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 MARCH 31, 2007
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
Commission File Number 1-13237
CENTERLINE HOLDING COMPANY
(Formerly CharterMac)
(Exact name of Registrant as specified in its Trust Agreement)
DELAWARE 13-3949418
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 MADISON AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
(212) 317-5700
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Large Accelerated filer [X] Accelerated filer [ ] Non-accelerated
filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of April 30, 2007, there were 50,922,631 outstanding shares of the
registrant's shares of beneficial interest.
TABLE OF CONTENTS
CENTERLINE HOLDING COMPANY
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 35
Item 3. Quantitative and Qualitative Disclosures about Market Risk 48
Item 4. Controls and Procedures 50
PART II
Item 1. Legal Proceedings 51
Item 1A. Risk Factors 51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 51
Item 3. Defaults Upon Senior Securities 52
Item 4. Submission of Matters to a Vote of Security Holders 52
Item 5. Other Information 52
Item 6. Exhibits 52
SIGNATURES 53
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
March 31, December 31,
2007 2006
----------- -----------
(Unaudited)
ASSETS
Cash and cash equivalents $ 99,297 $ 178,907
Restricted cash 16,081 14,843
Mortgage revenue bonds-at fair value (Note 2) 2,460,894 2,397,738
Other investments (Note 3) 315,362 338,920
Goodwill and intangible assets, net (Note 4) 532,757 542,277
Deferred costs and other assets, net (Note 5) 162,084 196,145
Loan to affiliate (Note 15) 10,190 15,000
Investments held by consolidated partnerships (Note 9) 5,337,259 4,965,907
Other assets of consolidated partnerships (Note 9) 972,941 1,038,779
----------- -----------
Total assets $ 9,906,865 $ 9,688,516
=========== ===========
LIABILITIES AND EQUITY
Liabilities:
Financing arrangements (Note 6) $ 1,875,544 $ 1,801,170
Notes payable (Note 6) 443,540 591,165
Preferred shares of subsidiary (subject to mandatory repurchase) 273,500 273,500
Accounts payable, accrued expenses and other liabilities (Note 8) 203,409 214,344
Notes payable and other liabilities of consolidated partnerships (Note 9) 2,664,412 2,700,154
----------- -----------
Total liabilities 5,460,405 5,580,333
----------- -----------
Minority interests in consolidated subsidiaries (Note 10) 232,559 247,390
----------- -----------
Preferred shares of subsidiary (not subject to mandatory repurchase) 104,000 104,000
----------- -----------
Limited partners' interests in consolidated partnerships 3,159,062 2,806,661
----------- -----------
Commitments and contingencies (Note 17)
Shareholders' equity:
Beneficial owners equity:
4.4% Convertible CRA preferred shares; no par value; 2,160 shares issued
and outstanding in 2007 and 2006 104,498 104,498
Convertible CRA shares; no par value; 6,552 shares issued and
outstanding in 2007 and 2006 92,946 97,499
Special preferred voting shares; no par value (14,693 shares issued and
outstanding in 2007 and 14,825 shares issued and outstanding in 2006) . 147 148
Common shares; no par value (160,000 shares authorized; 52,892 issued
and 51,188 outstanding in 2007 and 52,746 issued and 51,343
outstanding in 2006) 679,558 709,142
Treasury shares of beneficial interest - common, at cost (1,704 shares in
2007 and 1,403 shares in 2006) (33,817) (28,018)
Accumulated other comprehensive income 107,507 66,863
----------- -----------
Total shareholders' equity 950,839 950,132
----------- -----------
Total liabilities and equity $ 9,906,865 $ 9,688,516
=========== ===========
See accompanying notes to condensed condolidated financial statements.
3
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
March 31,
----------------------
2007 2006
--------- ---------
Revenues:
Mortgage revenue bond interest $ 37,063 $ 36,522
Other interest income 12,557 5,944
Fee income 14,635 16,071
Other revenues 5,594 5,357
Revenues of consolidated partnerships (Note 9) 47,316 8,245
--------- ---------
Total revenues 117,165 72,139
--------- ---------
Expenses:
Interest expense 28,302 17,107
Interest expense of consolidated partnerships (Note 9) 22,909 6,946
Interest expense - distributions to preferred shareholders of subsidiary 4,724 4,724
General and administrative (Note 13) 57,424 32,567
Depreciation and amortization 11,498 8,913
Loss on impairment of mortgage revenue bonds and other assets (Note 2) 16,447 --
Other expenses of consolidated partnerships (Note 9) 23,753 15,281
--------- ---------
Total expenses 165,057 85,538
--------- ---------
Loss before other income (47,892) (13,399)
Other income (loss):
Equity and other (loss) income (250) 510
Gain on sale or repayment of mortgage revenue bonds and other assets 2,379 5,430
Loss on investments held by consolidated partnerships (Note 9) (57,600) (62,149)
--------- ---------
Loss before allocations (103,363) (69,608)
Allocations:
Income allocated to preferred shareholders of subsidiary (1,556) (1,556)
Minority interests in consolidated subsidiaries, net of tax (Note 10) 6,117 (5,879)
Loss allocated to partners of consolidated partnerships 81,111 88,781
--------- ---------
(Loss) income before income taxes (17,691) 11,738
Income tax benefit 2,946 2,919
--------- ---------
Net (loss) income $ (14,745) $ 14,657
========= =========
Allocation of net (loss) income to:
4.4% Convertible CRA preferred shareholders $ 1,188 $ 1,188
Common shareholders (14,152) 11,962
Convertible CRA shareholders (1,781) 1,507
--------- ---------
Total $ (14,745) $ 14,657
========= =========
Net (loss) income per share (Note 14):
Basic and diluted $ (.27) $ 0.23
========= =========
Weighted average shares outstanding:
Basic 57,957 58,578
========= =========
Diluted 57,957 58,895
========= =========
Dividends declared per share $ 0.42 $ 0.42
========= =========
See accompanying notes to condensed condolidated financial statements.
4
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended March 31,
---------------------------
2007 2006
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (14,745) $ 14,657
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Gain on sale or repayment of mortgage revenue bonds and other assets (653) (891)
Loss on impairment of mortgage revenue bonds and other assets 16,447 --
Depreciation and amortization 11,498 8,913
Equity in income (loss) of unconsolidated entities 250 (510)
Distributions received from equity investees -- 1,374
Income allocated to preferred shareholders of subsidiary 1,556 1,556
Income allocated to minority interests in consolidated subsidiaries (6,117) 5,879
Non-cash compensation expense 9,057 2,035
Other non-cash expense 3,514 1,342
Deferred taxes (54) --
Reserves for bad debt 13,642 6,413
Changes in operating assets and liabilities:
Mortgage servicing rights (1,173) (3,951)
Mortgage loans held for sale 73,082 95,412
Loan to affiliate 4,810 --
Deferred revenues (2,053) (2,502)
Restructuring costs payable (778) --
Receivables 26,175 (26,793)
Other assets 991 (9,178)
Accounts payable, accrued expenses and other liabilities (14,506) (12,766)
--------- ---------
Net cash provided by operating activities 120,943 80,990
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition and funding of mortgage revenue bonds (28,393) (60,675)
Repayments of mortgage revenue bonds 8,001 31,509
Acquisition of notes receivable (12,155) (1,250)
Repayments of notes receivable 3,026 667
Acquisitions of subsidiaries, net of cash acquired -- 113
Advances to partnerships (32,369) (28,103)
Collection of advances to partnerships 22,230 38,120
Deferred investment acquisition costs (1,218) (46)
Increase in cash and cash equivalents - restricted (1,238) (94)
Increase in marketable securities (31,160) --
Other investing activities (6,692) (1,172)
Equity investments (7,391) --
--------- ---------
Net cash used in investing activities (87,359) (20,931)
--------- ---------
(continued)
See accompanying notes to condensed condolidated financial statements.
5
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2007 2006
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders (26,385) (25,914)
Distributions to preferred shareholders of subsidiary (1,556) (1,556)
Distributions to minority interests in consolidated subsidiaries (8,883) (8,916)
Proceeds from financing arrangements 146,800 96,968
Repayments of financing arrangements (72,426) (4,701)
Decrease in notes payable (147,625) (105,531)
Minority interest contribution 3,225 --
Retirement of minority interests and special preferred voting shares (2,803) --
Treasury stock purchases (3,529) --
Deferred financing costs (12) --
--------- ---------
Net cash used in financing activities (113,194) (49,650)
--------- ---------
Net (decrease) increase in cash and cash equivalents (79,610) 10,409
Cash and cash equivalents at the beginning of the year 178,907 161,295
--------- ---------
Cash and cash equivalents at the end of the period $ 99,297 $ 171,704
--------- ---------
Acquisition activity:
Redemption of preferred stock and advances $ 7,170
Assets acquired (8,421)
Liabilities assumed 1,364
---------
Net cash paid for acquisitions $ 113
=========
Non-cash investing and financing activities:
Share grants issued $ 8,998 $ 3,662
Conversion of SCUs to common shares $ -- $ 358
Treasury stock purchases via employee withholding $ 2,270 $ 435
See accompanying notes to condensed condolidated financial statements.
6
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 1 - GENERAL
A. PRINCIPLES OF CONSOLIDATION
Centerline Holding Company, formerly known as CharterMac, is a full service
investing and finance company with a core focus on real estate. The unaudited
condensed consolidated financial statements include the accounts of Centerline
Holding Company, it's wholly owned and majority owned subsidiary statutory
trusts, other non-trust subsidiary companies it controls and entities
consolidated pursuant to the adoption of Financial Accounting Standards Board
("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", "us" and "Centerline", as used throughout this
document, refers to Centerline Holding Company and its consolidated
subsidiaries. For certain of the entities identified throughout this document as
"consolidated partnerships", the financial information included is as of and for
the periods ended December 31, 2006, the latest practical date available (see
Note 9).
B. ORGANIZATION
Effective January 1, 2007, we began reporting our segment results under a
reorganized structure including five business segments:
1. Affordable Housing, which brings together the users and providers of
debt and equity capital to the affordable multifamily rental housing
industry, and includes:
o Mortgage Revenue Bond Investing - through our subsidiaries, we
invest primarily in tax-exempt first mortgage revenue bonds
issued by various state or local governments, agencies or
authorities. The proceeds of these mortgage revenue bonds are
used to finance the new construction, substantial rehabilitation,
acquisition, or refinancing of affordable multifamily housing
properties located throughout the United States; and
o Tax Credit Fund Management - through our subsidiaries, we manage
funds that invest in Low-Income Housing Tax Credit ("LIHTC")
properties. Managing these funds involves origination,
underwriting and management reporting. With respect to certain
LIHTC equity investment funds, our subsidiaries provide specified
returns to investors.
2. Commercial Real Estate, which provides a broad spectrum of financing
and investment products for multifamily, office, retail, industrial,
mixed-use and other properties, and includes:
o High Yield CMBS Fund Management - through our subsidiaries, we
co-invest in and manage funds that invest in high yield
Commercial Mortgage-Backed Securities ("CMBS") investments;
o Direct Loan Fund Management - through our subsidiaries, we
co-invest in and manage a fund that invests in real estate
finance products, including first mortgage loans, B-notes, bridge
loan and mezzanine loans;
o Management of American Mortgage Acceptance Company ("AMAC") -
AMAC is a publicly-traded real estate investment trust we manage
through a subsidiary (see Note 15). It invests in similar real
estate products such as the Direct Loan funds mentioned above as
well as CMBS, collateralized debt obligation ("CDO")
securities and government insured mortgage securities;
o Real Estate Equity Fund Management - through a subsidiary, we
co-invest in and manage a fund that invests in real estate equity
joint ventures; and
o Debt Product Origination - through our subsidiaries, we originate
and underwrite debt products for the funds we manage as well as
third parties, including:
o The Federal National Mortgage Association ("Fannie Mae");
o The Federal Home Loan Mortgage Corporation ("Freddie Mac");
7
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
o The Federal Housing Authority ("FHA");
o The Government National Mortgage Association ("GNMA");
o AMAC; and
o Insurance companies and conduits.
o Primary Servicing - through our subsidiaries, we provide
multifamily and commercial loan servicing for third parties.
Through this segment, we may also invest in other entities and hold
investments similar to those in the funds we manage. Such investments
included our pre-acquisition preferred and common investments in
Centerline Investors I LLC, formerly known as ARCap Investors, L.L.C.
("Investors") and other loans to or investments in entities associated
with Commercial Real Estate, including AMAC.
