UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 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 July 31, 2006, there were 51,571,729 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 28
Item 3. Quantitative and Qualitative Disclosures about Market Risk 45
Item 4. Controls and Procedures 46
PART II
Item 1. Legal Proceedings 47
Item 1A. Risk Factors 47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 47
Item 3. Defaults Upon Senior Securities 47
Item 4. Submission of Matters to a Vote of Security Holders 48
Item 5. Other Information 48
Item 6. Exhibits 48
SIGNATURES 50
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
June 30, December 31,
2006 2005
----------- -----------
(Unaudited)
ASSETS
Mortgage revenue bonds-at fair value $ 2,413,949 $ 2,294,787
Other investments 370,351 298,590
Cash and cash equivalents 116,181 161,295
Restricted cash 20,452 34,025
Goodwill and intangible assets, net 436,169 439,175
Loan to affiliate 27,042 --
Other assets, net 144,667 144,670
Investments held by consolidated partnerships 3,109,031 3,025,762
Other assets of consolidated partnerships 665,898 580,524
----------- -----------
Total assets $ 7,303,740 $ 6,978,828
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Financing arrangements $ 1,600,778 $ 1,429,692
Preferred shares of subsidiary (subject to mandatory
repurchase) 273,500 273,500
Notes payable 408,337 304,888
Accounts payable, accrued expenses and other liabilities 164,680 179,275
Notes payable and other liabilities of consolidated partnerships 1,365,076 1,627,556
----------- -----------
Total liabilities 3,812,371 3,814,911
----------- -----------
Minority interests in consolidated subsidiaries 253,191 262,274
----------- -----------
Preferred shares of subsidiary (not subject to mandatory
repurchase) 104,000 104,000
----------- -----------
Partners' interests in consolidated partnerships 2,156,653 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 100,714 104,369
Special preferred voting shares; no par value (14,825
shares issued and outstanding in 2006 and 14,885 shares
issued and outstanding in 2005) 149 150
Common shares; no par value (160,000 shares authorized;
52,474 issued and 52,093 outstanding in 2006 and 52,309
issued and 51,988 outstanding in 2005) 723,591 752,042
Restricted shares granted -- (4,193)
Treasury shares of beneficial interest - common, at cost
(381 shares in 2006 and 321 shares in 2005) (8,124) (7,135)
Accumulated other comprehensive income 56,697 100,104
----------- -----------
Total shareholders' equity 977,525 1,049,835
----------- -----------
Total liabilities and shareholders' equity $ 7,303,740 $ 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 Six Months Ended
June 30, June 30,
----------------------- -----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Revenues:
Mortgage revenue bond interest income $ 39,217 $ 37,061 $ 75,739 $ 73,428
Other interest income 6,580 3,279 12,519 6,842
Fee income 18,272 24,404 34,343 34,284
Other revenues 5,796 6,584 11,158 9,818
Revenues of consolidated partnerships 9,366 7,152 17,611 12,054
--------- --------- --------- ---------
Total revenues 79,231 78,480 151,370 136,426
--------- --------- --------- ---------
Expenses:
Interest expense 24,085 14,351 41,193 24,931
Interest expense of consolidated partnerships 5,611 6,133 12,557 13,022
Interest expense - distributions to preferred
shareholders of subsidiary 4,725 4,725 9,449 9,449
General and administrative 39,861 33,068 72,427 59,280
Depreciation and amortization 14,615 9,469 23,528 17,165
Loss on impairment of assets 2,271 1,098 2,271 1,098
Other expenses of consolidated partnerships 16,258 13,618 31,539 24,665
--------- --------- --------- ---------
Total expenses 107,426 82,462 192,964 149,610
--------- --------- --------- ---------
Loss before other income (28,195) (3,982) (41,594) (13,184)
Equity and other income 3,548 552 4,058 1,076
Gain on sale of loans and repayment of mortgage
revenue bonds 2,538 5,229 7,968 6,924
Loss on investments held by consolidated
partnerships (77,930) (66,623) (140,079) (116,562)
--------- --------- --------- ---------
Loss before allocations and income taxes (100,039) (64,824) (169,647) (121,746)
Income allocated to preferred shareholders of
subsidiary (1,557) (1,556) (3,113) (3,112)
Minority interests in consolidated subsidiaries,
net of tax (1,651) (7,881) (7,530) (13,946)
Loss allocated to partners of consolidated
partnerships 107,090 93,370 195,871 164,333
--------- --------- --------- ---------
Income before income taxes 3,843 19,109 15,581 25,529
Income tax benefit 405 335 3,324 8,700
--------- --------- --------- ---------
Net income
$ 4,248 $ 19,444 $ 18,905 $ 34,229
========= ========= ========= =========
Allocation of net income to:
4.4% Convertible CRA preferred shareholders $ 1,188 $ -- $ 2,376 $ --
Common shareholders 2,595 17,243 14,557 30,353
Convertible CRA shareholders 465 2,201 1,972 3,876
--------- --------- --------- ---------
Total $ 4,248 $ 19,444 $ 18,905 $ 34,229
========= ========= ========= =========
Net income per share:
Basic $ 0.05 $ 0.34 $ 0.28 $ 0.59
========= ========= ========= =========
Diluted $ 0.05 $ 0.33 $ 0.28 $ 0.59
========= ========= ========= =========
Weighted average shares outstanding:
Basic 58,639 57,890 58,609 57,856
========= ========= ========= =========
Diluted 58,919 58,274 58,961 58,271
========= ========= ========= =========
Dividends declared per share $ 0.42 $ 0.41 $ 0.84 $ 0.82
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
4
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended June 30,
-------------------------
2006 2005
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,905 $ 34,229
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on repayment of mortgage revenue bonds (912) (903)
Loss on impairment of assets 2,271 1,098
Depreciation and amortization 23,528 17,165
Equity in income of unconsolidated entities (4,058) (1,076)
Income allocated to preferred shareholders of subsidiary 3,113 3,113
Income allocated to minority interests in consolidated subsidiaries 7,531 13,946
Gain on sale of mortgages (5,924) (7,134)
Non-cash compensation expense 3,468 3,836
Other non-cash expense 1,597 1,448
Deferred taxes -- (9,815)
Distributions received from equity investees 2,255 1,110
Reserves for bad debt 14,227 10,869
Changes in operating assets and liabilities:
Mortgage loans held for sale (66,771) (33,539)
Loan to affiliate (27,042) 4,600
Deferred revenues 3,796 5,216
Restructuring costs payable 1,995 --
Receivables (27,939) (24,554)
Other assets (8,569) 3,639
Accounts payable, accrued expenses and other liabilities (18,986) 11,941
--------- ---------
Net cash (used in) provided by operating activities (77,515) 35,189
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal amortization and repayments of mortgage revenue bonds 42,346 34,357
Mortgage revenue bond acquisitions and fundings (213,866) (166,781)
Investments in notes receivable (1,986) --
Repayments of notes receivable 27,584 --
Acquisitions, net of cash acquired (31) (290)
Loans to Capri Capital -- (6,000)
Advances to partnerships (82,726) (57,377)
Collection of advances to partnerships 70,157 66,542
Deferred investment acquisition costs, net of reimbursements 573 (259)
Decrease (increase) in cash and cash equivalents - restricted 13,573 (8,285)
Investing in marketable securities (23,116) (1,194)
Other investing activities (1,467) 1,498
--------- ---------
Net cash used in investing activities (168,959) (137,789)
--------- ---------
(continued)
5
CHARTERMAC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended June 30,
---------------------------
2006 2005
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders (51,830) (47,802)
Distributions to preferred shareholders of subsidiary (3,113) (3,113)
Distributions to Special Common Unit and Special Membership Unit holders (17,821) (17,303)
Proceeds from financing arrangements 1,007,298 260,325
Repayments of financing arrangements (836,212) (115,213)
Increase in notes payable 102,481 28,435
Issuance of common and convertible CRA shares -- 771
Minority interest contribution 3,300 --
Retirement of SCUs and special preferred voting shares (723) (1)
Treasury stock purchases (137) (1,946)
Deferred financing costs (1,883) (185)
----------- -----------
Net cash provided by financing activities 201,360 103,969
----------- -----------
Net (decrease) increase in cash and cash equivalents (45,114) 1,369
Cash and cash equivalents at the beginning of the year 161,295 71,287
----------- -----------
Cash and cash equivalents at the end of the period $ 116,181 $ 72,656
=========== ===========
Acquisition activity:
Redemption of preferred stock and advances $ 7,170 $ --
Conversion of note receivable -- 70,000
Assets acquired (8,565) (90,530)
Liabilities assumed 1,364 20,240
----------- -----------
Net cash paid for acquisitions $ (31) $ (290)
=========== ===========
Non-cash investing and financing activities:
Share grants $ 3,570 $ 1,286
----------- -----------
Conversion of SCUs and SMUs to common shares $ 1,426 $ 800
----------- -----------
Treasury stock purchases via employee withholding $ 573 $ 1,946
----------- -----------
See accompanying notes to condensed consolidated financial statements.
6
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 March 31, 2006, the latest practical date available.
During June 2006, we created a new subsidiary, Centerbrook Financial LLC
("Centerbrook") to provide credit intermediation products to the affordable
housing finance industry. We own 90% of Centerbrook's direct parent and IXIS
Capital Markets North America Inc. ("IXIS") owns the remainder.
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. 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. That filing on Form 10-K 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 ("SFAS No. 123(R)") which replaces
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS No. 123"). Among
other things, SFAS No. 123(R) requires that companies record the value of stock
option grants as compensation expense, while SFAS No. 123 allowed disclosure of
the impact instead of recording the expense. As we had been accounting for
share-based payments as an expense following the fair value provisions of SFAS
No. 123, the impact of adopting this standard was not material to us. See also
Note 13.
In November 2005, the FASB issued Staff Position 115 / 124 - 1, THE MEANING OF
OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS. The
Staff Position clarified, among other matters, the determination as to when an
unrealized loss on debt securities should be reflected in the income statement
as opposed to accumulated other comprehensive income and was effective as of the
first quarter of 2006. Application of the Staff Position had no material impact
on our results of operations.
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
and do not expect any material impact in our financial statements as we intend
to continue amortization of our MSRs.
In June 2006, the FASB issued Interpretation 48, ACCOUNTING FOR UNCERTAINTY IN
INCOME TAXES. The Interpretation sets a standard for recognizing tax benefits in
a company's income statement based on a determination whether it is likely or
7
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
not that the position would withstand audit, without regard for the likelihood
of an audit taking place. Assuming a position meets the "more-likely-than-not"
threshold, the Interpretation also prescribes measurement standards requiring
determination of how much of the tax position would ultimately be allowed if
challenged. The Interpretation will be effective in the first quarter of 2007.
We are currently determining the impact of the Interpretation 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 trusts operating
companies.
