund Management
activities:
For the Three Months Ended March 31,
------------------------------------
(In thousands) 2006 2005 % Change
------------------------------------------- -------- -------- ---------
Equity raised $ 60,905 $ 15,212 300.4%
Equity invested by investment funds (1) $149,764 $123,942 20.8%
Fees based on equity raised $ 2,234 $ 990 125.7%
Fees based on equity invested $ 6,404 $ 5,130 24.8%
Fees based on management of other entities:
Partnership and asset management fees $ 6,945 $ 4,284 62.1%
Construction fees 1,148 870 32.0
Investment origination fees -- 34 --
-------- -------- -----
Subtotal 8,093 5,188 56.0
-------- -------- -----
Total fund sponsorship fees (2) 16,731 11,308 48.0
Credit intermediation fees (2) 2,515 2,439 3.1
Expense reimbursement (2) 2,908 2,221 30.9
Other revenues (2) 769 449 71.3
-------- -------- -----
Total $ 22,923 $ 16,417 39.6%
======== ======== =====
(1) Excludes warehoused properties that have not yet closed into an investment
fund.
(2) 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 partnership and 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 2006 increases relate
to the funds closed since the end of the first quarter of 2005.
FEES BASED ON EQUITY RAISED
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. O&O
fees are realized immediately while we earn the partnership management fees over
five-year periods. O&O fees increased approximately 361% in the first quarter of
2006 as compared to the same period in 2005 primarily due to the increase in
equity raised.
Fees earned for partnership management services increased approximately 82.9% to
$1.5 million compared to $837,000 for the same period in 2005. This increase is
primarily the result of ongoing revenues for fund sponsorships completed after
the first quarter of 2005.
FEES BASED ON EQUITY INVESTED
We earn property acquisition fees and acquisition allowance fees based upon the
level of fund equity invested. The increase in fees is higher than the increase
of equity invested because of a higher fee rate realized, stemming from changes
in the mix of funds originated.
FEES BASED ON MANAGEMENT OF OTHER ENTITIES
Partnership and asset management fees increased in 2006, primarily attributable
to the higher level of assets under management and an improvement of the cash
position of certain investment funds, allowing us to collect additional
management fees in 2006 which we did not previously recognize until
collectibility was reasonably assured.
OTHER REVENUES
Credit intermediation, expense reimbursement and 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.
31
MORTGAGE BANKING
The table below shows selected information regarding our Mortgage Banking
activities:
For the Three Months Ended March 31,
-----------------------------------
(In thousands) 2006 2005 % Change
--------------------------------------------------- ---------- ---------- ---------
Originations $ 281,156 $ 104,062 170.2 %
Mortgage portfolio at March 31 $8,935,959 $9,051,266 (1.3)%
Fair value of mortgage servicing rights at March 31 $ 62,589 $ 74,398 (15.9)%
---------- ---------- -----
Mortgage origination fees (1) $ 2,108 $ 757 178.5 %
Mortgage servicing fees 5,746 3,323 72.9
---------- ---------- -----
Total fee income 7,854 4,080 92.5
Interest income 4,268 1,235 245.6
Prepayment penalties 807 190 324.7
Other revenues 322 366 (12.0)
---------- ---------- -----
$ 13,251 $ 5,871 125.7 %
========== ========== =====
Gain on sale of mortgages $ 4,539 $ 1,705 166.2 %
========== ========== =====
(1) Prior to intersegment eliminations.
Mortgage origination fees increased in proportion to the increase in
originations. The higher volume of originations in 2006 resulted from a
significant increase in Fannie Mae originations, due to the CCLP acquisition
(due to the fact that CCLP had traditionally conducted a large portion of its
business through Fannie Mae). The 2006 period includes a full quarter of CCLP
origination as compared to only one month during the 2005 period as the
acquisition did not occur until March 2005. Conduit originations also increased
sharply as we continued to pursue business that does not warrant agency
execution in response to market demand.