3. Asset Management, comprises activities for monitoring and managing the
Affordable Housing and Commercial Real Estate assets we own, for funds
we manage, and for third parties. This segment includes:
o Loan Servicing - through our subsidiaries, we provide primary and
special loan servicing for third parties and special servicing on
the CMBS securitizations in which either we, or the funds we
manage, invest; and
o Asset management services to the other Centerline segments and
AMAC.
4. Credit Risk Products - through our subsidiaries, we provide credit
intermediation, primarily for the mortgage revenue bond
securitizations in the Affordable Housing segment.
5. Consolidated Partnerships, which primarily include the LIHTC equity,
high yield CMBS and direct loan investing funds we manage through the
Affordable Housing and Commercial Real Estate segments' and property
partnerships which we are required to consolidate in accordance with
various accounting pronouncements.
In addition to these five segments, our "Corporate" group includes our
central administrative, financing and acquisition related costs, assets and
liabilities.
In prior years, we had operated in different business segments and we have
reclassified the prior year results to reflect comparability with the
current structure.
C. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements have been
prepared without audit. In the opinion of management, the financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly 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, 2006. 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, 2006. New accounting pronouncements pending adoption
8
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
that may have a significant impact on our unaudited condensed consolidated
financial statements are also described 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 2007
presentation, including the revisions to our segment reporting as noted above.
D. NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 2007, we adopted Statement of Financial Accounting Standards
("SFAS") No. 156, ACCOUNTING FOR SERVICING OF FINANCIAL Assets ("SFAS No. 156").
SFAS No. 156 stipulates the accounting for mortgage servicing rights ("MSRs")
and requires that they be recorded initially at fair value. SFAS No. 156 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 elected to continue amortizing our MSRs and, therefore, there was no
impact on our condensed consolidated financial statements.
As of January 1, 2007, we adopted FASB Interpretation No. 48, ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES ("FIN 48"). FIN 48 sets a standard for recognizing
tax benefits in a company's income statement based on a determination whether it
is more likely than 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, FIN 48 also prescribes measurement standards
requiring determination of how much of the tax position would ultimately be
allowed if challenged (see Note 11 regarding the impact of adoption).
In September 2006, the FASB issued SFAS No. 157, FAIR VALUE MEASUREMENTS, which
established a framework for calculating the fair value of assets and liabilities
as required by numerous other accounting pronouncements, and expands disclosure
requirements of the fair values of certain assets and liabilities. The statement
is effective as of our 2008 fiscal year. We are currently evaluating the impact,
if any, that the adoption of this Statement will have on our consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES. This statement was issued with the
intent to provide an alternative measurement treatment for certain financial
assets and liabilities. The alternative measurement would permit fair value to
be used for both initial and subsequent measurement, with changes in fair value
recognized in earnings as those changes occur. This "Fair Value Option" would be
available on a contract by contract basis. The effective date for this statement
is the beginning of our 2008 fiscal year. We are currently assessing the impact,
if any, that the adoption would have on our consolidated financial statements
should we elect to adopt it. If we were to do so, we would not apply its
provisions until SFAS No. 157 (described above) is adopted.
9
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 2 - MORTGAGE REVENUE BONDS
A. SUMMARY
The following table summarizes our mortgage revenue bond portfolio:
March 31, December 31,
(In thousands) 2007 2006
------------------------- ----------- -----------
Amortized cost basis $ 2,730,978 $ 2,727,372
Gross unrealized gains 139,451 101,364
Gross unrealized losses (22,869) (33,670)
----------- -----------
Subtotal/fair value 2,847,560 2,795,066
Less: eliminations (1) (386,666) (397,328)
----------- -----------
Total fair value $ 2,460,894 $ 2,397,738
=========== ===========
(1) These bonds are either recorded as liabilities on the balance sheets of
certain consolidated partnerships or are recorded as liabilities of real
estate owned and are therefore eliminated in consolidation.
The fair value and gross unrealized losses of our mortgage revenue bonds,
aggregated by length of time that individual bonds have been in a continuous
unrealized loss position, is summarized in the table below:
Less than 12 Months
(Dollars in thousands) 12 Months or More Total
----------------------- --------- --------- --------
MARCH 31, 2007
Number of bonds 33 70 103
Fair value $251,719 $435,767 $687,486
Gross unrealized loss $ 11,717 $ 11,152 $ 22,869
--------------------------------------
DECEMBER 31, 2006
Number of bonds 76 60 136
Fair value $502,758 $356,543 $859,301
Gross unrealized loss $ 22,355 $ 11,315 $ 33,670
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 that approximates market; 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.
10
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
The following summarizes the maturity dates of mortgage revenue bonds we held as
of March 31, 2007:
Weighted
Outstanding Average
(Dollars in thousands) Bond Amount Fair Value Interest Rate
------------------------------ ----------- ---------- -------------
Due in less than one year $ 16,453 $ 16,361 5.97%
Due between one and five years 61,207 60,248 5.60
Due after five years 2,671,149 2,770,951 6.61
---------- ---------- -------
Total / weighted average 2,748,809 2,847,560 6.58%
=======
Less: eliminations (1) (395,763) (386,666)
---------- ----------
Total $2,353,046 $2,460,894
========== ==========
(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 three months
ended March 31, 2007:
Weighted Weighted
Average Average
Face Construction Permanent
(Dollars in thousands) Amount Interest Rate Interest Rate
-------------------------------------- -------- ------------- --------------
Construction/rehabilitation properties $20,142 6.50% 5.70%
Lease up properties 7,100 6.40 6.40
Additional funding of existing bonds 1,151 6.00 6.00
------- ------- -------
Total $28,393 6.45% 5.88%
======= ======= =======
The following table summarizes mortgage revenue bonds repaid during the three
months ended March 31, 2007:
Net Book Realized
(In thousands) Value Proceeds Loss
--------------------------------- -------- -------- --------
Non-participating, not stabilized $2,627 $2,622 $ (5)
C. SECURITIZED OR PLEDGED ASSETS
At March 31, 2007, mortgage revenue bonds with an aggregate fair value of $2.3
billion were securitized or pledged as collateral in relation to financing
arrangements. Of these, 44 bonds with a fair value of approximately $386.7
million are eliminated in consolidation as noted in the tables above.
D. IMPAIRMENT
During 2007, we recognized approximately $16.4 million of mortgage revenue bond
impairment charges. Of this amount, $13.7 million is related to the change in
our strategy in recovering investments associated with troubled developers (see
discussion under PRC/CRG/ERC in Note 17). The change in strategy, while still
not finalized, may involve a change in the length of time we plan to hold the
investments or the amount of funding we may provide to support the underlying
property. As such, the estimated level and timing of cash flows used to value
the properties reduced the estimated fair values of the mortgage revenue bonds.
11
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
Two other impairments resulted from substandard performance at the underlying
properties. For one property, there is a full interest forbearance in place and
re-issuance of the bond is expected to occur later in the year.
NOTE 3 - OTHER INVESTMENTS
Investments other than mortgage revenue bonds consisted of:
March 31, December 31,
(In thousands) 2007 2006
------------------------------------------------------ -------- -----------
Equity Method Investments
Investment in equity interests in LIHTC properties $ 63,219 $ 53,492
Co-investment in commercial real estate equity fund 3,448 3,066
Available for Sale
Resecuritization certificates 98,980 102,357
Marketable securities 31,758 1,465
Other
Mortgage loans held for sale 49,377 122,459
Notes receivable 60,946 46,477
Other investments 7,634 9,604
-------- --------
Total other investments $315,362 $338,920
======== ========
A. INVESTMENTS IN EQUITY INTERESTS IN LIHTC PROPERTIES
Through a subsidiary, we acquire equity interests in property ownership entities
on a short-term basis for inclusion in Affordable Housing fund offerings to
investors. We expect to recapture such amounts from the proceeds of the equity
and debt financing when the investment fund has closed. At March 31, 2007,
approximately $19.8 million of these investments were guaranteed by the
developers.
B. CO-INVESTMENT IN COMMERCIAL REAL ESTATE EQUITY FUND
Centerline Urban Capital I, LLC, formerly known as CharterMac Urban Capital I
LLC ("CUC"), is an investment fund with the California Public Employees
Retirement System ("CalPERS") as majority investor, focusing on investments in
multifamily properties in major urban markets. Our membership interest includes
a co-investment obligation amounting to 2.5% of capital invested.
12
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
C. RESECURITIZATION CERTIFICATES
Resecuritization certificates pertain to retained investments in trusts which
hold CMBS investments and which were sponsored by Investors. Those we hold (not
including the certificates held at the fund level detailed in Note 9) were
comprised of the following as of March 31, 2007:
Percentage of
(Dollars in thousands) Face Amount Accreted Cost Fair Value Fair Value
---------------------------- ----------- ------------- ---------- -------------
Security rating:
AAA interest only $ -- $ 15,704 $ 20,602 20.81 %
AAA 26,150 13,702 25,397 25.66
BBB+ 12,536 5,083 9,127 9.22
BBB 9,402 3,468 6,214 6.28
BBB- 9,402 2,644 5,664 5.72
BB+ 24,454 8,033 12,705 12.84
BB 8,501 2,015 3,544 3.58
BB- 11,635 2,083 4,145 4.19
B+ 13,273 2,167 2,920 2.95
B 11,486 1,104 1,805 1.82
B- 11,635 951 1,671 1.69
Non-rated 59,365 3,390 4,671 4.72
Non-rated interest only -- 427 515 0.52
-------- -------- -------- --------
$197,839 $ 60,771 $ 98,980 100.00 %
======== ======== ======== ========
At March 31, 2007, the AAA interest only certificate had a notional amount of
$539.6 million and the non-rated interest only certificates had a combined
notional amount of $196.5 million.
Fair value of the resecuritization certificates is determined assuming no
defaults on the underlying collateral loans and according to the payment terms
of the underlying loans, which generally do not allow prepayment without yield
maintenance except during the last three months of a loan. The discount rates
take into account any risk of default. The remaining key assumptions used in
measuring fair value at the resecuritization date were as follows:
Face Amount at Fair Value at Weighted Discount Rate
Resecuritization Resecuritization Average Life Applied to Cash
(Dollars in thousands) Date Date (yrs) Flows
-------------------------- ---------------- ---------------- ------------ ---------------
Security rating:
AAA interest only $ -- $ 29,827 -- 8.19%
AAA 26,150 26,180 8.73 6.14
BBB+ 12,536 9,900 11.27 9.76
BBB 9,402 6,830 11.78 11.01
BBB- 9,402 6,291 12.16 12.26
BB+ 24,454 13,202 11.87 13.78
BB 8,501 3,765 12.36 17.21
BB- 11,635 4,283 12.65 19.86
B+ 13,273 2,878 12.34 29.72
B 11,486 1,832 12.83 40.55
B- 11,635 1,708 13.03 43.51
Non-rated 131,397 15,139 14.79 53.94
Non-rated interest only -- 839 -- 36.36
-------- -------- --------- ---------
Total $269,871 $122,674
======== ========
At the resecuritization date, the AAA interest only certificate had a notional
amount of $545.4 million and the non-rated interest only certificates had a
combined notional amount of $197.5 million.
13
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
At March 31, 2007, the sensitivity of the current fair value of the
resecuritization certificates to potential adverse changes was as follows:
Expected Discount Rate Applied
Credit Loss to Cash Flows
------------------ ---------------------
Weighted 1.0% 2.0%
Average 1% 2% Adverse Adverse
(Dollars in thousands) Fair Value Life (yrs) CDR (1) CDR (1) Change Change
------------------------ ---------- ---------- ------- ------- -------- -------
Security rating:
AAA interest only $20,602 5.90 0.78 % 0.27 % (2.59)% (4.07)%
AAA 25,397 8.99 (0.67) (0.88) (6.56) (12.59)
BBB+ 9,127 11.50 (1.15) (7.30) (7.15) (13.63)
BBB 6,214 11.67 (1.50) (51.72) (6.98) (13.31)
BBB- 5,664 11.73 (3.07) (59.80) (6.77) (12.92)
BB+ 12,705 11.03 (5.12) (60.70) (6.43) (12.31)
BB 3,544 11.49 (7.60) (65.04) (5.96) (11.39)
BB- 4,145 11.65 (10.56) (63.53) (5.49) (10.51)
B+ 2,920 11.41 (7.72) (55.12) (4.86) (9.33)
B 1,805 12.26 (13.21) (46.66) (3.44) (6.64)
B- 1,671 12.56 (20.40) (47.46) (3.00) (5.82)
Non-rated 4,671 -- (31.07) (45.75) (2.01) (3.93)
Non-rated interest only 515 7.97 (51.25) (57.68) (1.88) (3.16)
-------
Total $98,980
=======
(1) Constant Default Rate
The coupon interest rates on the principal classes range from 4.0% to 5.7% and
range from 0.1% to 1.1% on the interest only classes. During the three months
ended March 31, 2007, we received approximately $4.9 million of interest income
from retained resecuritization certificates.