The consideration paid was approximately $7.3 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 $3.2 million of costs and advances we
had made to CCA with respect to this business (see Note 4).
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
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 $6.1
million. Certain allocations are preliminary as of June 30, 2006, and will be
refined prior to March 2007.
Pro forma information is not presented, as this acquisition is not material to
our revenues, net income or assets.
In June 2006, we announced our intent to acquire ARCap Investors, LLC ("ARCap").
The transaction is subject to ARCap shareholder approval (see Notes 4 and 19).
NOTE 3 - MORTGAGE REVENUE BONDS
A. SUMMARY
The following table summarizes our mortgage revenue bond portfolio:
June 30, December 31,
(In thousands) 2006 2005
---------------------------------- ----------- -----------
Amortized cost basis $ 2,584,117 $ 2,417,185
Gross unrealized gains 75,415 116,541
Gross unrealized losses (24,030) (11,424)
----------- -----------
Subtotal/fair value 2,635,502 2,522,302
Less: eliminations (1) (221,553) (227,515)
----------- -----------
Total fair value per balance sheet $ 2,413,949 $ 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.
8
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
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
---------------------- --------- --------- --------
JUNE 30, 2006
Number of bonds 97 27 124
Fair value $714,807 $137,067 $851,874
Gross unrealized loss $ 18,317 $ 5,713 $ 24,030
--------------------------------------
DECEMBER 31, 2005
Number of bonds 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.
The following summarizes the maturity dates of mortgage revenue bonds we held as
of June 30, 2006:
Weighted
Outstanding Average
(In thousands) Bond Amount Fair Value Interest Rate
------------------------------ ----------- ---------- -------------
Due in less than one year $ 2,807 $ 2,809 8.03%
Due between one and five years 29,621 29,530 6.10
Due after five years 2,552,098 2,603,163 6.68
---------- ---------- ------
Total / weighted average 2,584,526 2,635,502 6.67%
======
Less: eliminations (1) (226,574) (221,553)
---------- ----------
Total $2,357,952 $2,413,949
========== ==========
(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.
B. PORTFOLIO ACTIVITY
The following table summarizes our acquisition activity for the six months ended
June 30, 2006:
Weighted Weighted
Average Average
Face Construction Permanent
(In thousands) Amount Interest Rate Interest Rate
--------------------------------------- -------- ------------- -------------
Construction/rehabilitation properties $203,776 6.66% 6.20%
Additional funding of existing bonds 10,090 5.38 5.45
-------- ------ ------
Total $213,866 6.60% 6.17%
======== ====== ======
9
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
The following table summarizes mortgage revenue bonds repaid during the six
months ended June 30, 2006:
Net Book Realized
(In thousands) Value Proceeds Gains (Losses)
--------------------------------- -------- -------- -------------
Participating, stabilized $17,810 $18,728 $ 918
Non-participating, stabilized 11,814 11,808 (6)
Non-participating, not stabilized 1,450 1,450 --
------- ------- -------
Total $31,074 $31,986 $ 912
======= ======= =======
C. SECURITIZED OR PLEDGED ASSETS
At June 30, 2006, mortgage revenue bonds with an aggregate fair value of $2.4
billion were securitized or pledged as collateral in relation to financing
arrangements. Of these, 21 bonds with a fair value of approximately $221.6
million are eliminated in consolidation as noted in the tables above.
D. IMPAIRMENT
During the second quarter of 2006 we recognized impairment of mortgage revenue
bonds in light of substandard performance at four underlying properties. For one
of the properties, we reached an agreement with the general partner whereby he
relinquished control of the property, and for another we revised the terms of
the bond to reduce the interest rate. In the aggregate, we recorded charges of
approximately $1.9 million with respect to mortgage revenue bond investments.
See also Note 18 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.
NOTE 4 - OTHER INVESTMENTS
Investments other than mortgage revenue bonds consisted of:
June 30, December 31,
(In thousands) 2006 2005
-------------------------------------------------- -------- -----------
Investment in equity interests in LIHTC properties $ 59,082 $ 46,985
Investment in properties under development 4,771 4,300
Investment in ARCap 22,865 19,874
CCA loans and preferred stock 20,150 26,884
Mortgage loans held for sale 220,807 153,277
Notes receivable 6,000 32,670
Marketable securities 24,370 1,249
Other 12,306 13,351
-------- --------
Total other investments $370,351 $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).
At December 31, 2005, "Notes receivable" included a $26.0 million investment in
a mortgage loan in which we had 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). During April 2006, we sold the investment to AMAC at its approximate
par value and subsequently assigned the fair value hedge associated with the
investment (see Note 8).
Marketable securities at June 30, 2006, include $23.0 million of investments
Centerbrook maintained in cash accounts with maturities in excess of 90 days.
"Other" includes $5.0 million invested in a fund we sponsor through CRES, which
we do not consolidate in our financial statements.
In June 2006, we announced our intent to acquire the membership interests in
ARCap that we do not currently own (see Note 19).
10
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following:
June 30, December 31,
(In thousands) 2006 2005
------------------------------ -------- -----------
Goodwill $241,298 $235,684
Other intangible assets, net 135,224 141,301
Mortgage servicing rights, net 59,647 62,190
-------- --------
Total $436,169 $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 6,133 -- 6,133
Reductions (519) -- (519)
--------- --------- ---------
Balance at June 30, 2006 $ 203,551 $ 37,747 $ 241,298
========= ========= =========
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") which we
acquired in 2003.
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
----------------------------------------- ---------- ---------------------- --------------------- ----------------------
June 30, December 31, June 30, December 31, June 30, December 31,
2006 2005 2006 2005 2006 2005
-------- ------------ -------- ----------- -------- -----------
Amortized identified intangible assets:
Partnership service contracts 9.4 $ 47,300 $ 47,300 $ 13,246 $ 10,718 $ 34,054 $ 36,582
Transactional relationships 16.5 104,900 103,000 22,205 17,864 82,695 85,136
General partner interests 9.0 5,100 5,100 1,485 1,201 3,615 3,899
Joint venture developer relationships 5.0 4,800 4,800 2,515 2,035 2,285 2,765
Mortgage banking broker relationships 5.0 1,080 1,080 288 180 792 900
Other identified intangibles 9.3 4,427 4,427 3,417 3,181 1,010 1,246
-------- -------- -------- -------- -------- -------- --------
Subtotal/weighted average life 13.7 167,607 165,707 43,156 35,179 124,451 130,528
========
Unamortized identified intangible assets:
Mortgage banking licenses and approvals
with no expiration 10,773 10,773 -- -- 10,773 10,773
-------- -------- -------- -------- -------- --------
Total identified intangible assets $178,380 $176,480 $ 43,156 $ 35,179 $135,224 $141,301
======== ======== ======== ======== ======== ========
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2006 2005 2006 2005
------ ------ ------ ------
Amortization expense $4,053 $4,170 $7,977 $8,340
====== ====== ====== ======
11
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
The amortization of "other identified intangibles" (approximately $473,000 per
year) is included as a reduction to mortgage revenue bond interest income as
they pertain to the acquisition of such bond investments.
NOTE 6 - OTHER ASSETS
The components of other assets were as follows:
June 30, December 31,
(In thousands) 2006 2005
---------------------------------------------------- --------- -----------
Deferred financing and other costs $ 26,291 $ 38,059
Less: Accumulated amortization (6,350) (14,031)
--------- ---------
Net deferred costs 19,941 24,028
Real estate owned, net 35,712 35,608
Interest receivable 17,851 16,964
Fees receivable, net 24,121 30,774
Due from unconsolidated partnerships, net 2,945 2,576
Furniture, fixtures and leasehold improvements, net 8,740 8,178
Income tax receivable 6,896 4,276
Interest rate swaps at fair value (see Note 8) 7,390 4,857
Deferred taxes 915 1,849
PRS/CRG advances 6,649 9,961
Other 13,507 5,599
--------- ---------
Total $ 144,667 $ 144,670
========= =========
In connection with the restructuring of our securitization programs (see Note 7)
we wrote off the unamortized balance of deferred financing costs pertaining to
the terminated programs. As a result, we recorded incremental amortization
expense of $3.4 million during the second quarter of 2006.
We had classified our real estate owned as "Held for Sale" upon our foreclosure
of the properties securing mortgage revenue bonds. As we have not yet sold the
properties, we have reclassified them as "Held and Used" and recorded a
retroactive depreciation charge of $934,000 in the second quarter of 2006, as if
we had depreciated them since the May 2005 foreclosure.
The advances due from PRS/CRG related to the financial difficulties of a
developer and our subsequent actions to protect our investments in the
properties that were under development (see Note 18). The above balances are net
of eliminations with liabilities of consolidated partnerships of $13.3 million
and $3.9 million at June 30, 2006 and December 31, 2005, respectively.
NOTE 7 - FINANCING ARRANGEMENTS AND NOTES PAYABLE
The CharterMac Mortgage Capital ("CMC") warehouse line was amended to permit
temporary overadvances through August 29, 2006 of up to $125.0 million in June
2006 (in addition to the $125.0 million base borrowing amount) pursuant to terms
arranged with Bank of America. This facility has been extended to August 2006
and is subject to annual renewal.
Our Capri acquisition line with Bank of America was increased to $110.0 million
in May 2006. The term of this facility has been extended to August 2006.
Upon its launch in June 2006, Centerbrook entered into a $30 million senior debt
facility and a $125 million mezzanine debt facility, maturing in June 2036. The
senior debt facility is provided by IXIS and one of our subsidiary companies and
generally bears interest, at our discretion, at:
12
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
(1) 1.40% plus the higher of
a. the Prime Rate, or
b. the federal funds effective rate, as defined, plus 1/2%; or
(2) LIBOR plus 0.40% depending on the type of loan.
The mezzanine debt facility is provided by Citibank, N.A. and generally bears
interest, at our discretion, at:
(1) 2.25% plus the higher of
a. the Prime Rate, or
b. the federal funds effective rate, as defined, plus 1/2%, or
(2) LIBOR plus 1.25% depending on the type of loan.
Upon the launch of Centerbrook, we also restructured several of our
securitization programs whereby Centerbrook is now the provider of credit
intermediation, as supported by IXIS. As a result, we terminated our programs
through MBIA and created a similar structure through Goldman Sachs. In
connection with the termination of the MBIA program, we paid approximately $1.4
million in termination fees (included in general and administrative expense) and
$1.9 million of other costs (recorded in interest expense) in the second quarter
of 2006.
NOTE 8 - DERIVATIVE INSTRUMENTS
As of June 30, 2006, we had interest rate swaps with varying expiration dates
and an aggregate notional amount of $450.0 million, which are designated as cash
flow hedging instruments which hedge the interest payments on our variable-rate
securitizations. These swaps are recorded at fair value, with changes in fair
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 interest payments on our
variable-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.