Originations for the three months ended March 31 are broken down as follows:
(In thousands) 2006 % of total 2005 % of total
----------------- -------- ---------- -------- ----------
Fannie Mae $209,466 74.5 % $ 88,598 85.1 %
Freddie Mac 50,625 18.0 2,650 2.6
Conduit and other 21,065 7.5 12,814 12.3
-------- ----- -------- -----
Total $281,156 100.0 % $104,062 100.0 %
======== ===== ======== =====
The increase in servicing fees is a result of the CCLP acquisition in March
2005. Adjusting for the impact of the acquisition, servicing fee income in 2006
declined approximately 7.1% as compared to the same period in 2005. 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.
Interest income relates primarily to that earned on escrow balances and
benefited from increased market rates earned. The increase in prepayment
penalties relates to a higher level of refinancing activity in the current year.
Other revenues include a significantly higher level of fees for processing
assumptions in the 2006 quarter as compared to the 2005 quarter. All categories
also increased due to the CCLP acquisition.
Gain on sale of mortgages increased in 2006 as compared to 2005 due to the
increased origination volume where we have retained mortgage servicing rights.
CONSOLIDATED PARTNERSHIPS
The results of consolidated partnerships reflected in our financial statements
are for entities we 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 14 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.
32
The increased revenue amounts in 2006 are due to the origination of nine funds
and the assumption of the general partner interests in 13 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 $3,000, representing our nominal ownership. As a
result, the consolidation of these partnerships has an insignificant impact on
our net income.
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. Because the distributions paid on the minority interests in these
corporate subsidiaries effectively provide a tax deduction, as well as other
factors within these businesses, they often have losses for book purposes.
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 effective tax rate on a consolidated basis for three months ended March 31,
2006 and 2005 was (24.6)% and (130.3)%, respectively. The effective rate for our
corporate subsidiaries that were subject to taxes was 31.0% and 55.2% for the
three months ended March 31, 2006 and 2005, respectively.
The tax benefit disclosed relates to the book losses of the taxable businesses
and the tax deductible distributions on their subsidiary equity. The lower
effective rate in the 2006 period is a result of recognizing a valuation
allowance against deferred tax assets. Management determined that, in light of
the projected taxable losses in the corporate subsidiaries for the foreseeable
future, not all of the deferred tax assets will likely be realized and hence a
valuation allowance was provided. 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.
Inflation
---------
Inflation did not have a material effect on our results for the periods
presented.
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
immediate and long term 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, and fee income receipts. 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 $175.0 million, used for mortgage banking needs, which matures in May 2006,
and 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 $110.0 million, used initially to provide the loans to CCA and CCLP and
since used for general corporate purposes which matures in June 2006;
o $40.0 million, established in connection with the CMC acquisition, which
expires in December 2006;
o $650.0 million in MBIA credit intermediation capacity through 2011, under
which we can complete up to $425.0 million of variable-rate demand note
securitizations and $225.0 million of auction-rate securitizations;
o securitization through the Merrill Lynch P-FLOATs/RITES program of a
specified percentage of the fair value of mortgage revenue bonds not
otherwise securitized or pledged as collateral; and
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 intermediated.
33
As of March 31, 2006, we had approximately $333.4 million available to borrow
under these debt and securitization facilities without exceeding limits imposed
by debt covenants and our by-laws. Although certain of the facilities noted
above mature in 2006, we expect to renew, replace or refinance them as
necessary, and we are in negotiations to replace the maturing lines listed above
(except for the mortgage banking credit line), with a master credit facility
with these same lenders as our current lines. While we believe that we will be
able to do so, there is no assurance that we will achieve refinancing terms
favorable to us.
Equity
------
We have the ability to issue $500.0 million of equity securities pursuant to
registration statements we have filed with the SEC. We currently have no plans
to issue any such securities.
Liquidity Requirements after March 31, 2006
-------------------------------------------
During May 2006, equity distributions will be paid as follows:
(In thousands)
Common/CRA shareholders $24,764
SCU/SMU holders 8,904
4.4% CRA Preferred shareholders 1,188
Equity Issuer Preferred shareholders 6,281
-------
Total $41,137
=======
In connection with the formation of our Centerbrook credit intermediary
subsidiary, we will be capitalizing the entity with approximately $50.0 million
to $70.0 million during 2006, utilizing available cash.