Delinquencies on the collateral loans underlying the resecuritization
certificates totaled 0.4% at March 31, 2007. At March 31, 2007, actual losses to
date were 8.0% of the original pool balances, and projected remaining losses are
estimated at 13.2% of the original pool balances.
D. MARKETABLE SECURITIES
Marketable securities at March 31, 2007, primarily represent the investment of
cash balances at Centerline Financial LLC ("Centerline Financial"), formerly
known as Centerbrook Financial LLC, our Credit Risk Products subsidiary.
E. MORTGAGE LOANS HELD FOR SALE
The balance of mortgage loans held for sale fluctuates based on origination
volume and the timing of corresponding sales. These loans are typically sold
within three months of origination and primarily represent loans sold to
government sponsored entities, such as Fannie Mae, Freddie Mac and GNMA.
F. NOTES RECEIVABLE
Notes receivable at March 31, 2007, primarily represent the fair value of
investments in first-mortgage and mezzanine loans originated through Investors.
14
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 4 - GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill and intangible assets consisted of the following:
March 31, December 31,
(In thousands) 2007 2006
------------------------------ ---------- -----------
Goodwill $344,974 $345,806
Other intangible assets, net 123,605 127,686
Mortgage servicing rights, net 64,178 68,785
-------- --------
Total $532,757 $542,277
======== ========
A. GOODWILL
The following table provides information regarding goodwill, which we include in
our Corporate group:
(In thousands) Total
---------------------------- ---------
Balance at December 31, 2006 $ 345,806
Additions 432
Reductions (1,264)
---------
Balance at March 31, 2007 $ 344,974
=========
The addition to goodwill relates to the adoption of FIN 48 as the accrual
recorded included a reserve for an uncertain tax position that existed at
Investors at the time we acquired it.
Reductions to the goodwill balance pertain to the redemption of SCUs (see Note
10), as the deferred tax impact of such redemptions served to effectively reduce
the purchase price of the subsidiary of which they were issued to finance.
B. OTHER INTANGIBLE ASSETS
The components of other identified intangible assets are as follows:
Estimated
Useful
Life Gross Accumulated
(Dollars in thousands) (in Years) Carrying Amount Amortization Net
--------------------------------------- ---------- ----------------------- ----------------------- ------------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2007 2006 2007 2006 2007 2006
-------- ----------- -------- ----------- --------- ------------
Amortized identified intangible assets:
Transactional relationships 16.7 $103,000 $103,000 $ 27,698 $ 25,590 $ 75,302 $ 77,410
Partnership service contracts 9.4 47,300 47,300 17,868 16,604 29,432 30,696
General partner interests 8.5 6,016 6,016 1,955 1,774 4,061 4,242
Joint venture developer relationships 5.0 4,800 4,800 3,155 2,915 1,645 1,885
Internally developed software 3.0 1,390 1,390 279 163 1,111 1,227
Mortgage banking broker relationships 5.0 1,080 1,080 450 396 630 684
Other identified intangibles 9.3 4,427 4,427 3,776 3,658 651 769
------- -------- -------- -------- -------- -------- --------
Weighted average life/subtotal 13.6 168,013 168,013 55,181 51,100 112,832 116,913
=======
Unamortized identified
intangible assets:
Mortgage banking licenses and
approvals with no expiration 10,773 10,773 -- -- 10,773 10,773
-------- -------- -------- -------- -------- --------
Total identified intangible assets $178,786 $178,786 $ 55,181 $ 51,100 $123,605 $127,686
======== ======== ======== ======== ======== ========
15
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
Three Months Ended
(In thousands) March 31,
-------------------- ------------------
2007 2006
------ ------
Amortization expense $4,081 $3,924
====== ======
The amortization of "other identified intangibles" (approximately $472,000 per
year) is included as a reduction to mortgage revenue bond interest income as
they pertain to the acquisition of such bond investments.
NOTE 5 - DEFERRED COSTS AND OTHER ASSETS
The components of deferred costs and other assets were as follows:
March 31, December 31,
(In thousands) 2007 2006
-------------------------------------------------------------------------- --------- ------------
Deferred financing and other costs $ 33,834 $ 32,472
Less: Accumulated amortization (7,376) (6,718)
--------- ---------
Net deferred costs 26,458 25,754
Real estate owned, net of accumulated depreciation of $1.5 million in 2007
and $1.3 million in 2006 41,440 41,743
Interest receivable 22,305 23,606
Fees receivable, net 13,772 23,313
Deposits receivable 17,915 18,863
Due from unconsolidated partnerships, net 9,156 31,466
Furniture, fixtures and leasehold improvements, net 9,108 8,502
PRS/CRG/ERC advances, net 5,468 13,780
Income taxes receivable 7,439 714
Interest rate swaps at fair value (Note 7) 1,554 2,236
Other 7,469 6,168
--------- ---------
Total $ 162,084 $ 196,145
========= =========
PRS/CRG/ERC ADVANCES
The advances due from PRS/CRG/ERC relate to the financial difficulties of three
developers and our subsequent actions to protect our investments in the
properties that were under development (see Note 17). The above balances are net
of eliminations with liabilities of consolidated partnerships of $26.9 million
at March 31, 2007, and $24.3 million at December 31, 2006.
NOTE 6 - FINANCING ARRANGEMENTS AND NOTES PAYABLE
Fluctuations in our borrowing levels correspond to the level of investment
activity in a given period. Borrowing under the mortgage loan warehouse line and
our corporate revolver relates to the level of origination activity, which is
typically higher at the end of a year than at the end of the first quarter (see
also Note 3).
16
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 7 - DERIVATIVE INSTRUMENTS
Our financing arrangements and notes payable incur interest expense at variable
rates, exposing us to interest rate risk. We have established a policy for risk
management and our objectives and strategies for the use of derivative
instruments to potentially mitigate such risk. We currently manage a portion of
our interest rate risk resulting from the exposure to variable rates (benchmark
rate) on our financing agreements and notes payable through the use of interest
rate swaps indexed to the Bond Market Association Municipal Swap Index ("BMA")
rate, the most widely used tax-exempt floating rate index, or to LIBOR. Under
each swap agreement, for a specified period of time we are required to pay a
fixed rate of interest on a specified notional amount to the transaction
counterparty and we receive a floating rate of interest equivalent to the BMA or
LIBOR index.
At inception, we designate these swaps as hedging instruments in cash flow
hedges with the hedging relationships item being the variable interest payments
on our floating rate debt. We assess both at the inception of the hedge and on
an ongoing basis whether the swap agreements are effective in offsetting changes
in the cash flows of the hedged financing. Amounts in accumulated other
comprehensive income will be reclassified into earnings in the same period
during which the hedged forecasted transaction affects earnings. Since we are
hedging the variable interest payments in our floating rate debt, the forecasted
transactions are the interest payments. An inherent risk of these swap
agreements is the credit risk related to the counterparty's ability to meet
terms of the contracts with us.
We have entered into swap agreements as follows:
Notional
Amount at March 31,
Counterparty (in millions) Inception Date Expiration Date Rate
--------------------------------------------------------------------------------------------------------------
2007 2006
-------- --------
CASH FLOW HEDGES:
Bank of America $100.0 $100.0 January 2005 December 2007 2.56%
Bank of America 50.0 50.0 January 2005 January 2008 3.27%
Bank of America 50.0 50.0 January 2005 January 2008 2.86%
Bank of America 50.0 50.0 January 2005 January 2009 3.08%
RBC Capital Markets 100.0 100.0 January 2005 January 2009 3.075%
Wachovia 275.0 -- August 2006 August 2009 5.25%
Bank of America 100.0 100.0 January 2005 January 2010 3.265%
-------- --------
Subtotal cash flow hedges 725.0 450.0
-------- --------
FAIR VALUE SWAP:
Bank of America -- 26.0 November 2005 November 2014 4.92%
-------- --------
Total $725.0 $476.0
======== ========
We evaluate our interest rate risk on an ongoing basis to determine whether it
would be advantageous to engage in any further hedging transactions.
Certain of our cash flow swaps in the hedging relationships experienced some
ineffectiveness. We recorded ineffectiveness of approximately $200,000 during
the first quarters of 2006 and 2007.
In the first quarter of 2006, 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 in the second quarter of 2006. 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.
17
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
Interest rate swaps for which we were in a net liability position ("out of the
money") are recorded in accounts payable, accrued expenses and other liabilities
and those for which we are in a net asset position ("in the money") are recorded
in deferred costs and other assets. The amounts recorded were as follows:
March 31, December 31,
(In thousands) 2007 2006
---------------------- -------- -----------
Net liability position $3,406 $1,997
Net asset position $1,554 $2,236
Interest expense included the following expense (income) related to our swaps:
Three months ended
March 31,
------------------
(In thousands) 2007 2006
------------------------------------------------------------- ------ ------
Interest expense $ 695 $ 96
Interest income (688) (181)
Change in fair value of free standing swap assigned to AMAC -- (750)
----- -----
Total $ 7 $(835)
===== =====
We estimate that approximately $2.2 million of the net unrealized gain included
in accumulated other comprehensive income will reduce interest expense within
the next twelve months.
Certain of our consolidated partnerships also had interest rate swaps accounted
for as hedges as of March 31, 2007 (see Note 9).
NOTE 8 - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities consisted of the
following:
March 31, December 31,
(In thousands) 2007 2006
----------------------------------------------- --------- -----------
Deferred revenues $ 90,108 $ 92,564
Distributions payable 41,603 41,554
Accounts payable 13,877 18,626
Salaries and benefits 23,973 29,551
Accrued fund organization and offering expenses 9,228 11,860
Escrow/deposits payable 3,845 5,570
Accrued interest payable 7,010 5,825
Interest rate swaps at fair value (Note 7) 3,406 1,997
Restructuring accrual 350 1,128
FIN 48 liability (Note 11) 2,085 --
Other 7,924 5,669
-------- --------
Total $203,409 $214,344
======== ========
18
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
The restructuring accrual pertains to integration activities with respect to the
acquisition of Investors. We recorded these costs in general and administrative
expenses in the second quarter of 2006. A roll forward of the restructuring
costs (included within our Asset Management and Commercial Real Estate segments)
is as follows:
(In thousands) Total
------------------------------ -------
Employee termination costs
Balance at January 1, 2007 $ 964
Additions 259
Payments (1,034)
-------
Balance at March 31, 2007 189
-------
Lease termination costs
Balance at January 1, 2007 164
Payments (3)
-------
Balance at March 31, 2007 161
-------
Total $ 350
=======
The restructuring with respect to employee terminations was completed in April
2007. The accrual for lease termination costs will be paid over the remaining
term of the lease (3.3 years).
19
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 9 - CONSOLIDATED PARTNERSHIPS
Consolidated partnerships consist of four groups:
o Funds we manage to acquire LIHTC equity ("LIHTC Partnerships");
o Property level partnerships for which we have assumed the role of
general partner ("Property Partnerships");
o Funds we manage which invest in CMBS and associated resecuritization
trusts ("CMBS Partnerships"); and
o A fund we manage which invests in real estate debt products ("Direct
Loan Partnership").
Financial information for the LIHTC and Property Partnerships are as of December
31, 2006, the latest practical date. Information with respect to the CMBS and
Direct Loan Partnerships is as of March 31, 2007.