We also had an interest rate swap with a notional amount of $26.0 million that
hedged the change in the fair value of a $26.0 million investment. This swap was
assigned to AMAC when we sold AMAC the related investment (see Note 4). Prior to
its assignment, we did not elect to apply hedge accounting to this swap and,
therefore, the change in its fair value was included in net income.
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 were as follows:
June 30, December 31,
-------- -----------
(In thousands) 2006 2005
---------------------- -------- -----------
Net liability position $ -- $ 208
Net asset position $7,390 $4,857
Interest expense included the following expense (income) related to our swaps:
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
(In thousands) 2006 2005 2006 2005
------------------------------------------ ------- ------- ------- -------
Interest expense $ 3 $ 536 $ 36 $ 1,886
Interest income (631) (90) (749) (58)
Change in fair value of free standing swap 547 -- (203) --
------- ------- ------- -------
Total $ (81) $ 446 $ (916) $ 1,828
======= ======= ======= =======
13
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
We estimate that approximately $1.5 million of the net unrealized gain included
in accumulated other comprehensive income will reduce interest expense within
the next twelve months.
NOTE 9 - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities consisted of the
following:
June 30, December 31,
(In thousands) 2006 2005
----------------------------------------------- -------- ------------
Deferred revenues $ 73,099 $ 70,025
Distributions payable 41,127 41,080
Accounts payable 15,792 22,314
Salaries and benefits 10,272 15,816
Accrued fund organization and offering expenses 10,876 9,562
Restructuring costs 1,995 --
Other 11,519 20,478
-------- --------
Total $164,680 $179,275
======== ========
The accrued restructuring costs pertain to integration actions with respect to
the planned acquisition of ARCap (see Note 19). We recorded these costs in
general and administrative expenses in the second quarter of 2006 which
comprised the following:
Fund Mortgage
Management Banking
(In thousands) Segment Segment Total
-------------------------- ---------- -------- ------
Employee termination costs $ 580 $1,251 $1,831
Lease termination costs -- 164 164
------ ------ ------
Total $ 580 $1,415 $1,995
====== ====== ======
All of these costs will require cash expenditures although none were paid prior
to June 30, 2006. We anticipate that the restructuring will be completed by the
end of the first quarter of 2007 and do not anticipate increases to the amounts
detailed above.
NOTE 10 - CONSOLIDATED PARTNERSHIPS
Assets and liabilities of consolidated partnerships consisted of:
June 30, December 31,
(In thousands) 2006 2005
------------------------------------ ---------- ------------
Investments in property partnerships $3,109,031 $3,025,762
Land, buildings and improvements,
net of accumulated depreciation 344,547 329,869
Cash 246,316 172,622
Other assets 75,035 78,033
---------- ----------
Subtotal 665,898 580,524
---------- ----------
Total assets $3,774,929 $3,606,286
========== ==========
Notes payable $ 488,627 $ 565,877
Due to property partnerships 742,784 896,031
Other liabilities 133,665 165,648
---------- ----------
Total liabilities $1,365,076 $1,627,556
========== ==========
14
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
Of the notes payable balance, at June 30, 2006, $379.7 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 $108.9 million is collateralized with the
underlying properties of the consolidated operating partnerships. All of this
debt is non-recourse to the Company.
NOTE 11 - MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES
Minority interests in consolidated subsidiaries consisted of the following:
June 30, December 31,
(In thousands) 2006 2005
-------------------------------- -------- ------------
Convertible Special Common Units
("SCUs") of a subsidiary $239,789 $250,866
Convertible Special Membership
Units ("SMUs") of a subsidiary 10,102 11,408
Other 3,300 --
-------- --------
Total $253,191 $262,274
======== ========
Income allocated to minority interests was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
(In thousands) 2006 2005 2006 2005
---------------- ------- ------- ------- -------
SCUs $ 1,632 $ 7,826 $ 7,361 $13,891
SMUs 19 55 169 55
------- ------- ------- -------
Total $ 1,651 $ 7,881 $ 7,530 $13,946
======= ======= ======= =======
In the first quarter of 2006, the holder of 20,000 SCUs converted the units to
an equivalent number of common shares. During the second quarter, the holder of
an additional 40,000 SCUs converted the units, for which we paid approximately
$723,000 in cash and holders of approximately 48,600 SMUs converted the units to
an equivalent number of common shares. We also redeemed the special preferred
voting shares related to the converted SCUs at par ($0.01 per share).
"Other" minority interests represent the 10% interest in Centerbrook owned by
IXIS.
NOTE 12 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) was as follows:
Six months Ended
June 30,
---------------------
(In thousands) 2006 2005
------------------------------------------------------------------- -------- --------
Net income $ 18,905 $ 34,229
Net unrealized gain (loss) on interest rate derivatives 2,189 (963)
Net unrealized gain on marketable securities and equity investments 455 52
Net unrealized gain (loss) on mortgage revenue bonds:
Unrealized (loss) gain during the period (45,139) 5,180
Reclassification adjustment for net gain included in net income (912) (903)
-------- --------
Comprehensive (loss) income $(24,502) $ 37,595
======== ========
15
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 13 - 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 (which includes equity
that is convertible into common shares) 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
On January 1, 2006, we adopted SFAS No. 123(R). Since we previously accounted
for our stock-based compensation plans as an expense under the fair value
provisions of SFAS No. 123, our adoption did not significantly impact our
financial position or our results of operations.
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.
In 2006, we granted the following options pursuant to the Plan:
Weighted
Weighted Average
Weighted Average Average Vesting
Number Exercise Price Term Period
------- ---------------- --------- ------------
544,000 $21.78 7.4 years 2.1 years
We used the following weighted average assumptions in the Black-Scholes option
pricing model to determine fair values of options granted:
Risk free interest rate 4.42%
Expected years until exercise 1.71
Expected stock volatility 23.14%
Dividend yield 8.11%
16
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
The following table summarizes share option activity for the six months ended
June 30, 2006:
Weighted
Average
Weighted Remaining Aggregate
Average Contractual Intrinsic
Exercise Term Value
Options Price (in years) (in thousands)
---------------------------------------------------
Outstanding at beginning of year 1,510,341 $20.42
Granted 544,000 21.78
Forfeited / expired -- --
Exercised -- --
---------------------------------------------------
Outstanding at end of period 2,054,341 $20.78 7.5 $1,115
===================================================
Vested and expected to vest at end of period 2,054,341 $20.78 7.5 $1,115
===================================================
Exercisable at end of period 779,351 $21.16 6.3 $ 557
===================================================
Fair value of options granted during the
period (in thousands) $ 852
==========
Compensation cost recorded (in thousands) $ 502
==========
The aggregate intrinsic value in the table above represents the difference
between our closing common share price on June 30, 2006, and the exercise price,
multiplied by the number of "in the money" options. This amount will change
based on the fair market value of our common shares.
The following table summarizes information about share options outstanding and
exercisable at June 30, 2006:
Weighted
Average
Remaining
Number Contractual Life Number
Exercise Price Outstanding (in Years) Exercisable
-------------- ----------- ---------------- -----------
$11.56 51,576 3.8 51,576
$17.56 2,250 6.2 2,250
$17.78 800,000 7.4 200,000
$21.18 159,510 0.7 159,510
$21.61 20,000 8.9 6,667
$22.03 384,490 9.5 --
$24.44 636,515 8.5 359,348
---------- -------- ---------
2,054,341 6.3 779,351
========== ======== =========
17
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
C. NON-VESTED SHARES AND SCUS
The following table summarizes information about non-vested shares and SCUs for
the six months ended June 30, 2006:
Weighted Weighted
Average Average
Non-vested Grant Date Non-vested Grant Date
shares Fair Value SCUs Fair Value
------------------------ ------------------------
Non-vested at January 1, 2006 241,194 $ 20.25 310,400 $ 17.92
Granted 237,330 20.54 -- --
Vested 89,367 20.02 -- --
Forfeited 12,996 20.81 -- --
------------------------ ------------------------
Non-vested at June 30, 2006 376,161 $ 20.47 310,400 $ 17.92
======================== ========================
D. UNAMORTIZED COSTS AND SHARES AVAILABLE FOR GRANT
As of June 30, 2006, there was $4.8 million of total unrecognized compensation
cost related to non-vested share-based compensation grants. This unrecognized
compensation is expected to be recognized over a weighted-average period of 1.2
years.
As of June 30, 2006, there were approximately 4.1 million options or share
grants available for issuance under the Plan.
NOTE 14 - STOCK REPURCHASE PLAN
During the second quarter 2006, in connection with our existing program to
repurchase up to 1,500,000 of our common shares, we entered into a 10b5-1
trading plan to facilitate the purchases of shares under this program. During
the six months ended June 30, 2006, we repurchased 29,400 shares at an average
price of $18.79 per share, including shares we purchased prior to implementing
the 10b5-1 plan.
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. Income for the
calculation 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
non-vested 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 June 30, 2006 Six months Ended June 30, 2006
--------------------------------- ---------------------------------
(In thousands, except per share amounts) Income Shares Per Share Income Shares Per Share
------------------------------------------------- --------- --------- --------- --------- -------- ---------
Net income $ 4,248 $ 18,905
Preferred dividends 1,188 2,376
--------- ---------
Net income allocable to shareholders (Basic EPS) 3,060 58,639 $ 0.05 16,529 58,609 $ 0.28
======== =========
Effect of dilutive securities -- 280 -- 352
--------- --------- --------- --------
Diluted EPS $ 3,060 58,919 $ 0.05 $ 16,529 58,961 $ 0.28
========= ========= ======== ========= ======== =========
18
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
Three Months Ended June 30, 2005 Six months Ended June 30, 2005
--------------------------------- ---------------------------------
(In thousands, except per share amounts) Income Shares Per Share Income Shares Per Share
------------------------------------------------- --------- --------- --------- --------- -------- ---------
Net income $ 19,444 $ 34,229
Preferred dividends -- --
--------- ---------
Net income allocable to shareholders (Basic EPS) 19,444 57,890 $ 0.34 34,229 57,856 $ 0.59
======== =========
Effect of dilutive securities -- 384 -- 415
--------- --------- --------- --------
Diluted EPS $ 19,444 58,274 $ 0.33 $ 34,229 58,271 $ 0.59
========= ========= ======== ========= ======== =========
NOTE 16 - RELATED PARTY TRANSACTIONS
General and administrative expenses include shared services fees paid or payable
to The Related Companies, L.P. ("TRCLP"), a company controlled by our chairman.
In addition, a subsidiary of TRCLP earned fees for performing property
management services for various properties held in investment funds which we
manage and are included in "other expenses of consolidated partnerships".