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.
Summary of Cash Flows
---------------------
The net increase in cash and cash equivalents during 2006 was lower than the
increase in 2005 despite significantly higher operating inflows and lower
investing outflows. These positive items were offset by net financing outflows
in 2006 as compared to net cash provided by financing in 2005.
Operating cash flows were higher in the 2006 period by a margin of $75.0 million
due primarily to the sale of mortgage loans in the quarter whereas the 2005
period experienced net fundings of such loans. Additionally, the timing of
receipts and payments in operating asset and liability accounts contributed to
this increase.
Investing outflows were lower in 2006 as compared to 2005 by a margin of $89.9
million. The decrease was due to:
o a lower level of mortgage revenue bond acquisitions coupled with a higher
level of repayments; and
o a net decrease in advances to partnerships as compared to a net investment
outflow in 2005;
These factors were offset in part by a high level of cash acquired from CCLP in
2005 with a much smaller amount acquired with CRES in the 2006 period.
Financing inflows in the 2006 period were lower than in 2005 by $178.5 million.
The primary reason for the higher outflows in 2006 was the repayment of
borrowings associated with the mortgage loans sold during the quarter and a much
lower net level of securitized borrowings during the current year. Additionally,
financing outflows increased due to distributions on the higher level of equity
outstanding.
34
Commitments, Contingencies and Off Balance Sheet Arrangements
-------------------------------------------------------------
Note 17 to the unaudited 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
March 31, 2006, for guarantees we and our subsidiaries have entered into:
Maximum Carrying
(In thousands) Exposure Amount
-------------------------------------------- ---------- --------
Repayment guarantees (1) $ 3,602 $ --
Completion guarantees (1) 37,980 --
Development deficit guarantees (1) 26,666 1,566
Operating deficit guarantees (1) 6,960 --
ACC transition guarantees (1) 3,245 --
Recapture guarantees (1) 96,324 --
Replacement reserve (1) 2,998 --
Guarantee of payment (1) 45,471 --
Mortgage pool credit intermediation (2) 7,446 --
LIHTC credit intermediation (2) 787,175 22,080
Mortgage banking loss sharing agreements (3) 868,899 12,747
---------- --------
$1,886,766 $ 36,393
========== ========
(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 transactions as opportunities to expand our Fund Management
business by offering broad capital solutions to customers. To date, we have had
minimal exposure to losses and anticipate no material liquidity requirements in
satisfaction of any arrangement. The carrying values disclosed above relate to
the fees we earn for the transactions, which we recognize as their fair values.
(3) The loss sharing agreements with Fannie Mae and Freddie Mac are a normal
part of the DUS and DUI lender programs and afford 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 and Freddie Mac, 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.
35
CONTRACTUAL OBLIGATIONS
The following table provides our commitments as of March 31, 2006, 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) $ 200,325 $ 199,358 $ 967 $ -- $ --
Notes payable of consolidated
partnerships (2) 567,777 178,788 116,582 26,853 245,554
Operating lease obligations 69,001 6,764 13,468 12,496 36,273
Unfunded loan commitments (3) 326,307 244,380 81,927 -- --
Financing arrangements (1) 1,521,959 1,521,959 -- -- --
Preferred shares of subsidiary (subject
to mandatory repurchase) 273,500 -- -- -- 273,500
---------- ---------- ---------- ---------- ----------
Total $2,958,869 $2,151,249 $ 212,944 $ 39,349 $ 555,327
========== ========== ========== ========== ==========
(1) The amounts included in each category 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, $459.2 million relate to
equity subscriptions and are 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 $108.6 million is collateralized with the underlying properties
of the consolidated operating partnerships. All of this debt is
non-recourse to us.
(3) Of this amount, $217.4 million represents mortgage loan origination
commitments with corresponding sale commitments.