Assets and liabilities of consolidated partnerships consisted of the following
at:
March 31, 2007 December 31, 2006
-------------------------------------- --------------------------------------
LIHTC and CMBS and LIHTC and CMBS and
Property Direct Loan Property Direct Loan
(In thousands) Partnerships Partnerships Total Partnerships Partnerships Total
--------------------------------------------- ------------ ------------ ---------- ------------ ------------ ----------
Investments in property partnerships $3,582,019 $ -- $3,582,019 $3,546,208 $ -- $3,546,208
Investments in CMBS - available for sale -- 942,487 942,487 -- 719,645 719,645
Investments in resecuritization
certificates - available for sale -- 597,638 597,638 -- 597,491 597,491
Notes receivable -- 213,722 213,722 -- 101,156 101,156
Other investments -- 1,393 1,393 -- 1,407 1,407
---------- ---------- ---------- ---------- ---------- ----------
Investments held by consolidated partnerships 3,582,019 1,755,240 5,337,259 3,546,208 1,419,699 4,965,907
---------- ---------- ---------- ---------- ---------- ----------
Land, buildings and improvements, net
of accumulated depreciation 543,248 -- 543,248 576,171 -- 576,171
Cash 257,516 16,428 273,944 277,860 27,213 305,073
Other assets 114,982 40,767 155,749 123,890 33,645 157,535
---------- ---------- ---------- ---------- ---------- ----------
Other assets of consolidated partnerships 915,746 57,195 972,941 977,921 60,858 1,038,779
---------- ---------- ---------- ---------- ---------- ----------
Total assets $4,497,765 $1,812,435 $6,310,200 $4,524,129 $1,480,557 $6,004,686
========== ========== ========== ========== ========== ==========
Financing arrangements $ -- $ 687,742 $ 687,742 $ -- $ 709,219 $ 709,219
Notes payable 569,590 81,500 651,090 594,477 -- 594,477
Due to property partnerships 811,540 -- 811,540 925,301 -- 925,301
Repurchase agreements -- 301,284 301,284 -- 243,955 243,955
Other liabilities 199,803 12,953 212,756 215,628 11,574 227,202
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities $1,580,933 $1,083,479 $2,664,412 $1,735,406 $ 964,748 $2,700,154
========== ========== ========== ========== ========== ==========
A. INVESTMENTS IN PROPERTY PARTNERSHIPS AND DUE TO PROPERTY PARTNERSHIPS
The LIHTC Partnerships invest in property level partnerships that neither we nor
the LIHTC Partnerships control and which, therefore, we do not consolidate.
"Investments in property partnerships" represents the limited partner equity
investments in those property level partnerships. "Due to property partnerships"
represents the capital commitments of the LIHTC Partnerships in those property
partnerships that have not yet been spent. As those commitments are spent, the
"investments in property partnerships" balance increases.
20
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
B. INVESTMENTS IN CMBS
The CMBS Partnerships invest in and hold CMBS Investments. Such investments held
by these partnerships were comprised of the following as of March 31, 2007:
Percentage of
(Dollars in thousands) Face Accreted Cost Fair Value Fair Value
---------------------- ---------- ------------- ---------- -------------
Security rating:
BBB- $ 117,693 $ 111,425 $ 110,963 11.77 %
BB+ 169,317 147,805 148,908 15.80
BB 179,516 150,649 151,825 16.11
BB- 196,490 141,077 144,374 15.32
B+ 103,754 68,638 69,906 7.42
B 95,078 55,354 57,405 6.09
B- 141,610 69,257 76,850 8.15
Non-rated 492,455 166,497 182,256 19.34
---------- ---------- ---------- --------
$1,495,913 $ 910,702 $ 942,487 100.00 %
========== ========== ========== ========
C. INVESTMENTS IN RESECURITIZATION CERTIFICATES
The CMBS Partnerships retain interests ("resecuritization certificates") in
certain securitized assets that they have sold, as well as others purchased in
market transactions. Investments in such resecuritization certificates held by
these partnerships were comprised of the following as of March 31, 2007:
Percentage of
(Dollars in thousands) Face Amount Accreted Cost Fair Value Fair Value
-------------------------- ----------- ------------- ---------- -------------
Security rating:
AAA $111,900 $106,545 $109,783 18.37 %
AA 66,600 64,276 66,018 11.05
A 47,000 45,174 47,097 7.88
A- 23,900 24,043 24,421 4.09
BBB+ 101,338 96,636 98,980 16.56
BBB 55,381 50,558 51,932 8.69
BBB- 121,294 114,159 118,102 19.76
BB+ 47,820 21,856 31,249 5.23
BB 12,158 4,935 7,078 1.18
BB- 12,157 4,443 6,369 1.07
B+ 21,073 6,834 9,806 1.64
B 11,348 2,613 3,771 0.63
B- 12,158 2,107 3,058 0.51
Non-rated 180,960 9,765 16,220 2.71
Non-rated interest only -- 4,987 3,754 0.63
-------- -------- -------- -------
$825,087 $558,931 $597,638 100.00 %
======== ======== ======== =======
At March 31, 2007, the non-rated certificates had a combined notional amount of
$1.4 billion.
The following tables and discussion relate only to those resecuritization
certificates associated with assets sold by the CMBS Partnerships that met the
sale requirements of SFAS No. 140.
21
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
Fair value of the resecuritization certificates is determined assuming no
defaults on the underlying collateral loans and according to the payment terms
of the underlying loans, which generally do not allow prepayment without yield
maintenance except during the last three months of a loan. The discount rates
take into account any risk of default. The remaining key assumptions used in
measuring fair value at the resecuritization date were as follows:
Weighted Discount Rate
Face Amount at Fair Value at Average Applied to Cash
(Dollars in thousands) Resecuritization Date Resecuritization Date Life (yrs) Flows
------------------------ --------------------- --------------------- ------------ ---------------
Security rating:
BB+ $ 47,820 $ 29,599 9.90 9.80%
BB 12,158 6,671 10.32 11.20
BB- 12,157 5,991 10.45 12.50
B+ 21,073 9,210 10.79 13.90
B 11,348 3,520 11.06 18.70
B- 12,158 2,853 11.20 23.20
Non-rated 186,416 16,493 12.83 49.40
Non-rated interest only -- 2,080 9.06 63.20
-------- --------
Total $303,130 $ 76,417
======== ========
At the resecuritization date, the non-rated certificates had a combined notional
amount of $648.4 million.
At March 31, 2007, the sensitivity of the current fair value of the
resecuritization certificates to potential adverse changes is as follows:
Expected Discount Rate Applied to
Credit Loss Cash Flows
-------------------------- --------------------------
Weighted 1.0% 2.0%
Fair Average 1.0% 2.0% Adverse Adverse
(Dollars in thousands) Value Life (yrs) CDR (1) CDR (1) Change Change
------------------------ ------- ---------- --------- --------- ---------- ----------
Security rating:
BB+ $31,249 9.90 (4.40)% (75.60)% (7.20)% (13.70)%
BB 7,078 10.32 (5.90) (75.20) (7.20) (13.70)
BB- 6,369 10.45 (7.80) (73.90) (7.00) (13.40)
B+ 9,806 10.79 (9.30) (72.40) (6.90) (13.20)
B 3,771 11.06 (12.10) (66.40) (6.20) (11.80)
B- 3,058 11.20 (13.80) (60.30) (5.40) (10.40)
Non-rated 16,220 12.83 (24.40) (40.40) (2.10) (4.20)
Non-rated interest only 994 9.06 (65.60) (65.60) (3.10) (3.10)
-------
Total $78,545
=======
(1) Constant Default Rate
The coupon interest rate on the principal classes is 4.0% and 0.2% on the
interest only class. During the three months ended March 31, 2007, the CMBS
Partnerships received approximately $3.2 million of interest income from
retained resecuritization certificates.
Delinquencies on the collateral loans underlying the resecuritization
certificates totaled 0.4% at March 31, 2007. At March 31, 2007, actual losses to
date were 0.8% of the original pool balance, and projected remaining losses are
estimated at 24.3% of the original pool balance.
22
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
D. NOTES RECEIVABLE
The Direct Loan Partnership invests in various types of loans. The aggregate
carrying values, allocated by product type and weighted average coupons, of
notes receivable held by the Direct Loan Partnership as of March 31, 2007 were
as follows:
Allocation Fixed Variable
by Rate Rate
Total Carrying Product Average Average
(Dollars in thousands) Commitment Value Type Yield Yield
------------------------------ ---------- --------- ---------- ------- ---------
Product Type:
Bridge loans, variable rate $ 15,000 $ 2,552 5.54 % -- 8.32 %
Bridge loans, fixed rate 25,696 25,696 9.48 7.07 % --
B-notes, variable rate 40,000 32,504 14.77 -- 9.64
B-notes, fixed rate 27,985 23,208 10.33 7.93 --
Mezzanine loans, variable rate 141,748 108,336 43.09 -- 8.87
Mezzanine loans, fixed rate 45,492 21,426 16.79 10.21 --
-------- -------- ------- ------- -------
Total / Average $295,921 $213,722 100.00% 8.40 % 8.94 %
======== ======== ======= ======= =======
E. FINANCING ARRANGEMENTS/ NOTES PAYABLE/ REPURCHASE AGREEMENTS
The funds use these debt facilities to finance investment activity. Changes in
the balances from December 31, 2006, are due to transactions undertaken in the
ordinary course of business.
F. REVENUES AND EXPENSES
Revenues and expenses of consolidated partnerships consisted of the following:
Three Months Ended March 31,
---------------------------
(In thousands) 2007 2006
------------------------------------ -------- --------
Rental income $12,151 $ 6,271
Interest and other income 35,165 1,974
------- -------
Total revenues $47,316 $ 8,245
======= =======
Interest expense $22,909 $ 6,946
Asset management fees 6,339 4,635
Property operating expenses 4,989 3,397
General and administrative expenses 5,794 3,389
Depreciation and amortization 5,889 3,376
Other expenses 742 484
------- -------
Subtotal 23,753 15,281
------- -------
Total expenses $46,662 $22,227
======= =======
23
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
NOTE 10 - MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES
Minority interests in consolidated subsidiaries consisted of the following:
March 31, December 31,
(In thousands) 2007 2006
--------------------------------- ---------- ------------
Convertible Special Common Units
("SCUs") of a subsidiary $213,563 $231,262
Convertible Special Membership
Units ("SMUs") of a subsidiary 4,952 5,110
Convertible Special Common
Interests ("SCIs") of a
subsidiary 4,565 4,758
Other 9,479 6,260
-------- --------
Total $232,559 $247,390
======== ========
Income (loss) allocated to minority interests, net of tax, was as follows:
Three Months Ended
March 31,
-----------------------
(In thousands) 2007 2006
-------------------- -------- --------
SCUs $(5,956) $ 5,729
SMUs (79) 150
SCIs (76) --
Other (6) --
------- -------
Total $(6,117) $ 5,879
======= =======
A. SCUS
During 2007, the holder of 132,000 SCUs redeemed the units, for which we paid
approximately $2.8 million in cash. We also redeemed the special preferred
voting shares related to the converted SCUs at par ($0.01 per share).
B. OTHER
"Other" minority interests at March 31, 2007, primarily represent the 10%
interest in Centerline Financial Holdings LLC, formerly known as Centerbrook
Holdings LLC ("CFH") owned by Natixis Capital Markets Inc. ("Natixis") (formerly
IXIS Capital Markets North America, Inc.).
NOTE 11 - INCOME TAXES
We adopted the provisions of FIN 48 on January 1, 2007. As a result of adoption,
we recognized a charge of approximately $1.2 million to the January 1, 2007,
balance of beneficial owners' equity and approximately $432,000 to the January
1, 2007 goodwill balance (see Note 4). As of the adoption date, we had gross
unrecognized tax benefits of approximately $2.0 million and accrued interest of
approximately $836,000. Of this total, $2.5 million represents the amount of
unrecognized tax benefits that, if recognized, would favorably affect the
effective income tax rate in future periods. We do not anticipate that these
unrecognized tax benefits will significantly change due to the settlement of
audits and the expiration of statute of limitations prior to March 31, 2008. We
recognize interest and penalties related to uncertain tax positions within our
income tax provision or benefit.
The Internal Revenue Service is examining the consolidated corporate federal
income tax returns of our subsidiaries subject to taxes for the tax periods
ended June 30, 2003, December 31, 2003 and December 31, 2004. The New York City
24
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
taxing authority is examining the partnership tax returns of one of our
subsidiaries for the years ended December 31, 2003 and 2004. These examinations
are in a preliminary stage and no significant issues have yet been raised.
NOTE 12 - COMPREHENSIVE INCOME
Comprehensive income was as follows:
Three months Ended
March 31,
-----------------------
(In thousands) 2007 2006
------------------------------------------------------------------ --------- ---------
Net (loss) income $(14,745) $ 14,657
Net unrealized (loss) gain on interest rate derivatives (1,063) 591
Net unrealized gain (loss) on marketable and equity securities 17 (285)
Net unrealized loss on other investments (1,793) --
Net unrealized gain (loss) on mortgage revenue bonds:
Unrealized gain (loss) during the period 44,135 (13,685)
Reclassification adjustment for net gain included in net income (653) (891)
-------- --------
Comprehensive income $ 25,898 $ 387
======== ========
NOTE 13 - GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consisted of the following:
Three Months Ended
March 31,
------------------------
(In thousands) 2007 2006
-------------------------------- -------- --------
Salaries and benefits $36,860 $19,902
Other general and administrative 20,564 12,665
------- -------
Total $57,424 $32,567
======= =======
NOTE 14 - EARNINGS PER SHARE ("EPS")
For basic EPS, the number of shares includes common shares 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 or loss less dividends for our 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' convertible equity units
are not included in the calculation as their assumed conversions would be
antidilutive.