We collect asset management, incentive management and expense reimbursement fees
from AMAC. These fees are included in fund sponsorship income. We entered into a
new agreement, effective as of April 2006 whereby the basis of certain of the
fees we earn have changed, although we do not expect the fees earned to differ
significantly from the previous 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 April 2006, we increased the facility to $50.0 million and, as of
June 30, 2006, there was approximately $27.0 million advanced to AMAC under this
facility. Income we earn from this facility is included in "other interest
income". In the opinion of management, the terms of this facility are consistent
with those of loan transactions with independent third parties.
During 2006, our Mortgage Banking subsidiaries originated over $151.0 million in
loans on behalf of AMAC and received approximately $924,000 of mortgage banking
fees from the borrowers. We record these fees in "Fee income" in the condensed
consolidated statements of income.
Fees paid to TRCLP and income earned from AMAC was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
(In thousands) 2006 2005 2006 2005
----------------------------------------------- ------ ------ ------ ------
Shared service fee expense $ 153 $ 123 $ 316 $ 262
TRCLP property management services expense $1,025 $ 822 $2,056 $1,800
AMAC asset management, incentive management and
expense reimbursement fee income $ 824 $ 635 $1,780 $1,500
AMAC credit facility interest income $ 745 $ -- $ 745 $ 73
19
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 17 - 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 hedge fund management 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 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.
20
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
The following table provides more information regarding our segments:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
(In thousands) 2006 2005 2006 2005
---------------------------------------------- --------- --------- --------- ---------
REVENUES
Portfolio Investing $ 49,933 $ 42,295 $ 93,924 $ 82,027
Fund Management 28,616 32,982 51,540 49,399
Mortgage Banking 13,391 11,561 26,642 17,432
Consolidated Partnerships 9,366 7,152 17,611 12,054
Elimination of intersegment transactions (22,075) (15,510) (38,347) (24,486)
--------- --------- --------- ---------
Consolidated Revenues $ 79,231 $ 78,480 $ 151,370 $ 136,426
========= ========= ========= =========
CAD
Portfolio Investing $ 24,254 $ 25,622 $ 48,686 $ 53,736
Fund Management 13,165 23,131 13,648 26,286
Mortgage Banking 2,268 5,373 6,030 5,161
--------- --------- --------- ---------
Total Segment CAD 39,687 54,126 68,364 85,183
Preferred dividends (1,188) -- (2,376) --
Subsidiary equity distributions (8,860) (8,660) (17,765) (17,300)
Dividends on subsidiary preferred stock (6,281) (6,281) (12,561) (12,561)
Current tax benefit (expense) 591 (781) 3,542 (781)
--------- --------- --------- ---------
Consolidated CAD 23,949 38,404 39,204 54,541
Fees deferred for GAAP (1) (10,574) (14,292) (9,420) (18,722)
Depreciation and amortization expense (14,615) (9,469) (23,528) (17,165)
Mortgage revenue bond yield adjustments (2) (468) 360 (631) 850
Gain on sale of loans (3) 2,190 5,012 6,813 6,649
Loss on impairment of assets (2,271) (1,098) (2,271) (1,098)
Tax adjustment (4) (187) 1,116 (219) 9,481
Non-cash compensation (5) (1,061) (1,576) (3,413) (3,534)
Difference between subsidiary equity
distributions and income allocated to
subsidiary equity holders (6) 7,209 779 10,234 3,354
Preferred dividends 1,188 -- 2,376 --
Other, net (1,112) 208 (240) (127)
--------- --------- --------- ---------
Consolidated Net Income $ 4,248 $ 19,444 $ 18,905 $ 34,229
========= ========= ========= =========
DEPRECIATION AND AMORTIZATION
Portfolio Investing $ 4,966 $ 793 $ 5,754 $ 1,754
Fund Management 4,541 5,014 8,924 9,611
Mortgage Banking 5,108 3,662 8,850 5,800
Consolidated Partnerships -- -- -- --
Elimination of intersegment transactions -- -- -- --
--------- --------- --------- ---------
Consolidated Depreciation and Amortization $ 14,615 $ 9,469 $ 23,528 $ 17,165
========= ========= ========= =========
(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.
21
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 18 - 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 on page 24. 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 on page 24.
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 on page 24. 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 on page 24. On those deals in which our funds are not the equity sponsor,
we will look to the respective equity investor to take control, complete
construction and stabilize the partnerships. Absent a satisfactory resolution,
we may exercise our available remedies to protect our investments. In those
situations, there is substantial equity in the form of LIHTCs in addition to the
real estate, both of which are our collateral.
There can be no assurance that a bankruptcy by or against PRS or its affiliates
may not give rise to additional claims concerning these partnerships.
22
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
Our potential exposure falls into three categories as follows:
Cash required to bring the properties to break-even operation - As
of June 30, 2006, advances outstanding totaled approximately
$20.0 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.
We currently estimate that we will not need to advance funds
materially in excess of advances outstanding at June 30, 2006.
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.
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 on
page 24, ten 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.
23
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
The partnerships in question are summarized as follows:
(In thousands)
--------------------------
CharterMac CharterMac Fair Value of
Holds or Capital Loan Mortgage
Will Hold Sponsored Included in CharterMac Third Amounts Revenue
Mortgage Fund is Credit Capital Parties Upon Full Bonds
Revenue Equity Intermediated Holds GP Provided Draw Oustanding at
Number Bond Partner Funds Interest Equity Down June 30, 2006
------ ----------- ----------- -------------- ---------- --------- --------- -------------
PRS
PARTNERSHIPS
Construction 1 1 -- -- -- 1 $ 12,500 $ 12,487
Lease-Up 9 8 5 3 5 4 99,300 97,820
Rehab 2 2 1 1 1 1 30,400 31,374
Stabilized 2 2 -- -- -- 2 18,575 18,602
----------------------------------------------------------------------------------------------------------
Subtotal 14 13 6 4 6 8 160,775 160,283
----------------------------------------------------------------------------------------------------------
CRG
PARTNERSHIPS
Construction 1 1 1 -- 1 -- 7,130 --
Lease-Up 3 1 3 2 1 -- 10,524 10,530
Rehab 3 3 3 3 3 -- 71,497 72,237
Stabilized -- -- -- -- -- -- -- --
----------------------------------------------------------------------------------------------------------
Subtotal 7 5 7 5 5 -- 89,151 82,767
----------------------------------------------------------------------------------------------------------
GCG
PARTNERSHIPS
Construction 1 1 1 1 -- -- 14,600 14,600
Lease-Up 1 1 1 -- -- -- 13,170 13,170
Rehab -- -- -- -- -- -- -- --
Stabilized -- -- -- -- -- -- -- --
----------------------------------------------------------------------------------------------------------
Subtotal 2 2 2 1 -- -- 27,770 27,770
----------------------------------------------------------------------------------------------------------
Total 23 20 15 10 11 8 $277,696 $270,820
==========================================================================================================
Total eliminated in consolidation $155,401 $149,654
============================
FORWARD TRANSACTIONS
At June 30, 2006, our Mortgage Banking subsidiaries had forward commitments of
approximately $264.7 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 $214.8 million. Approximately $194.3 million of this amount was funded
as of June 30, 2006, and is included in "Other Investments" as "Mortgage Loans
Held for Sale". The balance of approximately $20.5 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 $31.9 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 $9.1
million at June 30, 2006.
24
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
MORTGAGE BANKING LOSS SHARING AGREEMENT
Pursuant to a master loss sharing agreement under the Fannie Mae Delegated
Underwriting and Servicing ("DUS") program, we assume responsibility for a
portion of any loss that may result from borrower defaults, based on Fannie Mae
loss sharing formulas. At June 30, 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 may originate under this
program can 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 June 30, 2006, pursuant to these agreements, was
approximately $873.2 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 June 30, 2006, that reserve was
approximately $12.9 million, which, we believe, represents our actual potential
losses at that time.
As of June 30, 2006, our Mortgage Banking subsidiaries maintained, collateral
consisting of treasury notes, and Fannie Mae and Freddie Mac securities of
approximately $1.5 million and a money market account of approximately $11.4
million, which is included in restricted cash in the condensed consolidated
balance sheet, to satisfy the Fannie Mae collateral requirements of $12.9
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 $8.0 million covers this letter of credit
requirement. At June 30, 2006, commitments under this reimbursement agreement
totaled $2.5 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 June 30, 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 June 30, 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 ("SFAS No. 5").
25
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 $20.0 million as of June 30, 2006. This amount is
included in deferred revenues on our condensed 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 a portion of 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 these senior trust interest using credit
intermediation from the Primary Intermediator as part of the P-FLOATs/RITES
securitization program. We use the remaining subordinate trust interests as
collateral in this program. In connection with these transactions, we have
posted $585.7 million as collateral with a Primary Intermediator in the form of
either cash or mortgage revenue bonds as of June 30, 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
$231.1 million as of June 30, 2006. The fair value of these obligations,
representing the deferral of the fee income over the obligation periods, was
$1.3 million as of June 30, 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 June 30, 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.
26
CHARTERMAC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE 19 - SUBSEQUENT EVENTS
Proposed Acquisition
--------------------
In June 2006, we announced our intent to acquire ARCap Investors, LLC ("ARCap")
in which we currently have a 10.7% interest (see Note 4). The transaction,
subject to ARCap shareholder approval, calls for net consideration of
approximately $258.6 million, of which approximately $253.6 million is payable
in cash and $5.0 million in convertible common share equivalent securities
(similar to our convertible SMUs).
In connection with the acquisition, we would also issue approximately $1.7
million of CharterMac restricted shares to existing ARCap employees.
Financing
---------
In July 2006, we reached an agreement to enter into a $350.0 million six-year
term loan and a separate $150.0 million revolving credit facility. The proceeds
will be used to pay the cash portion of the proposed acquisition consideration
and to retire existing financing arrangements and notes payable (see Note 7).
27
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 risks associated with providing credit intermediation;
o risk of loss under mortgage banking loss sharing agreements;
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.
During June 2006, we created our Centerbrook subsidiary to provide credit
intermediation products to the affordable housing finance industry. Our majority
ownership of Centerbrook will enable us to prospectively retain a significant
portion of the fees that we would have paid to third party credit providers.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2006 AND 2005
The following is a summary of our operations for the three months ended June 30,
2006 and 2005:
% of % of
(In thousands) 2006 Revenues 2005 Revenues % Change
-------------------------- ------- -------- ------- -------- --------
Revenues $79,231 100.0 % $78,480 100.0 % 1.0 %
Income before income taxes $ 3,843 4.9 % $19,109 24.3 % (79.9)%
Net income $ 4,248 5.4 % $19,444 24.8 % (78.2)%
28
Increases in Portfolio Investing and Mortgage Banking revenues were partially
offset by a decrease in Fund Management revenues caused by the timing of the
fund sponsorship business. Despite revenue gains and an incremental equity
income pick-up of approximately $3.3 million resulting from a large
resecuritization gain realized by ARCap (for which we recognized our
proportionate share), income before income taxes and net income decreased from
prior period as these gains were more than offset by:
o an increase in interest expense, due to higher amount of debt as well
as an increase in our average borrowing rate period over period;
o start-up costs for Centerbrook operations and restructuring costs
relating to integration actions in anticipation of the proposed
acquisition of ARCap (see Note 19 to condensed consolidated financial
statements);
o termination fees and other costs associated with the restructuring of
our securitization programs upon the launch of Centerbrook, including
writing off deferred financing costs; and
o a retroactive depreciation charge for real estate owned.