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 precise 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. A rising
interest rate environment could reduce the demand for multifamily tax-exempt and
taxable financing, which could limit our ability to invest in mortgage revenue
bonds or to structure transactions. Conversely, falling interest rates may
prompt historical renters to become homebuyers, in turn potentially reducing the
demand for multifamily housing.
Our exposure to interest rate is twofold:
o the potential increase in interest expense on our variable rate debt; and
o the impact of interest rates on the fair value of our assets.
36
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 variable rate securitization programs
fluctuate with market interest rates based on the BMA index and are re-set
weekly or every 35 days. In addition, we have variable rate debt related to our
acquisition financing and our warehouse facilities, with rates based on LIBOR.
Other long-term sources of capital, such as our preferred shares of Equity
Issuer and our 4.4% Convertible CRA preferred shares, carry a fixed dividend
rate and as such, are not impacted by changes in market interest rates.
With the exception of $450.0 million of debt hedged via interest rate swap
agreements, the full amount of our liabilities labeled on our unaudited
condensed consolidated balance sheet 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 pre-tax income by approximately $12.7 million.
Conversely, we have large escrow balances maintained by our Mortgage Banking
business and we are entitled to the interest earned on those balances. A 1.0%
increase in interest rates would therefore increase our pre-tax income by
approximately $1.8 million.
We manage interest rate risk through the use of interest rate swaps, interest
rate caps and forward bond origination commitments, as described in the notes to
our unaudited condensed consolidated financial statements. In addition, we
manage our exposure by striving for diversification in our businesses to include
those less 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
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 that, using the same methodology used to estimate the portfolio fair
value under SFAS No. 115, a 1% increase in market rates for tax-exempt
investments would reduce the estimated fair value of our portfolio of mortgage
revenue bonds by approximately $141.0 million and a 1% decrease would result in
an increase of approximately $158.4 million. Changes in the estimated fair value
of the mortgage revenue bonds do not impact our reported net income, net income
per share, distributions or cash flows, but are reported as components of
accumulated other 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 March 31, 2006, 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. In January 2006, we
implemented an internal audit function and contracted a specialty firm
to assist in the execution. Other than the foregoing, there have not
been any significant changes in our internal control over financial
reporting during the fiscal quarter to which this report relates that
have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
37
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 1A. RISK FACTORS
There have been no material changes to the risk factors as disclosed in
our filing on form 10-K for the year ended December 31, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Securities purchased by us
The following table presents information related to our repurchases of
our equity securities during the first quarter of 2006 and other
information related to our repurchase program:
Purchases of Equity Securities
(a) (b) (c) (d)
Total number
of shares
Total Weighted 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
----------------------- --------------- -------------- ----------------- ----------------------
January 1-31, 2006 746 $ 22.04 --
February 1-28, 2006 1,164 22.15 --
March 1-31, 2006 17,802 21.73 --
--------- ------- ----
Total 19,712 $ 21.77 -- 1,491,600
=============== ======= ===== ==========
(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 - None
ITEM 6. EXHIBITS
31.1 Chief Executive Officer certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
31.2 Chief Financial Officer certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
32.1 Chief Executive Officer and Chief Financial Officer certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
* Filed herewith
38
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: May 10, 2006 By: /s/ Marc D. Schnitzer
---------------------
Marc D. Schnitzer
Managing Trustee, Chief Executive Officer
and President
Date: May 10, 2006 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, Marc D. Schnitzer, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period
ending March 31, 2006 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: May 10, 2006 By: /s/ Marc D. Schnitzer
---------------------
Marc D. Schnitzer
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 March 31, 2006 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: May 10, 2006 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 MARCH 31, 2006
In connection with the Quarterly Report on Form 10-Q of CharterMac for the
quarterly period ending March 31, 2006, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), Marc D. Schnitzer, 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/ Marc D. Schnitzer By: /s/ Alan P. Hirmes
--------------------- ------------------
Marc D. Schnitzer Alan P. Hirmes
Chief Executive Officer Chief Financial Officer
May 10, 2006 May 10, 2006