In accordance with SFAS No. 128, EARNINGS PER SHARE, no common share equivalents
are included in the Diluted EPS calculation in a period when we report a net
loss after dividends for the 4.4% Convertible CRA Preferred Shares.
25
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
Three Months Ended March 31, 2007 Three Months Ended March 31, 2006
----------------------------------- ---------------------------------
(In thousands, except per share amounts) Income Shares Per Share Income Shares Per Share
---------------------------------------- ---------- -------- --------- --------- --------- ---------
Net (loss) income $ (14,745) $ 14,657
Preferred dividends 1,188 1,188
---------- ---------
Net (loss) income allocable to (15,933) 57,957 $ (0.27) 13,469 58,578 $ 0.23
shareholders (Basic EPS)
========= =========
Effect of dilutive securities -- -- -- 317
---------- --------- --------- ---------
Diluted EPS $ (15,933) 57,957 $ (0.27) $ 13,469 58,895 $ 0.23
========== ========= ========= ========= ========= =========
NOTE 15 - RELATED PARTY TRANSACTIONS
A. TRCLP
General and administrative expenses include shared service 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".
During the quarter ended March 31, 2007, we acquired two mortgage revenue bonds
for properties developed by a subsidiary of TRCLP. LIHTC funds we consolidate
also provided equity financing to these properties. Centerline Real Estate
Special Situations Mortgage Fund LLC ("CRESS"), formerly known as ARCap Real
Estate Special Situations Mortgage Fund LLC, also acquired participation
interests with AMAC in two loans secured by properties developed by TRCLP.
B. AMAC
We collect asset management and incentive management fees and expense
reimbursements from AMAC pursuant to an advisory agreement. These fees and
reimbursements are included in fee income in the condensed consolidated
statements of income. We entered into a new advisory agreement, effective as of
March 2007 whereby the basis of certain of the fees we earn has changed,
although we do not expect the fees earned to differ significantly from the
previous agreement absent the effect of AMAC's growth.
We have extended an unsecured revolving credit facility to AMAC to provide it up
to $50.0 million, bearing interest at LIBOR plus 3.0%, which is to be used by
AMAC to purchase new investments and for general corporate purposes. As of March
31, 2007, $10.2 million was outstanding 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 March 2007, AMAC entered into an agreement with CRESS with respect to its
investment in a CDO issued by Nomura CRE CDO 2007-2, LTD. Under the terms of
this agreement, CRESS temporarily held an investment in the name of AMAC as its
nominee pending permanent financing to be obtained by AMAC but did not carry the
investment on its balance sheet. As of March 31, 2007, AMAC owed approximately
$5.0 million to CRESS at a weighted average interest rate of 5.92%, in
connection with this investment. In April 2007, AMAC obtained the permanent
financing and paid the amount due to CRESS.
In the first quarter of 2007, our Commercial Real Estate subsidiaries originated
approximately $203.7 million in loans on behalf of AMAC and, pursuant to the
advisory agreement, received approximately $792,000 of mortgage banking fees
from the borrowers. We record these fees in "Fee income" in the condensed
consolidated statements of income.
26
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
We serve as the collateral manager for AMAC's $400.0 million CDO. We also
service all of the loans in AMAC's CDO, as well as other loans currently held by
AMAC outside of the CDO. In this capacity, we perform all primary servicing
functions as well as special servicing of any loans in default. Pursuant to the
advisory agreement, we receive fees from AMAC based on the dollar amount of
loans we service and record these fees in "Fee income" in the condensed
consolidated statements of income.
C. INCOME STATEMENT IMPACT
(Fees paid) and income earned were as follows:
Three Months Ended
March 31,
-------------------------
(In thousands) 2007 2006
--------------------------------------------------------------- ----------- ----------
TRCLP shared service fee expense $ (143) $ (163)
TRCLP property management services expense $ (1,073) $ (1,000)
AMAC asset management and incentive management fees and expense
reimbursements $ 1,007 $ 952
AMAC credit facility interest income $ 97 $ --
AMAC servicing fee income $ 130 $ --
NOTE 16 - BUSINESS SEGMENTS
We operate in five business segments plus a corporate group as described in Note
1. 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. Unallocated corporate costs are reported
separately.
The table below includes Cash Available for Distribution ("CAD"), and a
reconciliation from CAD to net (loss) income, as CAD is the performance measure
used by our chief decision-maker to allocate resources among the segments.
27
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
The following table provides more information regarding our segments:
Three Months Ended
March 31,
----------------------------
(In thousands) 2007 2006
---------------------------------------------------- ------------ ------------
REVENUES
Affordable Housing $ 60,592 $ 62,030
Commercial Real Estate (1) 13,426 11,870
Asset Management (1) 13,992 6,499
Credit Risk Products 3,260 --
Corporate Group 7,145 3,383
Consolidated Partnerships (2) 50,045 9,286
Elimination of intersegment transactions (31,295) (20,929)
------------ ------------
Consolidated Revenues $ 117,165 $ 72,139
============ ============
CAD
Affordable Housing $ 15,061 $ 25,485
Commercial Real Estate (1) 4,527 3,104
Asset Management (1) 6,494 3,510
Credit Risk Products 964 (556)
Unallocated corporate costs (22,404) (16,288)
------------ ------------
Consolidated CAD 4,642 15,255
Reconciliation of CAD to net (loss) income:
Fees deferred for GAAP (3) 942 1,154
Depreciation and amortization expense (11,498) (8,913)
Interest income yield adjustments (4) (2,296) (158)
Gain on sale of loans (5) 1,881 4,623
Loss on impairment of assets (16,447) --
Tax adjustment (6) (1,204) (32)
Non-cash compensation (7) (9,182) (2,352)
Difference between subsidiary equity
distributions and income allocated to
minority interests (8) 14,919 3,025
Non-cash equity income 1,995 (204)
Preferred dividends 1,188 1,188
Other, net 315 1,071
------------ ------------
Consolidated Net (Loss) Income $ (14,745) $ 14,657
============ ============
DEPRECIATION AND AMORTIZATION
Affordable Housing $ 234 $ 765
Commercial Real Estate (1) 4,444 3,693
Asset Management (1) 26 23
Credit Risk Products 1 --
Corporate Group 6,593 4,432
Consolidated Partnerships 200 --
------------ ------------
Consolidated Depreciation and Amortization $ 11,498 $ 8,913
============ ============
March 31, December 31,
2007 2006
------------ ------------
IDENTIFIABLE ASSETS
Affordable Housing $ 2,908,614 $ 2,866,346
Commercial Real Estate (1) 227,592 390,886
Asset Management (1) 13,185 13,754
Credit Risk Products 92,950 52,337
Consolidated partnerships (2) 6,351,639 6,046,429
Corporate Group 785,479 794,619
Elimination of intersegment balances (472,594) (475,855)
------------ ------------
Consolidated Identifiable Assets $ 9,906,865 $ 9,688,516
============ ============
28
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
(1) Includes Investors as of August 2006.
(2) Includes funds sponsored by Investors as of August 2006.
(3) 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).
(4) 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.
(5) Represents non-cash gain recognized on sale of mortgage loans when servicing
rights are retained and gains on sales of mortgage revenue bonds.
(6) 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.
(7) Represents the add-back of amortization of costs recognized for share-based
compensation and non-cash compensation related to fund earnings.
(8) Represents the difference between actual distributions to SCU, SMU and SCI
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.
NOTE 17 - COMMITMENTS AND CONTINGENCIES
PRS/CRG/ERC
PRS/ CRG
PRS Companies ("PRS") and Capital Realty Group ("CRG") were sponsors of certain
property partnerships for which we hold mortgage revenue bonds and/or to which
investment funds we sponsor have contributed equity. A construction affiliate of
PRS served as general contractor for most of these partnerships. Due to
financial difficulties experienced by PRS and its construction affiliate, we
ceased our business dealings with PRS and acquired the general partner interest
in certain partnerships sponsored by PRS as part of agreements reached in April
2005 (the "PRS Partnerships"). There were two additional projects for which the
PRS construction affiliate was general contractor (the "GCG Partnerships") for
which the general partner interest owned by PRS or an affiliate were transferred
at the same time.
Likewise, we entered into agreements in April of 2005 with CRG with respect to
certain partnerships in which CRG served as sponsor (the "CRG Partnerships").
The PRS financial difficulties created construction finance shortfalls that
created liquidity problems for these partnerships as well. In December of 2006,
we entered into an additional agreement with CRG to transfer the general partner
interests held by CRG in four additional properties. This agreement included the
termination of certain rights retained by CRG with respect to the CRG
Partnerships in the 2005 Agreements and we have ceased our business dealings
with CRG.
The PRS Partnerships, GCG Partnerships, and CRG Partnerships are set out in the
table below.
In addition to the PRS Partnerships, CRG Partnerships and GCG Partnerships
described above, we own bonds that finance other partnerships associated with
PRS and CRG. In these partnerships, our funds are not the equity sponsor, and 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 2005, we halted construction on one property, and foreclosed upon and sold
the property in 2006 for our carrying basis. In 2006, we halted construction on
another property and sold our general partner and limited partner interest and
have recovered our fund's investment in the project.
ERC
To protect our interests in properties for which we had provided debt or equity
financing, in October 2006 we reached an agreement with ERC, Inc. (a developer)
to acquire its general partner interests in partnerships it had sponsored. Those
partnerships are also summarized in the table below.
29
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
Two of the properties are under construction, and we expect that the equity of
the applicable property partnerships is sufficient to cover the estimated costs
to complete these two properties. We may have to advance funds to the
partnerships to cover operating costs until the properties achieve
stabilization, which amounts we do not expect to exceed $2.5 million. We
anticipate the future equity payments due these partnerships will be sufficient
to repay the advances.
Summary of Impact
-----------------
In the first quarter of 2007, we reassessed our strategy with respect to the
ultimate recovery of our investments in these properties. We have undertaken an
initiative to determine the most advantageous strategy for recovery on the
mortgage revenue bonds. The strategies to be followed for individual bonds may
involve a change in our planned holding period of the asset or the level of
additional funding we may provide, if any. While the strategy remains under
review, the initial assessment of four of the mortgage revenue bonds has caused
us to recognize an impairment charge of approximately $13.7 million (see Note 2)
due in part to the revision of the estimated level and timing of cash flows for
the valuation of the properties. In connection with that determination,
management concluded that advances made to our sponsored funds in connection
with those underlying properties may not be fully recoverable and we recorded a
reserve of approximately $5.5 million in the first quarter of 2007.
The partnerships are summarized as follows:
(In thousands)
-------------------------
Fair Value of
Centerline Centerline Mortgage
Holds or Capital Loan Revenue
Will Hold Sponsored Included in Third Amounts Bonds
Mortgage Funds is Credit Centerline Parties Upon Full Outstanding
Revenue Equity Intermediated Holds GP Provided Draw at March 31,
Number Bond Partner Funds Interest Equity Down 2007
-------- ----------- ---------- ------------- ---------- -------- --------- -------------
PRS PARTNERSHIPS
Lease-Up 10 9 5 3 5 5 $ 103,831 $ 88,248
Rehab 1 1 1 1 1 -- 19,300 20,229
Stabilized 2 2 -- -- -- 2 18,377 19,438
----------------------------------------------------------------------------------------------------------
Subtotal 13 12 6 4 6 7 141,508 127,915
----------------------------------------------------------------------------------------------------------
CRG PARTNERSHIPS
Lease-Up 4 2 4 3 2 -- 19,931 19,864
Rehab 2 2 2 2 2 -- 61,888 62,828
----------------------------------------------------------------------------------------------------------
Subtotal 6 4 6 5 4 -- 81,819 82,692
----------------------------------------------------------------------------------------------------------
GCG PARTNERSHIPS
Construction 1 1 1 1 -- -- 16,600 16,600
Lease-Up 1 1 1 -- -- -- 13,170 13,781
----------------------------------------------------------------------------------------------------------
Subtotal 2 2 2 1 -- -- 29,770 30,381
----------------------------------------------------------------------------------------------------------
ERC PARTNERSHIPS
Construction 2 2 2 2 2 -- 16,950 17,896
Lease-Up 14 13 14 13 14 -- 111,670 115,099
Stabilized 2 2 2 1 2 -- 9,392 9,878
----------------------------------------------------------------------------------------------------------
Subtotal 18 17 18 16 18 -- 138,012 142,873
----------------------------------------------------------------------------------------------------------
Total 39 35 32 26 28 7 $ 391,109 $ 383,861
==========================================================================================================
Total eliminated in consolidation $ 286,111 $ 279,074
==========================
30
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
Our potential exposure falls into three categories as follows:
Cash required to bring the properties to break-even operation - As of
March 31, 2007, advances outstanding totaled approximately $26.9
million, net of the reserve described above. These advances, and
additional loans, are assessed periodically for collectability and
the impact on the potential impairment of existing mortgage
revenue bonds. At present, we do not anticipate that any of the
remaining advances would require a charge to expense, although the
strategy ultimately adopted with respect to recovery on any
individual mortgage revenue bond may require a change in that
outlook.