Incremental costs in the second quarter as described above related to corporate
initiatives were as follows:
(In thousands) Where recorded
-------------- --------------
Centerbrook start-up costs $ 3,758 General and administrative
Restructuring costs in anticipation of ARCap acquisition 1,995 General and administrative
Restructuring of securitization programs - incremental interest expense 1,915 Interest expense
Restructuring of securitization programs - termination fee 1,420 General and administrative
Restructuring of securitization programs - write-off of deferred costs 3,398 Depreciation and amortization
-------
12,486
Tax effect (752)
-------
Net incremental costs $11,734
=======
REVENUES
Our revenues were as follows:
For the Three Months Ended June 30,
-----------------------------------
(In thousands) 2006 2005 % Change
------------------------------------- ------- ------- --------
Mortgage revenue bond interest income $39,217 $37,061 5.8 %
Other interest income 6,580 3,279 100.7
Fee income:
Mortgage banking 7,744 7,778 (0.4)
Fund sponsorship 9,062 14,849 (39.0)
Credit intermediation 1,466 1,777 (17.5)
------- ------- -----
Total fee income 18,272 24,404 (25.1)
Other revenues:
Construction service fee 1,102 962 14.6
Expense reimbursements 240 1,470 (83.7)
Rental income of real estate owned 2,056 962 113.7
Administration fees 575 512 12.3
Prepayment penalties 1,234 1,545 (20.1)
Other 589 1,133 (48.0)
------- ------- -----
Total other revenues 5,796 6,584 (12.0)
Subtotal 69,865 71,328 (2.1)
------- ------- -----
Revenues of consolidated partnerships 9,366 7,152 31.0
------- ------- -----
Total revenues $79,231 $78,480 1.0 %
======= ======= =====
Mortgage revenue bond interest income increased due to an increase in the
average portfolio balance over the comparable period 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. Fund sponsorship fee
income variances primarily relate to a decrease in equity invested during the
current quarter and are detailed in the discussions of results for the Fund
Management segment.
29
Other interest income includes income from temporary investments, interest
earned on Mortgage Banking escrow balances and interest earned on our loan to
CCA. The increase compared to 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 (predominantly escrow accounts we manage) coupled
with increasing market interest rates for temporary investments.
Rental income of real estate owned pertains to the operations of properties on
which we foreclosed during the second quarter of 2005. The 2006 period includes
a full quarter of operations while the 2005 results represent only a partial
period.
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.
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.
In the second quarters 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 June 30,
-----------------------------------
(In thousands) 2006 2005 % Change
------------------------------------- -------- -------- --------
Mortgage revenue bond interest income $ 2,748 $ 1,520 80.8%
Other interest income 52 (62) (183.9)
Fund sponsorship fees 11,091 11,515 (3.7)
Credit intermediation fees 939 845 11.1
Other revenues 1,829 330 454.2
-------- -------- -----
Total $ 16,659 $ 14,148 17.7%
======== ======== =====
EXPENSES
Our expenses were as follows:
For the Three Months Ended June 30,
----------------------------------
(In thousands) 2006 2005 % Change
-------------------------------------------------- -------- -------- --------
Interest expense $ 24,085 $ 14,351 67.8%
Interest expense - preferred shares of subsidiary 4,725 4,725 --
Salaries and benefits 18,059 16,879 7.0
Fund origination and property acquisition expenses 3,487 6,193 (43.7)
Operating costs of real estate owned 1,840 588 212.9
Restructuring costs 1,995 -- --
Other general and administrative 14,480 9,408 53.9
-------- -------- -----
Subtotal 39,861 33,068 20.5
-------- -------- -----
Depreciation and amortization 14,615 9,469 54.3
Loss on impairment of assets 2,271 1,098 106.8
-------- -------- -----
Subtotal 85,557 62,711 36.4
Interest expense of consolidated partnerships 5,611 6,133 (8.5)
Other expenses of consolidated partnerships 16,258 13,618 19.4
-------- -------- -----
Total expenses $107,426 $ 82,462 30.3%
======== ======== =====
The increase in interest expense reflects the higher amount of average debt
outstanding (approximately $1.9 billion and $1.4 billion in the second quarters
of 2006 and 2005, respectively) to fund continuing mortgage revenue bond and
LIHTC investments and mortgage originations. In addition, our average borrowing
rate increased in 2006 as compared to 2005 as a result of increases in the Bond
Market Association Municipal Swap Index ("BMA") and LIBOR rates in both years.
30
The effect of rate increases was tempered, however, by the interest rate swaps
that we have in place, all of which are now "in the money". One swap that was in
effect in the 2005 period, however, has since expired. Our average borrowing
rate increased to 4.6% in the second quarter of 2006 as compared to 4.1% in the
second quarter of 2005.
The increase in salaries and benefits expense primarily relates to the continued
growth of our component 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. The decrease compared to last year is the
result of a lower level of fund sponsorship activity in 2006 (see FUND
MANAGEMENT section below for related revenue discussion).
Operating costs of real estate owned relates to properties we foreclosed upon in
May 2005 in connection with three of our mortgage revenue bonds. The 2006 period
represents a full quarter's worth of operating costs compared to approximately
seven weeks during 2005.
The increase in other general and administrative expenses primarily result from
start-up costs for Centerbrook operations and termination fees associated with
restructuring of our securitization programs. Restructuring costs relate to
integration actions in anticipation of the ARCap acquisition (see Notes 9 and 19
to condensed consolidated financial statements). These costs are detailed in the
table on page 29.
Depreciation and amortization expenses were higher in the 2006 period, primarily
due to increased amortization of mortgage servicing rights following the CCLP
acquisition and the expansion of the Mortgage Banking business, a write-off of
deferred financing costs in connection with the restructuring of our
securitization programs in June 2006 as well as recognizing a retroactive
depreciation charge for real estate owned which was reclassified from held for
sale to held and used (see Note 6 to condensed consolidated financial
statements). These were 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; as such, they have an insignificant impact on
our net income.
OTHER ITEMS
For the Three Months Ended June 30,
-------------------------------------
(In thousands) 2006 2005 % Change
----------------------------------------------- --------- --------- ---------
Equity and other income $ 3,548 $ 552 542.8 %
Gain on sale of loans $ 2,517 $ 4,317 (41.7)%
Gain on repayment of mortgage revenue bonds 21 912 (97.7)
--------- --------- -------
Gain on repayment of mortgage revenue bonds and
sale of loans $ 2,538 $ 5,229 (51.5)%
--------- --------- -------
Income allocated to preferred shareholders of
subsidiary $ (1,557) $ (1,556) 0.1 %
--------- --------- -------
Income allocated to SCUs $ (1,632) $ (7,826) (79.1)%
Income allocated to SMUs (19) (55) (65.5)
--------- --------- -------
Total income allocated to minority interests $ (1,651) $ (7,881) (79.17)%
Loss allocated to partners of consolidated
partnerships $ 107,090 $ 93,370 14.7 %
Equity and other income primarily includes income from our investment in ARCap
offset by losses from tax advantaged investment vehicles similar to those we
sponsor. The 2006 period includes incremental equity income of approximately
$3.3 million relating to our proportionate share of a large resecuritization
gain realized by ARCap.
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. The decrease in 2006 as
compared to 2005 is due to the decline in period earnings and the conversion of
units during the past twelve months.
The loss allocation to partners of consolidated partnerships represents the
operating losses of those partnerships, of which we have absorbed an
insignificant portion (approximately $2,000).
31
Results by Segment
------------------
PORTFOLIO INVESTING
The table below shows selected information regarding our Portfolio Investing
activities:
For the Three Months Ended June 30,
--------------------------------------
(In thousands) 2006 2005 % Change
-------------------------------------------------------- ---------- ---------- --------
New mortgage revenue bond acquisitions $ 120,801 $ 39,080 209.1 %
Funding of mortgage revenue bonds acquired in prior
years 10,090 1,800 460.6
Acquisitions related to prior period forward commitments 22,300 14,150 57.6
---------- ---------- -------
Total acquisition and funding activity $ 153,191 $ 55,030 178.4 %
Mortgage revenue bonds repaid $ 5,075 $ 18,922 (73.2)
Average portfolio balance (fair value) $2,431,420 $2,214,540 9.8 %
Weighted average permanent interest rate of bonds
acquired 6.19 % 5.47 %
Weighted average yield of portfolio 7.01 % 7.08 %
Average borrowing rate (includes effect of swaps) 4.36 % 3.72 %
Average BMA rate 3.55 % 2.64 %
---------- ----------
Mortgage revenue bond interest income (1) $ 42,614 $ 38,954 9.4 %
Other interest income (1) 4,670 1,088 329.2
Prepayment penalties 5 61 (91.8)
Rental income of real estate owned 2,056 961 113.9
Other revenues (1) 588 1,231 (52.2)
---------- ---------- -------
$ 49,933 $ 42,295 18.1 %
========== ========== =======
Interest expense and securitization fees (1) $ 24,197 $ 12,971 86.5 %
Loss on impairment of assets $ 2,271 $ 1,098 106.8%
Gain on repayments of mortgage revenue bonds $ 21 $ 912 (97.8)%
---------- ---------- -------
(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 six months of 2006.
Rental income of real estate owned pertains to the operations of properties on
which we foreclosed during the second quarter of 2005. The 2006 period includes
a full quarter of operations while the 2005 results represent only a partial
period.
While the decline in interest rates of bonds acquired 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. In
addition, the restructuring of our securitization programs in the second quarter
of 2006 resulted in incremental interest costs of $1.9 million.
While our borrowing costs have been increasing along with market rates, we
expect the commencement of Centerbrook, our new credit intermediation
subsidiary, will help enable us to retain a significant portion of fees which we
historically have paid to third parties. In addition, we anticipate Centerbrook
will enable us to obtain better leverage against our assets and lower our
average cost of capital.
32
FUND MANAGEMENT
The table below shows selected information regarding our Fund Management
activities:
For the Three Months Ended June 30,
----------------------------------
(In thousands) 2006 2005 % Change
------------------------------------------- ------- -------- --------
Equity raised $308,051 $421,182 (26.9)%
Equity invested by investment funds (1) $220,911 $307,067 (28.1)%
Fees based on equity raised $ 3,981 $ 5,760 (30.9)%
Fees based on equity invested $ 9,229 $ 13,460 (31.4)%
Fees based on management of other entities:
Asset management and partnership fees $ 7,109 $ 6,921 2.7 %
Construction fees 1,102 962 14.6
Investment origination fees 155 290 (46.6)
Other -- 60 --
-------- -------- -----
Subtotal 8,366 8,233 1.6
-------- -------- -----
Total fund sponsorship fees (2) 21,576 27,453 (21.4)
Credit intermediation fees (2) 2,406 2,622 (8.2)
Expense reimbursement (2) 3,612 2,258 60.0
Other interest income (2) 246 60 310.0 %
Other revenues (2) 776 589 31.7
-------- -------- -----
Total $ 28,616 $ 32,982 (13.2)%
======== ======== =====
(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 second 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 decreased approximately 36% in 2006 as compared to
the same period in 2005 primarily due to the decrease in amount of equity
raised. In addition, the mix of fund sponsorships served to decrease the fee
realization rate due to a higher proportion of "corporate" funds included in
equity raised for the 2006 period. Although the level of equity raised in the
2006 period fell short of the 2005 level, we anticipate that full-year equity
raising activity in 2006 to exceed that of the prior year. Related O&O
acquisition expenses were also comparatively down in-line with the decrease in
revenue.
FEES BASED ON EQUITY INVESTED
We earn property acquisition fees and acquisition allowance fees based upon the
level of fund equity invested, which varies due to the timing of fund closures.
While we acquire properties on an ongoing basis throughout the year, we do not
recognize revenue until we place the property in a sponsored fund. Therefore,
delays in timing of a fund closure may impact the level of revenues recognized
in a given period.
The decrease in fees is greater than the decrease of equity invested because of
a lower fee rate realized, stemming from changes in the mix of funds originated,
in that we sponsored a proportionally higher level of "corporate" funds in the
2006 period.
FEES BASED ON MANAGEMENT OF OTHER ENTITIES
Asset management and partnership 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.
33
OTHER REVENUES
Credit intermediation, expense reimbursement and other revenues in this segment
consist largely of service fees charged to entities (including consolidated
partnerships) managed by these subsidiaries and fluctuate with the growth of the
number of those entities and their cash flows.
MORTGAGE BANKING
The table below shows selected information regarding our Mortgage Banking
activities:
For the Three Months Ended June 30,
-------------------------------------
(In thousands) 2006 2005 % Change
-------------------------------------------------- ----------- ----------- --------
Originations $ 458,047 $ 336,981 35.9 %
Mortgage portfolio at June 30 $ 9,180,858 $ 9,022,353 1.8 %
Fair value of mortgage servicing rights at June 30 $ 59,647 $ 75,212 (20.7)%
----------- ----------- ------
Mortgage origination fees (1) $ 2,683 $ 2,033 32.0 %
Mortgage servicing fees (1) 5,161 5,378 (4.0)
Assumption fees (1) (27) 367 (107.4)
----------- ----------- ------
Total fee income 7,817 7, 778 0.5 %
Interest income (1) 3,993 2,070 92.9
Prepayment penalties (1) 1,228 1,484 (17.3)
Other revenues (1) 353 229 54.1
----------- ----------- -----
$ 13,391 $ 11,561 15.8 %
=========== =========== =====
Gain on sale of mortgages $ 2,713 $ 4,619 (41.3)%
=========== =========== =====
(1) Prior to intersegment eliminations.
Originations for the three months ended June 30 are broken down as follows:
(In thousands) 2006 % of total 2005 % of total
----------------- -------- ---------- -------- ----------
Fannie Mae $213,318 46.6 % $199,135 59.1 %
Freddie Mac 39,390 8.6 11,275 3.3
Conduit and other 205,339 44.8 126,571 37.6
-------- ------ -------- -------
Total $458,047 100.0 % $336,981 100.0 %
======== ====== ======== =======
The increase in mortgage origination fees for the quarter was generally in
proportion to the increase in originations although the average rate of
origination fees was impacted by the higher proportion of non-agency
originations. Although Fannie Mae originations increased over the prior year
period, they represented a lower proportion of the total. This was due to a
sharp increase in conduit originations as we continued to pursue business that
does not warrant agency execution in response to market demand and a large level
of loans originated on behalf of AMAC.
Despite the increased origination volume and the increase in the portfolio,
servicing fee income declined in the 2006 period as a result of steady erosion
of the servicing fee rate, also due to the higher proportion of non-agency loans
in the portfolio. This trend has also affected the level of mortgage servicing
rights, as write-offs in connection with the prepayment of mortgages at higher
servicing rates are replaced with new assets generating lower fee streams
Generally, as our prepayments have increased, our mortgage servicing rights have
decreased.
Interest income relates primarily to that earned on escrow balances. The income
increase resulted from higher account balances and increased market rates
earned. The decrease in prepayment penalties relates to a lower level of
refinancing activity in the current quarter as compared to last year.
Despite a higher level of mortgage originations, gain on sale of mortgages in
the current year period was lower than in the prior year due to appraisal
adjustments recognized in 2005 following the acquisition of CCLP. Excluding the
prior year adjustment, gain on sale of mortgages increased in 2006 consistent
with the originations volume.
34
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.
The increased revenue, expense, equity loss and allocation amounts in 2006 are
due principally to the origination of nine funds 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 $2,000, representing our nominal ownership. As a
result, the consolidation of these partnerships has an insignificant impact on
our net income.
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
The following is a summary of our operations for the six months ended June 30,
2006 and 2005:
% of % of
(In thousands) 2006 Revenues 2005 Revenues % Change
-------------------------- -------- -------- -------- -------- --------
Revenues $151,370 100.0 % $136,426 100.0 % 11.0 %
Income before income taxes $ 15,581 10.3 % $ 25,529 18.7 % (39.0)%
Net income $ 18,905 12.5 % $ 34,229 25.1 % (44.8)%
Compared to 2005, the 2006 period benefited from the continued expansion of all
of our businesses and a full six months of operations for CCLP in the Mortgage
Banking segment as compared to only four months in 2005. In addition, revenues
in 2006 include $17.6 million generated by consolidated partnerships compared to
$12.1 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.
Despite revenue gains, overall growth of other income in our Mortgage Banking
business and an equity income pick-up of approximately $3.3 million resulting
from a large resecuritization gain realized by ARCap, (for which we recorded our
proportionate share), income before income taxes and net income decreased from
prior period. These gains were more than offset by:
o an increase in interest expense, due to higher amount of debt as well
as an increase in our average borrowing rate period over period;
o an increase in general and administrative expenses due to the
acquisition of CCLP;
o start-up costs in commencing Centerbrook operations and restructuring
costs relating to integration actions with respect to the proposed
acquisition of ARCap (see Note 19 to condensed consolidated financial
statements);
o termination fees and other costs associated with the restructuring of
our securitization programs upon the launch of Centerbrook, including
a write-off of deferred financing costs; and
o a retroactive depreciation charge for real estate owned.
Incremental costs in 2006 as described above related to corporate initiatives
(the majority of which were recorded in the second quarter) were as follows:
(In thousands) Where recorded
-------------- --------------
Centerbrook start-up costs $ 4,313 General and administrative
Restructuring costs in anticipation of ARCap acquisition 1,995 General and administrative
Restructuring of securitization programs - incremental interest expense 1,915 Interest expense
Restructuring of securitization programs - termination fee 1,420 General and administrative
Restructuring of securitization programs - write-off of deferred costs 3,398 Depreciation and amortization
-------
13,041
Tax effect (863)
-------
Net incremental costs $12,178
=======
35
REVENUES
Our revenues were as follows:
For the Six Months Ended June 30,
-----------------------------------
(In thousands) 2006 2005 % Change
------------------------------------- -------- -------- --------
Mortgage revenue bond interest income $ 75,739 $ 73,428 3.1 %
Other interest income 12,519 6,842 83.0
Fee income:
Mortgage banking 15,598 12,155 28.3
Fund sponsorship 15,576 18,628 (16.4)
Credit intermediation 3,169 3,501 (9.5)
-------- -------- -----
Total fee income 34,343 34,284 0.2
Other revenues:
Construction service fee 2,250 1,832 22.8
Expense reimbursements 1,467 2,929 (49.9)
Rental income of real estate owned 3,097 962 221.9
Administration fees 976 846 15.4
Prepayment penalties 2,046 1,799 13.7
Other 1,322 1,450 (8.8)
-------- -------- -----
Total other revenues 11,158 9,818 13.6
Subtotal 133,759 124,372 7.5
-------- -------- -----
Revenues of consolidated partnerships 17,611 12,054 46.1
-------- -------- -----
Total revenues $151,370 $136,426 11.0 %
======== ======== =====
Mortgage revenue bond interest income increased due to an increase in the
average portfolio balance over the comparable period 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 Mortgage Banking businesses and a
decrease in the level of equity invested by our Fund Management business (due to
timing of fund originations) and are detailed in the discussions of results for
the Fund Management and Mortgage Banking segments below.
Other interest income includes income from temporary investments, interest
earned on Mortgage Banking escrow balances and interest earned on our loans to
CCA (and CCLP in 2005). 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 (predominantly escrow accounts we manage) coupled
with increasing market interest rates for temporary investments.
Rental income of real estate owned pertains to the operations of properties on
which we foreclosed during the second quarter of 2005. The 2006 period includes
a full six months of operations while the 2005 results represent only a partial
period.
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 half of 2006 and 2005, the following amounts were eliminated, as
they represented transactions between consolidated partnerships and our other
component businesses:
For the Six Months Ended June 30,
----------------------------------
(In thousands) 2006 2005 % Change
------------------------------------- -------- -------- --------
Mortgage revenue bond interest income $ 4,287 $ 1,780 140.8 %
Other interest income 105 103 1.9
Fund sponsorship fees 20,105 18,019 11.6
Credit intermediation fees 1,751 1,560 12.2
Other revenues 3,064 677 352.6
------- ------- -----
Total $29,312 $22,139 32.4 %
======= ======= =====
36
EXPENSES
Our expenses were as follows:
For the Six Months Ended June 30,
---------------------------------
(In thousands) 2006 2005 % Change
-------------------------------------------------- -------- -------- --------
Interest expense $ 41,193 $ 24,931 65.2 %
Interest expense - preferred shares of subsidiary 9,449 9,449 --
Salaries and benefits 37,961 33,500 13.3
Fund origination and property acquisition expenses 5,720 6,955 (17.8)
Operating costs of real estate owned 2,639 588 348.8
Restructuring costs 1,995 -- --
Other general and administrative 24,112 18,237 32.2
-------- -------- -----
Subtotal 72,427 59,280 22.2
-------- -------- -----
Depreciation and amortization 23,528 17,165 37.1
Loss on impairment of assets 2,271 1,098 106.8
-------- -------- -----
Subtotal 148,868 111,923 33.0
Interest expense of consolidated partnerships 12,557 13,022 (3.6)
Other expenses of consolidated partnerships 31,539 24,665 27.9
-------- -------- -----
Total expenses $192,964 $149,610 29.0 %
======== ======== =====
The increase in interest expense reflects the higher amount of average debt
outstanding (approximately $1.9 billion and $1.3 billion for the first half of
2006 and 2005, respectively) to fund continuing mortgage revenue bond and LIHTC
investments and mortgage originations. In addition, our average borrowing rate
increased in 2006 as compared to 2005 as a result of increases in BMA and LIBOR
rates in both years. The effect of rate increases was tempered, however, by the
interest rate swaps that we have in place, all of which are now "in the money".