Based on current lease-up estimates and projected costs to
complete construction, we estimate that the properties, in the
aggregate, may require approximately $13.5 million of additional
cash (to supplement cash from operations) to reach full
stabilization. While we expect that future equity contributions
at the fund level may provide some of this support to the
properties, we may need to advance some of this amount and a
portion of any such advances may be charged directly to expense
depending upon our assessment of the funds' ability to repay the
advances.
Potential impact on mortgage revenue bonds - As noted above, we
recognized impairment with respect to four of the affected bonds
in the first quarter of 2007. While we do not believe that there
is other-than-temporary impairment of any of the other bonds, the
outcome of our strategic plan with respect to this portfolio may
cause impairments to be recognized as other-than-temporary should
we determine that disposition of the bond or other actions be the
best course of action with respect to recovering our investment or
if the cash flow projections are affected by planned courses of
action. Any such impairments, should they be determined, can not
currently be estimated.
Potential cost to provide specified yields - As noted in the table
above, 26 of the partnerships 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.
There can be no assurance that a bankruptcy by or against PRS or its affiliates
or against ERC may not give rise to additional claims concerning these
partnerships.
FORWARD TRANSACTIONS
At March 31, 2007, our Commercial Real Estate subsidiaries had forward
commitments under Fannie Mae and Freddie Mac programs of approximately $232.3
million for mortgages to be funded in 2007 and later, and each lending
commitment has an associated sale commitment. In addition, those subsidiaries
had commitments to sell mortgages totaling $156.4 million. Approximately $49.4
million of this amount was funded as of March 31, 2007, and is included in
"Other Investments" as "Mortgage Loans Held for Sale". The balance of
approximately $107.0 million is to be funded later in 2007.
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 $17.7 million by the end of 2007.
31
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
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 $4.4
million at March 31, 2007.
MORTGAGE LOAN LOSS SHARING AGREEMENTS
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 March 31, 2007, a significant proportion 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 Program ("DUIP") 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 DUIP transactions. For such
loans, if a default occurs, our share of the loss will be the first 5% of the
unpaid principal balance and 25% of the next 20% of the remaining unpaid
principal balance to a maximum of 10% of the unpaid principal balance. The loss
on a defaulted loan is calculated as the unpaid principal amount due, unpaid
interest due and default resolutions costs (taxes, insurance, operation and
foreclosure costs) less recoveries.
Our maximum exposure at March 31, 2007, pursuant to these agreements, was
approximately $834.8 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 and losses were incurred in amounts equal to or greater
than these levels for which we are responsible), although this amount is not
indicative of our actual potential losses. We maintain an allowance for loan
losses for loans originated under these product lines at a level that, in
management's judgment, is adequate to provide for estimated losses. At March 31,
2007, that reserve was approximately $13.1 million, which, we believe,
represents our actual potential losses at that time.
As of March 31, 2007, we maintained collateral consisting of treasury notes and
Fannie Mae and Freddie Mac securities of approximately $12.5 million and a money
market account of approximately $900,000, which is included in restricted cash
in the condensed consolidated balance sheet, to satisfy the Fannie Mae
collateral requirements of $11.3 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 March 31, 2007, commitments under this reimbursement agreement
totaled $3.0 million.
YIELD TRANSACTIONS
We have entered into several credit intermediation agreements with either
Natixis or Merrill Lynch (each a "Primary Intermediator") to provide agreed-upon
rates of return for pools of multifamily properties to funds sponsored by
Centerline Affordable Housing Advisors LLC ("AHA"), formerly known as CharterMac
Capital LLC. In return, we have or will receive fees, generally at the start of
each credit intermediation period. There are a total of 15 outstanding
agreements to provide the specified returns:
32
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
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 $1.1
billion, 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 $23.7 million as of March 31, 2007. This amount is
included in "deferred revenues" within "Accounts payable, accrued expenses and
other liabilities" on our condensed consolidated balance sheet. Refer also to
PRS / CRG / ERC 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 from which senior and subordinated trust certificates were issued with
approximately 50% of these trust certificates being subordinated. We have
financed a portion of these senior and subordinated trust certificates through
our fixed rate securitization transaction. By placing these bonds into this
trust structure we have restricted our ability to foreclose on these bonds
without the consent of the Primary Intermediator.
OTHER CONTINGENT LIABILITIES
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. In some
instances, 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 was approximately $186.9 million as of March 31, 2007. The fair
value of these obligations, representing the deferral of the fee income over the
obligation periods, was $880,000 as of March 31, 2007. To date, we have had
minimal exposure to losses under these transactions and anticipate no material
liquidity requirements in satisfaction of any guarantee issued.
At March 31, 2007, we had unused letters of credit totaling $5.0 million
described in the MORTGAGE LOAN LOSS SHARING AGREEMENTS above.
LEGAL CONTINGENCIES
Claims have been asserted against subsidiaries of the Company in two separate
but interrelated lawsuits relating to two properties for which we have provided
debt and equity financing, but associated with the same developers. The lawsuits
allege, among other things:
o breach of fiduciary duty;
o breach of the implied covenant of good faith and fair dealing;
o intentional misrepresentation, fraud and deceit;
o negligent misrepresentation; and
o tortious interference with contracts.
One of the lawsuits claims unspecified damages while the other lawsuit alleges
damages of at least $10 - 15 million. One suit (which alleges losses of at least
$10 million) is currently scheduled to commence trial on March 31, 2008 and the
33
CENTERLINE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
other suit (with unspecified damages claimed) is currently scheduled for trial
in May 2008. The parties have engaged in discovery and have entered into
settlement discussions seeking a global resolution of all of these disputes. If
such a settlement cannot be achieved, we intend to defend vigorously against the
claims. The Company is unable at the present time to estimate what potential
losses, if any, may arise in connection with this litigation.
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.
FUNDING COMMITMENTS
We participate as co-investor in the CMBS and Direct Loan funds we sponsor. As
of March 31, 2007, our remaining unfunded capital commitments were $7.9 million.
NOTE 18 - SUBSEQUENT EVENTS
In April 2007, our Board of Trustees authorized an increase of 1.5 million
shares to our share repurchase plan, bringing the total repurchase authorization
to 3.0 million shares.
34
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 estimates, projections 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 real estate markets;
o competition with other companies;
o interest rate fluctuations;
o general economic and business conditions;
o environmental/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 loan loss sharing agreements;
o risk of loss from direct and indirect investments in CMBS;
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, 2006, and in Part II, Item 1.A. RISK FACTORS, in this document. 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
-------------------------------
In August 2006, we acquired Investors. Prior to the acquisition, we had recorded
equity income from a 10.7% investment in Investors (included in our Commercial
Real Estate segment). Following the acquisition, operating results of Investors
are included in our Commercial Real Estate, Asset Management and Consolidated
Partnerships segments. In addition, we incurred restructuring costs associated
with planned integration activities and incurred increased non-cash compensation
costs following the acquisition due to non-vested share grants and promote
income related to funds we manage.
During June 2006, we launched Centerline Financial to provide credit
intermediation products to the affordable housing finance industry. We expect
our majority ownership of Centerline Financial will enable us to prospectively
retain a significant portion of the fees that we would have paid to third party
credit providers. Various start-up costs were incurred in 2006 in connection
with this subsidiary.
35
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
------------------------------------------
The following is a summary of our operations for the three months ended March
31, 2007 and 2006:
% of % of
(In thousands) 2007 Revenues 2006 Revenues % Change
-------------------- ----------- ------------ ----------- ------------ ------------
Revenues $ 117,165 100.0 % $ 72,139 100.0 % 62.4 %
(Loss) income before %
income taxes $ (17,691) (15.1)% $ 11,738 16.3 % (250.7)
Net (loss) income $ (14,745) (12.6)% $ 14,657 20.3 % (200.6)%
The growth in revenues was due mostly to revenues earned by funds we
consolidated upon the acquisition of Investors in August 2006, and the interest
income of investments held by that subsidiary.
We recorded a net loss for the 2007 quarter as compared to net income in the
2006 quarter. Much of the decline was due to impairment charges recognized on
mortgage revenue bonds, a charge to reserve against associated receivables and
non-cash costs stemming from the acquisition of Investors, such as amortization
of restricted shares awarded in connection with the transaction and amortization
of intangible assets acquired. Other factors contributing to the net loss in the
2007 period were increased interest costs and severance costs associated with
the departure of an executive officer.
REVENUES
Our revenues were as follows:
For the Three Months Ended March 31,
-------------------------------------------
(In thousands) 2007 2006 % Change
-------------------------------------- ------------ ------------- -----------
Mortgage revenue bond interest income $ 37,063 $ 36,522 1.5 %
Other interest income 12,557 5,944 111.3
Fee income 14,635 16,071 (8.9)
Other revenues:
Construction service fee 1,265 1,148 10.2
Expense reimbursements 1,079 1,227 (12.1)
Rental income of real estate owned 1,433 1,041 37.7
Administration fees 596 401 48.6
Prepayment penalties 659 812 (18.8)
Other 562 728 (22.8)
------------ ------------ -----------
Total other revenues 5,594 5,357 4.4
------------ ------------ -----------
Subtotal 69,849 63,894 9.3
------------ ------------ -----------
Revenues of consolidated partnerships 47,316 8,245 473.9
------------ ------------ -----------
Total revenues $ 117,165 $ 72,139 62.4 %
============ ============ ===========
A large portion of the revenue increase was due to the Investors acquisition.
Adjusting to include Investors in the 2006 period, revenues would have increased
approximately 11.4%.
Mortgage revenue bond interest income and Fee income is discussed in RESULTS BY
SEGMENT below.
Other interest income includes income from resecuritization certificates held in
our Commercial Real Estate segment and interest earned on escrow balances in
that segment. The increase compared to the 2006 period relates to:
36
o interest generated by CMBS resecuritization certificates we hold
through Investors (acquired in August 2006 and thus for which there
was no comparable 2006 amount); and
o higher cash balances (predominantly the escrow accounts) coupled with
increasing market interest rates for temporary investments.
The 2006 quarter included interest earned on a loan to a Commercial Real Estate
business. That loan was repaid in September 2006 and there is no comparable
revenue in 2007.
Revenues of consolidated partnerships increased due to:
o CMBS partnerships consolidated as part of the Investors acquisition
(see Note 9);
o an increase in the number of LIHTC Partnerships due to fund
sponsorship activity; and
o an increase in the number of Property Partnerships over the past year
which we have taken control of to protect our investments (see Note
17).
Results of consolidated partnerships are also discussed below.