One swap in effect in the 2005 period, however, has since expired. Our average
borrowing rate increased to 4.3% for the six months ended June 30, 2006 as
compared to 3.7% for the 2005 period.
The increases in salaries and benefits 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. The 2006 period also includes
approximately $800,000 of severance related costs associated with the
elimination of certain executive positions during the first quarter.
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. The decrease compared to last year is the
result of a lower level of fund sponsorship activity in 2006 (see FUND
MANAGEMENT section below for related revenue discussion).
Operating costs of real estate owned relates to properties foreclosed upon in
May 2005 in connection with three of our mortgage revenue bonds. The 2006 period
represents a full six months worth of operating costs compared to approximately
seven weeks during 2005.
The increase in other general and administrative expenses primarily resulted
from start-up costs for Centerbrook operations and termination fees associated
with restructuring of our securitization programs. Restructuring costs relate to
integration and actions in anticipation of the ARCap acquisition (see Notes 9
and 19 to condensed consolidated financial statements). These costs are as
detailed in the table on page 35.
Depreciation and amortization expenses were higher in the 2006 period, primarily
due to higher amortization of mortgage servicing rights following the CCLP
acquisition and the expansion of the Mortgage Banking business, a write-off of
previously deferred fees in connection with the restructuring of certain
securitization programs upon the launch of Centerbrook as well as recognizing a
retroactive depreciation charge for real estate owned which was reclassified
from held for sale to held and used (see Note 6 to condensed consolidated
financial statements). These were 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; as such, they have an insignificant impact on
our net income.
37
OTHER ITEMS
For the Six Months Ended June 30,
------------------------------------
(In thousands) 2006 2005 % Change
----------------------------------------------- --------- --------- --------
Equity and other income $ 4,058 $ 1,076 277.1 %
Gain on sale of loans $ 7,056 $ 6,021 17.2 %
Gain on repayment of mortgage revenue bonds 912 903 1.0
--------- --------- -----
Gain on repayment of mortgage revenue bonds and
sale of loans $ 7,968 $ 6,924 15.1 %
--------- --------- -----
Income allocated to preferred shareholders of
subsidiary $ (3,113) $ (3,112) --
--------- --------- -----
Income allocated to SCUs $ (7,361) $ (13,891) (47.0)%
Income allocated to SMUs (169) (55) 207.3
--------- --------- -----
Total income allocated to minority interests $ (7,530) $ (13,946) (46.0)%
Loss allocated to partners of consolidated
partnerships $ 195,871 $ 164,333 19.2 %
Equity and other income primarily includes income from our investment in ARCap,
offset by losses from tax advantaged investment vehicles similar to those we
sponsor. The 2006 period includes equity income of approximately $3.3 million
relating to our proportionate share of a large resecuritization gain realized by
ARCap.
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. The decrease in 2006 as
compared to 2005 is due to the decline in period earnings and the conversion of
units during the past twelve months.
The loss allocation to partners of consolidated partnerships represents the
operating losses of those partnerships, of which we have absorbed an
insignificant portion (approximately $5,000).
38
Results by Segment
------------------
PORTFOLIO INVESTING
The table below shows selected information regarding our Portfolio Investing
activities:
For the Six Months Ended June 30,
------------------------------------
(In thousands) 2006 2005 % Change
--------------------------------------------------------- ---------- ---------- --------
New mortgage revenue bond acquisitions $ 155,380 $ 141,080 10.1 %
Funding of mortgage revenue bonds acquired in prior years 10,090 11,551 (12.6)
Acquisitions related to prior period forward commitments 48,396 14,150 242.0
---------- ---------- --------
Total acquisition and funding activity $ 213,866 $ 166,781 28.2 %
Forward commitments issued but not funded $ -- $ 8,000 --
Mortgage revenue bonds repaid $ 31,983 $ 19,381 65.0
Average portfolio balance (fair value) $2,402,410 $2,182,948 10.1 %
Weighted average permanent interest rate of bonds
acquired 6.17 % 6.04 %
Weighted average yield of portfolio 6.77 % 6.95 %
Average borrowing rate (includes effect of swaps) 3.95 % 3.41 %
Average BMA rate 3.32 % 2.25 %
---------- ----------
Mortgage revenue bond interest income (1) $ 81,300 $ 75,580 7.6 %
Other interest income (1) 8,182 3,512 133.0
Rental income of real estate owned 3,097 962 221.9
Prepayment penalties 10 124 (91.9)
Other revenues (1) 1,335 1,849 (27.8)
---------- ---------- --------
$ 93,924 $ 82,027 14.5 %
========== ========== ========
Interest expense and securitization fees (1) $ 40,343 $ 22,996 75.4 %
Loss on impairment of assets $ 2,271 $ 1,098 106.8 %
Gain on repayments of mortgage revenue bonds $ 912 $ 903 0.7 %
---------- ---------- --------
(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 six 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.
Rental income of real estate owned pertains to the operations of properties on
which we foreclosed during the second quarter of 2005. The 2006 period includes
a full six months of operations while the 2005 results represent only a partial
period.
While the decline in interest rates of bonds acquired 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. In
addition, the restructuring of our securitization programs in the second quarter
of 2006 resulted in incremental interest costs of $1.9 million.
While our borrowing costs have been increasing along with market rates, we
expect the commencement of Centerbrook, our new credit intermediation
subsidiary, will help enable us to retain a significant portion of fees which we
historically have paid to third parties. In addition, we anticipate Centerbrook
will enable us to obtain better leverage against our assets and lower our
average cost of capital.
39
FUND MANAGEMENT
The table below shows selected information regarding our Fund Management
activities:
For the Six Months Ended June 30,
--------------------------------
(In thousands) 2006 2005 % Change
------------------------------------------- -------- -------- --------
Equity raised $368,957 $436,394 (15.5)%
Equity invested by investment funds (1) $370,675 $431,009 (14.0)%
Fees based on equity raised $ 6,215 $ 6,750 (9.7)%
Fees based on equity invested $ 15,634 $ 18,590 (15.9)%
Fees based on management of other entities:
Asset management and partnership fees $ 14,054 $ 11,205 25.4 %
Construction fees 2,250 1,832 22.8
Investment origination fees 155 325 (52.3)
Other -- 60 --
-------- -------- -----
Subtotal 16,459 13,422 22.6
-------- -------- -----
Total fund sponsorship fees (2) 38,308 38,762 (1.2)
Credit intermediation fees (2) 4,921 5,061 (2.8)
Expense reimbursement (2) 6,520 4,479 45.6
Other interest income (2) 366 127 188.2 %
Other revenues (2) 1,425 970 46.9
-------- -------- -----
Total $ 51,540 $ 49,399 4.3 %
======== ======== =====
(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 second 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 decreased approximately 20% in 2006 as compared to
the same period in 2005 primarily due to the decrease in amount of equity
raised. In addition, the mix of fund sponsorships served to decrease the fee
realization rate due to a higher proportion of "corporate" funds included in
equity raised for the 2006 period. Although the level of equity raised in the
2006 period fell short of the 2005 level, we anticipate that full-year equity
raising activity in 2006 to exceed that of the prior year. Related O&O
acquisition expenses were also comparatively down in-line with the decrease in
revenue.
FEES BASED ON EQUITY INVESTED
We earn property acquisition fees and acquisition allowance fees based upon the
level of fund equity invested, which varies due to the timing of fund closures.
While we acquire properties on an ongoing basis throughout the year, we do not
recognize revenue until we place the property in a sponsored fund. Therefore,
delays in timing of a fund closure may impact the level of revenues recognized
in a given period.
The decrease in fees is greater than the decrease of equity invested because of
a lower fee rate realized, stemming from changes in the mix of funds originated,
in that we sponsored a proportionally higher level of "corporate" funds in the
2006 period.
FEES BASED ON MANAGEMENT OF OTHER ENTITIES
Asset management and partnership 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.
40
OTHER REVENUES
Credit intermediation, expense reimbursement and other revenues in this segment
consist largely of service fees charged to entities (including consolidated
partnerships) managed by these subsidiaries and fluctuate with the growth of the
number of those entities and their cash flows.
MORTGAGE BANKING
The table below shows selected information regarding our Mortgage Banking
activities:
For the Six Months Ended June 30,
------------------------------------
(In thousands) 2006 2005 % Change
-------------------------------------------------- ---------- ---------- ---------
Originations $ 739,203 $ 441,043 67.6 %
Mortgage portfolio at June 30 $9,180,858 $9,022,353 1.8 %
Fair value of mortgage servicing rights at June 30 $ 59,647 $ 75,212 (20.7)%
---------- ---------- -----
Mortgage origination fees (1) $ 4,792 $ 2,790 71.8 %
Mortgage servicing fees (1) 10,198 8,702 17.2
Assumption fees (1) 682 663 2.9
---------- ---------- -----
Total fee income 15,672 12,155 28.9
Interest income (1) 8,262 3,306 149.9
Prepayment penalties (1) 2,035 1,675 21.5
Other revenues (1) 673 296 127.4
---------- ---------- -----
$ 26,642 $ 17,432 52.8 %
========== ========== =====
Gain on sale of mortgages $ 7,033 $ 6,324 11.2 %
========== ========== =====
(1) Prior to intersegment eliminations.
Originations for the six months ended June 30 are broken down as follows:
(In thousands) 2006 % of total 2005 % of total
------------------ -------- ---------- ---------- ----------
Fannie Mae $422,784 57.2 % $ 287,733 65.2 %
Freddie Mac 90,015 12.2 13,925 3.2
Conduit and other 226,404 30.6 139,385 31.6
-------- ------ ---------- -----
Total $739,203 100.0 % $ 441,043 100.0 %
======== ====== ========== =====
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 two quarters of
CCLP origination as compared to only four months 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 and a large level of loans originated on
behalf of AMAC.
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 0.8% as compared to the same period in 2005. The decline
is due to erosion of the servicing fee rate due to the higher proportion of
non-agency loans in the portfolio. This trend has also affected the level of
mortgage servicing rights, as write-offs in connection with the prepayment of
mortgages at higher servicing rates are replaced with new assets generating
lower fee streams Generally, as our prepayments have increased, our mortgage
servicing rights have decreased.