Offsetting the revenue gains is the elimination of revenues earned by our
subsidiaries in transactions with LIHTC and Property 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 first quarters of 2007 and 2006, the following amounts were eliminated,
as they represented transactions between consolidated partnerships and our other
component businesses:
For the Three Months Ended March 31,
-------------------------------------------
(In thousands) 2007 2006 % Change
------------------------------------- ------------ ------------ -----------
Mortgage revenue bond interest income $ 5,347 $ 1,539 247.4%
Other interest income -- 52 (100.0)
Fee income 10,710 9,826 9.0
Other revenues 1,371 1,235 11.0
------------ ----------- -----------
Total $ 17,428 $ 12,652 37.7%
============ =========== ===========
37
EXPENSES
Our expenses were as follows:
For the Three Months Ended March 31,
----------------------------------------
(In thousands) 2007 2006 % Change
-------------------------------------------------------------- ----------- ------------ ----------
Interest expense $ 28,302 $ 17,107 65.4%
----------- -----------
Interest expense - preferred shares of subsidiary 4,724 4,724 --
----------- -----------
Salaries and benefits 36,860 19,902 85.2
Other general and administrative 20,564 12,665 62.4
----------- ----------- ---------
Subtotal general and administrative 57,424 32,567 76.3
----------- ----------- ---------
Depreciation and amortization 11,498 8,913 29.0
Loss on impairment of assets 16,447 -- --
----------- ----------- ---------
Subtotal before consolidated partnerships 118,395 63,311 87.0
----------- ----------- ---------
Interest expense of consolidated LIHTC and Property
partnerships 7,185 6,946 3.4
Interest expense of consolidated CMBS and Direct Loan
partnerships 15,724 -- --
----------- ----------- ---------
22,909 6,946 229.8
----------- ----------- ---------
Other expenses of consolidated LIHTC and Property partnerships 23,199 15,281 51.8
Other expenses of consolidated CMBS and Direct Loan
partnerships 554 -- --
----------- ----------- ---------
23,753 15,281 55.4
----------- ----------- ---------
Subtotal expenses of consolidated partnerships 46,662 22,227 109.9
----------- ----------- ---------
Total expenses $ 165,057 $ 85,538 93.0%
=========== =========== =========
The increase in interest expense reflects the higher amount of average debt
outstanding (approximately $2.3 billion in the first quarter of 2007 as compared
to $1.7 billion in the first quarter of 2006). The higher balance in 2007
reflects
o the cost of the Investors acquisition;
o continuing capital deployment in the Affordable Housing segment for
mortgage revenue bond and LIHTC investments; and
o debt facilities of Investors used in Commercial Real Estate investing
and fund sponsorship activities.
In addition, our average borrowing rate increased in 2007 as compared to 2006 as
a result of increases in the BMA and LIBOR rates in both years. The effect of
rate increases was tempered, however, by a fixed rate securitization program in
place since mid-2006 and the interest rate swaps that we have in place, some of
which are "in the money". Our average borrowing rate increased to 4.8% in the
first quarter of 2007 as compared to 3.8% in the first quarter of 2006.
While our borrowing costs have been increasing along with market rates, the
commencement of Centerline Financial has enabled us to retain a significant
portion of fees which we have historically paid to third parties in connection
with securitizations in the Affordable Housing segment. In addition, we
anticipate Centerline Financial will enable us to lower our average cost of
capital through more effective leverage of our assets.
The increase in salaries and benefits expense primarily relates to the
approximately 100 employees added upon the Investors acquisition, the continued
growth of our component businesses and approximately $4.6 million of incremental
non-cash compensation cost related to shares issued in connection with the
Investors acquisition. In addition, salaries and benefits include approximately
$1.5 million for deferred participation compensation related to CMBS funds we
sponsor and $2.2 million of severance costs, primarily associated with the
retirement of an executive officer.
38
The increase in other general and administrative expenses primarily resulted
from the following:
o higher infrastructure costs following the Investors acquisition;
o fees paid by Centerline Financial to Natixis (commenced in the third
quarter of 2006); and
o costs incurred in relation to the Company's re-branding.
These increases were partially offset by decreased fund origination costs within
our Affordable Housing segment due to the lower level of fund sponsorship
activity.
Depreciation and amortization expenses were higher in the 2007 period, primarily
due to increased amortization of mortgage servicing rights. In addition to
approximately $14.5 million in mortgage servicing rights acquired as part of the
Investors acquisition in August 2006, we recorded incremental assets since March
31, 2006, due to mortgage origination activity within our Commercial Real Estate
segment.
Loss on impairment of assets related to seven mortgage revenue bonds associated
with six properties experiencing substandard performance and the change in our
strategy with respect to protecting our investment in certain assets (see Notes
2 and 17).
Other expenses of the consolidated LIHTC and Property partnerships increased due
to the increase in the number of consolidated entities since March 2006.
Virtually all of the expenses of the consolidated LIHTC and Property
partnerships are absorbed by their equity partners; as such, they have an
insignificant impact on our net income.
Expenses of consolidated CMBS partnerships represent funds we manage to
syndicate investments in CMBS and associated resecuritization trusts. These
items were incorporated into our financial results upon our acquisition of
Investors.
OTHER ITEMS
For the Three Months Ended March 31,
----------------------------------------
(In thousands) 2007 2006 % Change
---------------------------------------------------- ------------ ------------ -----------
Equity and other (loss) income $ (250) $ 510 (149.0)%
Gain on sale or repayment of loans $ 1,624 $ 4,539 (64.2)%
Gain on sale or repayment of mortgage revenue
bonds and other assets 755 891 (15.3)
------------ ------------ -----------
$ 2,379 $ 5,430 (56.2)%
------------ ------------ -----------
Income allocated to preferred shareholders of
subsidiary $ (1,556) $ (1,556) -- %
------------ ------------ -----------
Loss (income) allocated to SCUs $ 5,956 $ (5,729) (204.0)%
Loss (income) allocated to SMUs 79 (150) (152.7)
Loss allocated to SCIs 76 -- --
Other 6 -- --
------------ ------------ -----------
Total loss (income) allocated to minority
interests $ 6,117 $ (5,879) (204.0)%
Loss allocated to partners of consolidated
partnerships $ 81,111 $ 88,781 (8.6)%
Equity and other (loss) income decreased since we no longer recognize our
proportionate share of Investors earnings through equity income subsequent to
our acquisition in August 2006. The loss for the quarter primarily relates to
losses from tax advantaged investment vehicles similar to those we sponsor.
Equity income from our investment in CMBS funds is eliminated in consolidation
but positively impacts our net income. For the first quarter of 2007, this
amount was approximately $6.7 million. There is no comparable amount in 2006 as
this earnings stream began with our acquisition of Investors.
Gains related to mortgage revenue bonds and loans fluctuate in relation to
relative activity levels in the Affordable Housing and Commercial Real Estate
businesses. See RESULTS BY SEGMENT below.
39
The income allocation to SCUs, SMUs and SCIs 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. "Other" minority interest
principally represents the portion of Centerline Financial owned by Natixis.
The loss allocation to partners of consolidated partnerships represents the
operating losses of LIHTC and Property partnerships, of which we have absorbed
an insignificant portion (approximately $3,000) and the majority ownership in
CMBS and Direct Loan funds we sponsor.
Results by Segment
------------------
AFFORDABLE HOUSING
The table below shows selected information regarding our Affordable Housing
activities:
For the Three Months Ended March 31,
--------------------------------------------
(In thousands) 2007 2006 % Change
--------------------------------------------------------- -------------- -------------- -------------
MORTGAGE REVENUE BOND INVESTING STATISTICS
New mortgage revenue bond acquisitions $ 20,142 $ 34,579 (41.8)%
Funding of mortgage revenue bonds acquired in prior
years 1,151 -- --
Acquisitions related to prior period forward commitments 7,100 26,096 (72.8)
----------- ----------- ----------
Total acquisition and funding activity $ 28,393 $ 60,675 (53.2)%
Mortgage revenue bonds repaid $ 2,622 $ 26,908 (90.3)%
Average portfolio balance (fair value) $ 2,744,922 $ 2,366,617 16.0 %
Weighted average permanent interest rate of bonds
acquired 5.88 % 5.82 %
Weighted average yield of portfolio 6.35 % 6.56 %
Average borrowing rate (includes fees and effect of
swaps) 4.40 % 3.77 %
Average BMA rate 3.59 % 3.08 %
LIHTC FUND SPONSORSHIP STATISTICS
Equity raised by LIHTC funds $ 6,444 $ 60,905 (89.4)%
Equity invested by LIHTC funds (1) $ 113,979 $ 149,764 (23.9)%
Mortgage revenue bond interest income (1) $ 43,130 $ 40,218 7.2 %
Other interest income (1) 311 621 (49.9)
Fee income from fund sponsorship (1) 12,930 17,432 (25.8)
Expense reimbursements 2,218 2,069 7.2
Other revenues (1) 2,003 1,690 18.5
----------- ----------- ----------
$ 60,592 $ 62,030 (2.3) %
=========== =========== ==========
Interest expense and securitization fees (1) $ 23,961 $ 14,704 63.0 %
Loss on impairment of assets $ 16,447 $ -- --
Gain on repayments of mortgage revenue bonds $ 742 $ 889 (16.5)%
CAD (2) $ 15,061 $ 25,485 (40.9)%
=========== =========== ==========
(1) Prior to intersegment eliminations.
(2) See Note 16 for a description of CAD.
40
Mortgage Revenue Bond Investing
-------------------------------
The increase in mortgage revenue bond interest income is primarily due to the
increased investment base resulting from new bonds funded during 2006 and the
first three months of 2007.
While generally declining 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 rising interest rates,
resulted in the increase in interest expense and securitization fees. By
entering into a fixed rate securitization in 2006 and using interest rate swaps
to fix the rate on a large portion of our remaining securitizations, we believe
that we have mitigated the impact on spreads of the increasing BMA rates.
We recognized impairment on seven mortgage revenue bonds in the 2007 period
and none in the 2006 period.
Of the charge recorded, $13.7 million pertained to a portfolio of property
partnerships for which we assumed the general partner interest in 2005. In the
first quarter of 2007, we reassessed our strategy with respect to the ultimate
recovery of our investments in these properties. The strategies to be followed
for individual bonds may involve a change in our planned holding period of the
asset or the level of additional funding we may provide, if any. While the
strategy remains under review, the initial assessment of four of the mortgage
revenue bonds has caused us to recognize impairment due in part to the revision
of the estimated level and timing of cash flows for the valuation of the
properties. See also notes 2 and 17 to the condensed consolidated financial
statements.
The remainder of the impairment charge pertained to two properties with
substandard performance and the restructuring of terms for one of the associated
mortgage revenue bonds.
LIHTC Fund Sponsorship
----------------------
Our LIHTC Fund sponsorship activities generate fees associated with sponsoring
tax-credit equity investment funds, for assisting the funds in acquiring assets
and for providing specified yields to investors of certain funds. We receive
many of these fees at the time a fund closes and recognize them over various
periods as earned, ranging from less than one year to twenty years.
The decrease in fund sponsorship revenues reflects the lower volume of fund
activity in the first quarter of 2007 as compared to the same period in 2006,
both from the level of equity raised and equity invested. Partially offsetting
this decline, certain ongoing fees (such as partnership management fees that are
collected at the time of closing and recognized over several years) increased in
the period due to funds closed after the end of the 2006 quarter.
Other ongoing fees are earned based on assets under management. Despite a higher
population of funds, those fees decreased in 2007, primarily attributable to the
timing of physical site visits from which we earn a portion of the fees. In
addition, fees earned from older LIHTC funds decline as they dispose of assets.
Other
-----
Expense reimbursement and other revenues in this segment consist largely of
service fees charged to entities (including consolidated partnerships) we manage
and fluctuate with the growth of the number of those entities and their cash
flows.
Affordable Housing CAD
----------------------
CAD for the first quarter of 2007 includes a higher level of mortgage revenue
bond interest income than in the 2006 quarter, offset by a decline in fee income
from lower fund sponsorship and investment activity. The net increase in
revenues, however, was less than the increase in securitization financing costs.
41
COMMERCIAL REAL ESTATE
The table below shows selected information regarding our Commercial Real Estate
activities:
For the Three Months Ended March 31,
-------------------------------------------
(In thousands) 2007 2006 % Change
------------------------------------------------ ------------- ------------ -----------
Mortgage originations $ 456,516 $ 281,156 62.4 %
------------- ------------ -----------
Primary servicing mortgage portfolio at March 31 $ 8,535,220 $ 8,935,959 (4.5)%
------------- ------------ -----------
Carrying value of mortgage servicing rights at %
March 31 $ 53,473 $ 62,589 (14.6)
Mortgage origination fees (1) $ 2,382 $ 2,108 13.0 %
Mortgage servicing fees 4,609 5,037 (8.5)
Other fee income 729 749 (2.7)
Other interest income (1) 4,734 2,279 107.7
Prepayment penalties 653 807 (19.1)
Other revenues 319 890 (64.2)
------------- ------------ -----------
Total $ 13,426 $ 11,870 13.1%
============= ============ ===========
------------- ------------ -----------
Gain on sale of mortgages $ 1,636 $ 4,541 (64.0) %
============= ============ ===========
------------- ------------ -----------
Equity income $ 6,740 $ 714 --
============= ============ ===========
------------- ------------ -----------
CAD (2) $ 4,527 $ 3,104 45.8 %
============= ============ ===========
(1) Prior to intersegment eliminations.
(2) See Note 16 for a description of CAD.