Interest income relates primarily to that earned on escrow balances. The income
increase resulted form higher account balances and increased market rates
earned. The increase in prepayment penalties relates to a higher level of
refinancing activity in the current year. Both categories also increased due to
the CCLP acquisition.
Gain on sale of mortgages increased in 2006 as compared to 2005 due to the
increased origination volume where we have retained mortgage servicing rights.
41
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.
The increased revenue, expense, equity loss and allocation amounts in 2006 are
due to the origination of nine funds in the past year and the assumption of the
general partner interests in 14 property level partnerships which occurred in
the second quarter of 2005. As a result, for the six months ending June 30,
2006, include a full period of activity for these property level partnerships
while the same period in 2005 only includes three months.
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 $5,000, 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 that
we recognize 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 six months ended June 30,
2006 and 2005 was (21.3)% and (34.1)%, respectively. The effective rate for our
corporate subsidiaries that were subject to taxes was 15.6% and 54.6% for the
six months ended June 30, 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
See NEW ACCOUNTING PRONOUNCEMENTS in Note 1 to the condensed consolidated
financial statements.
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.
42
We have the following debt and securitization facilities to provide short-term
and long-term liquidity:
o $250.0 million, used for mortgage banking needs, which matures in
August 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 August
2006;
o $40.0 million, established in connection with the CMC acquisition,
which expires in December 2006; and
o securitizations through the Merrill Lynch P-FLOATs/RITES program and
through the Goldman Sachs Floats/Residuals program of a specified
percentage of the fair value of mortgage revenue bonds not otherwise
securitized or pledged as collateral.
As of June 30, 2006, we had approximately $82.9 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. In connection with the proposed acquisition of ARCap (see Note 19 to
the condensed consolidated financial statements) 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. We plan to enter into a $350.0 million six-year term loan and a $150.0
million revolving credit facility, the term loan portion of which will be used
to pay the cash portion of the acquisition, while the revolving credit facility
would be used to refinance the existing lines and for general business purposes.
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 June 30, 2006
------------------------------------------
During August 2006, equity distributions will be paid as follows:
(In thousands)
--------------
Common/CRA shareholders $24,806
SCU/SMU holders 8,860
4.4% CRA Preferred shareholders 1,188
Equity Issuer Preferred shareholders 6,281
-------
Total $41,135
=======
In addition, as described in Note 19 to the condensed consolidated financial
statements, we have announced our intent to acquire ARCap during 2006.
During July 2006, we paid approximately $12.9 million to repurchase
approximately 683,000 of our common shares in the open market. See also Note 14
to the condensed consolidated financial statements.
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
---------------------
For the six months ended June 30, 2006, there was a net decrease in cash and
cash equivalents as compared to a net increase during the comparable 2005
period. A larger increase in 2006 in cash provided by financing activities was
more than offset by a larger increase in cash used in investing activities and
also by a significant decrease in operating cash flow.
Operating cash flows were lower in the 2006 period by a margin of $112.7 million
due primarily to:
o lower net income in 2006 due in part to a high level of costs for
corporate initiatives launched in 2006;
o a current year loan made to an affiliate as compared to the collection
of a previously outstanding advance in 2005; and
o higher net fundings of mortgage loans.
Additionally, the timing of receipts and payments in operating asset and
liability accounts contributed to this decrease.
43
More cash was used in investing activities in 2006 as compared to 2005 by a
margin of $31.2 million due to:
o a higher level of mortgage revenue bond acquisitions and fundings;
o net advances to partnerships in 2006 as compared to net collections
from partnerships in 2005; and
o our 2006 capitalization requirements for Centerbrook that were
invested in marketable securities.
These factors were offset in part by an investment sold to AMAC in April 2006
and a decrease in restricted cash and cash equivalents due to the release of
collateral requirements related to the MBIA securitization programs (which were
restructured in connection with launch of Centerbrook as discussed below).
Financing inflows in the 2006 period were higher than in 2005 by $97.4 million.
The primary reason for the higher inflows in 2006 was increased net borrowings
during the current period including those related to mortgage loans held for
sale at period end and the capitalization of Centerbrook. Also included in
financing activities are the proceeds and repayments related to the
restructuring of our securitization programs in connection with the launch of
Centerbrook whereby we terminated our programs through MBIA and created a
similar program through Goldman Sachs.
Commitments, Contingencies and Off Balance Sheet Arrangements
-------------------------------------------------------------
Note 18 to the condensed consolidated financial statements contains a summary of
our guarantees and off-balance sheet arrangements.
The following table reflects our maximum exposure and carrying amount as of June
30, 2006, for guarantees we and our subsidiaries have entered into:
Maximum Carrying
(In thousands) Exposure Amount
-------------------------------------------- ---------- ----------
Repayment guarantees (1) $ 3,602 $ --
Completion guarantees (1) 33,212 --
Development deficit guarantees (1) 26,040 810
Operating deficit guarantees (1) 7,234 236
ACC transition guarantees (1) 3,245 --
Recapture guarantees (1) 109,196 236
Replacement reserve (1) 3,076 67
Guarantee of payment (1) 45,471 --
Mortgage pool credit intermediation (2) 7,446 --
LIHTC credit intermediation (2) 787,175 20,036
Mortgage banking loss sharing agreements (3) 873,220 12,943
---------- ----------
$1,898,917 $ 34,328
========== ==========
(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. The carrying values disclosed above relate
to the fees we earn for the transactions, which we recognize as their fair
values.
(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.
44
CONTRACTUAL OBLIGATIONS
The following table provides our commitments as of June 30, 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) $ 408,337 $ 407,370 $ 967 $ -- $ --
Notes payable of consolidated
partnerships (2) 488,627 78,015 121,632 27,671 261,309
Operating lease obligations 67,280 6,699 13,381 12,261 34,939
Unfunded loan commitments (3) 305,665 247,620 58,045 -- --
Financing arrangements (1) 1,600,778 1,600,778 -- -- --
Preferred shares of subsidiary (subject
to mandatory repurchase) 273,500 -- -- -- 273,500
---------- ---------- ---------- ---------- ----------
Total $3,144,187 $2,340,482 $ 194,025 $ 39,932 $ 569,748
========== ========== ========== ========== ==========
(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, $379.7 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 $108.9 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, $264.7 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.
45
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 debt. We estimate that an increase of 1.0% in interest rates
would decrease our annual pre-tax income by approximately $15.6 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 $2.2 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 $141.1 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
June 30, 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. 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.
46
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 second 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
---------------- ------------- ----------- ----------------- ----------------------
April 1-30, 2006 -- -- --
May 1-31, 2006 7,200 $19.00 7,200
June 1-30, 2006 32,691 18.55 22,200
-------- ------- --------
Total 39,891 $18.63 29,400 1,462,200
======== ======= ======== ==========
(1) Some 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
47
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting of shareholders on June 13, 2006. Nathan
Gantcher, Jerome Y. Halperin, Robert L. Loverd and Stephen M. Ross
were elected as trustees for three-year terms expiring in 2009.
Continuing to serve their current terms are the following trustees:
Alan P. Hirmes, Peter T. Allen, Jeff T. Blau, Robert A. Meister,
Janice Cook Roberts, Andrew L. Farkas, Marc D. Schnitzer and Thomas W.
White. The four individuals elected, and the number of votes cast for
and abstaining, with respect to each of them, were as follows (no
votes were cast "against"):
For Abstain
---------- ---------
Nathan Gantcher
Common Shares 48,236,870 1,007,066
Restricted Common Shares 245,119 135,656
Special Preferred Voting Shares 13,369,941 1,495,370
Jerome Y. Halperin
Common Shares 46,089,388 3,154,548
Restricted Common Shares 245,119 135,656
Special Preferred Voting Shares 13,369,941 1,495,370
Robert L. Loverd
Common Shares 48,252,749 991,187
Restricted Common Shares 245,119 135,656
Special Preferred Voting Shares 13,369,941 1,495,370
Stephen M. Ross
Common Shares 46,256,355 2,987,581
Restricted Common Shares 245,119 135,656
Special Preferred Voting Shares 13,369,941 1,495,370
At the same meeting, an amendment to Section 6.1 of the Company's Second Amended
and Restated Trust Agreement was passed to increase the number of authorized
shares from 100,000,000 to 160,000,000. Votes cast were as follows:
For Abstain Against
---------- ---------- ---------
Change in authorized shares amendment
Common Shares 2,598,543 24,371,618 2,273,774
Restricted Common Shares 245,119 135,656 --
Special Preferred Voting Shares 13,369,941 1,495,370 --
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS
3.1(a) Amendment No. 3 to Second Amended and Restated Trust
Agreement.*
10.1 Limited Liability Company Agreement dated June 28, 2006 of
Centerbrook Holdings LLC and IXIS Financial Products Inc. and
Charter Mac Corporation.*
10.2 Unitholder and Warrant Agreement among Centerbrook Holdings LLC,
IXIS Financial Products Inc. and Charter Mac Corporation, dated
as of June 28, 2006.*
10.3 Limited Liability Company Agreement of Centerbrook Financial LLC,
dated as of June 28, 2006.**
10.4 Senior Loan Agreement among Centerbrook Financial LLC, the
lenders that are party thereto and Citibank, N.A., as senior
agent, dated as of June 28, 2006.*
10.5 Mezzanine Loan Agreement among Centerbrook Financial LLC, the
lenders that are party thereto and Citibank, N.A., as senior
agent, dated as of June 28, 2006.*
48
ITEM 6. EXHIBITS (continued)
10.6 Subordination and Security Agreement among Centerbrook Financial
LLC, Deutsche Bank Trust Company Americas, and Citibank, N.A., as
senior agent and mezzanine agent, dated as of June 28, 2006.*
10.7 Guarantee Agreement among CharterMac and IXIS Financial Products
Inc., dated as of June 28, 2006.*
10.8 Right of First Refusal Letter Agreement among CharterMac and
Centerbrook Financial LLC, dated as of June 28, 2006.*
10.9 Fee Letter among IXIS Capital Markets North America Inc. and
Centerbrook Holdings LLC, dated as of June 28, 2006.*
10.10 Credit Support Swap between Charter Mac Origination Trust 1 and
Centerbrook Financial LLC.*
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.
** Confidential treatment has been requested for certain portions of
this Exhibit pursuant to Rule 24b-2 of the Securities Exchange
Act of 1934, as amended, which portions have omitted and filed
separately with the Securities and Exchange Commission.
49
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: August 9, 2006 By: /s/ Marc D. Schnitzer
---------------------
Marc D. Schnitzer
Managing Trustee, Chief Executive Officer
and President
Date: August 9, 2006 By: /s/ Alan P. Hirmes
------------------
Alan P. Hirmes
Managing Trustee, Chief Financial Officer and
Chief Operating Officer