Originations
------------
The increase in mortgage origination fees for the quarter was generally in
proportion to the increase in originations offset by the average rate of
origination fees being impacted by the higher proportion of non-agency
originations and the spread compression in the market. Fannie Mae originations
decreased and Centerline Direct originations increased from the prior period
because loan production focused its efforts on originating loans for our lending
program for AMAC and CRESS ("Centerline Direct"). Freddie Mac originations
increased sharply because of a large portfolio of loans originated in the
current year.
Mortgage originations for the three months ended March 31 are broken down as
follows:
(In thousands) 2007 % of total 2006 % of total
------------------ ------------- ---------- ------------- ----------
Fannie Mae $ 69,181 15.2 % $ 209,466 74.5 %
Freddie Mac 144,720 31.7 50,625 18.0
Centerline Direct 203,685 44.6 -- --
Conduit and other 38,930 8.5 21,065 7.5
------------- ---------- ------------- ----------
Total $ 456,516 100.0 % $ 281,156 100.0 %
============= ========== ============= ==========
Servicing
---------
Primary servicing fees declined due to a decrease in the servicing fee rate and
and the higher proportion of non-agency and non-loss sharing 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.
Investments
-----------
Increased interest income in this segment reflects the acquisition of Investors
in mid-2006 as the operations acquired hold CMBS and resecuritization
certificates for investment.
42
Other
-----
The decrease in prepayment penalties relates to a lower level of refinancing
activity in the current quarter as compared to last year.
Gain on sale of mortgages relates directly to the value of mortgage servicing
rights recorded when loans are sold. The mortgage servicing rights, in turn, are
valued based on projected servicing revenues, which decreased in 2007 as
compared to 2006 due to lower servicing fee rates for new originations as noted
above.
We act as general partner of the CMBS and Direct Loan funds we sponsor and own a
portion of the funds. Equity income in this segment primarily represents our
proportionate share of profits as well as other allocations for general partner
services. This category became a part of this segment upon the Investors
acquisition while the 2006 amount represented our income from our membership
interest in Investors prior to full acquisition.
Commercial Real Estate CAD
--------------------------
The sharp increase in segment CAD is attributable to the Investors acquisition
and the addition of equity and interest income streams. These increases were
partially offset by increased infrastructure costs that were due to the addition
of the Investors business and the overall growth of this segment.
ASSET MANAGEMENT
The table below shows selected information regarding our Asset Management
activities:
For the Three Months Ended March 31,
----------------------------------------
(In thousands) 2007 2006 % Change
---------------------------------------------- ------------- ----------- ----------
Mortgage portfolio at March 31:
Primary servicing (1) $ 22,870,536 $ 8,935,959 155.9 %
Special servicing 164,927 -- --
Carrying value of mortgage servicing rights at
March 31 10,705 -- --
------------- ----------- ----------
Other interest income (2) $ 5,266 $ 2,216 137.6 %
Asset management fees (2) 3,441 2,616 31.5
Servicing fees (2) 2,879 1,667 72.7
Other fees (2) 2,092 -- --
------------- ----------- ----------
Subtotal 8,412 4,283 96.4
------------- ----------- ----------
Other income (2) 314 -- --
------------- ----------- ----------
$ 13,992 $ 6,499 115.3 %
============= =========== ==========
CAD (3) $ 6,494 $ 3,510 85.0 %
============= =========== ==========
(1) Includes sub-servicing on Commercial Real Estate portfolio. Excludes
servicing on mortgage revenue bonds in the Affordable Housing segment.
(2) Prior to intersegment eliminations.
(3) See Note 16 for a description of CAD.
Revenues
--------
Revenues increased in the 2007 period as a result of the servicing business
added as part of the Investors acquisition. The remaining revenues in this
segment represent charges to other segments for asset management and
subservicing on the assets under management in those businesses. The growth in
that revenue is reflective of the overall growth of assets under management
throughout the Company, due to the sponsorship of new LIHTC funds and the growth
of our Commercial Real Estate business, particularly with regard to the business
done with AMAC, CRESS and the CMBS funds. The increase also includes earnings
from escrow accounts maintained for the primary servicing portfolio and
increased in 2007 due to higher balances as well as higher rates earned.
43
Asset Management CAD
--------------------
Segment CAD for the first three months of 2007 was higher than the same period
in 2006 due primarily to the higher level of assets under management throughout
the Company, due in part to our acquisition of Investors. In addition, the
introduction of new revenue streams upon the Investors acquisition also had a
beneficial impact. The increase was partially offset by a higher level of
salaries and other infrastructure costs required to grow the business. We expect
that the continued expansion of this business and the expected synergies from
combining existing operations with Investors should benefit segment CAD in
future periods.
CREDIT RISK PRODUCTS
For the Three Months Ended March 31,
-----------------------------------------
(In thousands) 2007 2006 % Change
------------------------------ ------------- ------------ ----------
Credit intermediation fees (1) $ 2,335 -- --
Other interest income (1) 925 -- --
------------- ------------ ----------
$ 3,260 $ -- --
============= ============ ==========
CAD (2) $ 964 $ (556) -- %
============= ============ ==========
(1) Prior to intersegment eliminations.
(2) See Note 16 for a description of CAD.
Revenues
--------
Fee income is related to the credit intermediation of mortgage revenue bond
securitizations which began in mid-2006 with the launch of Centerline Financial.
The volume of credit intermediation provided to the Affordable Housing segment
now exceeds $1.2 billion. We expect these fees to continue growing as we expand
our bond portfolio and the proportion of Affordable Housing securitizations that
involve credit intermediation by Centerline Financial.
Interest income in this segment relates to the investment of cash balances
maintained by Centerline Financial.
Credit Risk Products CAD
------------------------
CAD in this segment for 2006 represents start up costs incurred prior to the
launch of Centerline Financial. The positive 2007 CAD results are entirely due
to the inception of the business in mid-2006 and the absence of the
non-recurring costs. As we continue to seek opportunities to provide services
external to Centerline, we expect revenues and CAD to benefit accordingly.
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 13 partnerships, an insignificant equity interest.
LIHTC AND PROPERTY PARTNERSHIPS
Our Affordable Housing segment earns fees from LIHTC Partnerships and
interest on mortgage revenue bonds for which Property Partnerships are the
obligors. The LIHTC Partnerships are tax credit equity investment funds we
sponsor and manage. The Property Partnerships are partnerships for which we
have assumed the role of general partner.
44
The increased revenue, expense, equity loss and allocation amounts in 2007
are due to the addition of 12 LIHTC Partnerships over the past year and the
assumption of the general partner interests in 17 Property Partnerships.
As third party investors hold virtually all of the equity interests in
these entities, we allocate all results of operations of these partnerships
to those partners except for approximately $3,000, which represents our
nominal ownership. As a result, the consolidation of these partnerships has
an insignificant impact on our net income.
CMBS AND DIRECT LOAN PARTNERSHIPS
CMBS and Direct Loan Partnerships were included in this segment upon our
acquisition of Investors in August 2006.
INCOME TAXES
------------
A large majority of our pre-tax income is derived from the mortgage revenue bond
investing within our Affordable Housing segment and CMBS fund sponsorship
activities in our Commercial Real Estate segment. The subsidiaries through which
we conduct these activities are structured as flow-through entities and their
income is not generally subject to income taxes. Our other businesses, however,
are conducted in corporations and are subject to income taxes. Because the
distributions paid on the minority interests in these corporate subsidiaries
effectively provide a tax deduction, as well as other factors within these
businesses, they often have losses for book purposes.
We provide for income taxes for these corporate subsidiaries in accordance with
SFAS No. 109, ACCOUNTING FOR INCOME TAXES ("SFAS No. 109") which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities.
The Company recognized an income tax benefit in the three months ended March 31,
2007 and 2006. The effective tax rate on a consolidated basis for the three
months ended March 31, 2007 and 2006 was 16.7% and (24.6)%, respectively. The
effective rate for our corporate subsidiaries that were subject to taxes was
16.0% and 31.0% for the three months ended March 31, 2007 and 2006,
respectively.
The income tax provision or benefit is affected by the book income or losses of
the taxable businesses and tax deductible distributions on their subsidiary
equity. Management determined that, in light of projected taxable losses in the
corporate subsidiaries for the foreseeable future, all of the deferred tax
assets will likely not be realized and hence a full 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.
45
Debt and Securitizations
------------------------
Short-term liquidity provided by operations comes primarily from interest income
from investments we hold in excess of the related financing costs, and fee
income receipts. We typically generate funds for investment purposes from
corresponding financing activities.
We have the following debt and securitization facilities to provide short-term
and long-term liquidity:
o a $100.0 million warehouse line, used for mortgage banking needs,
which matures on May 31, 2007, and we expect to enter into a new
facility or a further extension of this line upon maturity;
o a $250.0 million revolving credit facility, used to acquire equity
interests in property ownership entities prior to the inclusion of
these equity interests into investment funds, as well as for other
corporate purposes, which matures in August 2009;
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; and
o repurchase facilities used to fund investments by Investors and its
subsidiaries as well as for general business purposes.
As of March 31, 2007, we had approximately $242.2 million available to borrow
under these debt and securitization facilities without exceeding limits imposed
by debt covenants and our by-laws and without pledging additional collateral.
In addition to the credit lines detailed above, we have a $453.0 million
fixed-rate mortgage revenue bond securitization program and $250.0 million term
loan, both of which began in 2006 and were fully funded as of March 31, 2007.
The securitization certificates have a weighted average term of eight years and
the term loan matures in 2012.
Equity
------
We have the ability to issue $400.0 million of equity or debt securities
pursuant to a shelf registration statement we have filed with the SEC. We
currently have no plans to issue any such securities.
Liquidity Requirements after March 31, 2007
-------------------------------------------
During May 2007, equity distributions will be paid as follows:
(In thousands)
--------------
Common/CRA shareholders $ 25,327
SCU/SMU/SCI holders 8,807
4.4% CRA Preferred shareholders 1,188
Preferred shareholders of a subsidiary 6,281
------------
Total $ 41,603
============
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 three months ended March 31, 2007, there was a net decrease in cash and
cash equivalents as compared to a net increase during the comparable 2007
period. A larger increase in 2006 in operating cash flows was more than offset
by a larger increase in cash used in investing and financing activities.
46
Operating cash flow in 2007 was $40.0 million higher than in 2006. Despite
incurring a net loss in the 2007 period versus net income in the 2006 quarter,
the 2007 period included significantly higher non-cash costs due primarily to
impairment charges and bad debt reserves. A lower level of cash inflows related
to mortgage loan sale settlements in the current year period was more than
offset by more favorable inflows related to receivables and other assets.
Cash used in investing activities was higher in 2007 as compared to 2006 by a
margin of $66.4 million due to:
o a higher level of net investment in Affordable Housing property level
partnerships for sponsored funds;
o a higher level of Commercial Real Estate notes receivable
acquisitions;
o a lower level of mortgage revenue bond repayments; and
o investing activities related to CMBS funds.
These factors were offset in part by a lower level of mortgage revenue bond
originations in the 2007 period as compared to the 2006 quarter.
Financing outflows in the 2007 period were higher than in 2006 by $63.5 million.
While we had a net increase in the level of securitized borrowings, we sought to
reduce our credit facility debt through cash management initiatives that also
lowered our overall cash position at the end of the period. The 2007 period also
reflected a large amount of treasury share repurchases, continuing a program
that we began in mid-2006, partly offset by funds contributed to Centerline
Financial by the minority interest holder of that subsidiary.
Commitments, Contingencies and Off-Balance Sheet Arrangements
-------------------------------------------------------------
Note 17 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
March 31, 2007, for guarantees we and our subsidiaries have entered into:
Maximum Carrying
(In thousands) Exposure Amount
-------------------------------------------- ------------ -----------
Development deficit guarantees (1) $ 43,521 $ 528
Operating deficit guarantees (1) 7,567 154
ACC transition guarantees (1) 3,245 --
Recapture guarantees (1) 114,746 154
Replacement reserve (1) 3,132 44
Guarantee of payment (1) 14,720 --
LIHTC credit intermediation (2) 1,098,475 23,669
Mortgage banking loss sharing agreements (3) 834,754 13,116
------------ -----------
$2,120,160 $ 37,665
============ ===========
(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 Affordable Housing
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 DUIP 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
47
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.
CONTRACTUAL OBLIGATIONS
The following table provides our commitments as of March 31, 2007, 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)(2) $ 443,540 $ 108,790 $ 93,500 $ 5,000 $ 236,250
Notes payable of consolidated
partnerships (3) 569,590 147,743 65,147 20,549 336,151
Financing arrangements of consolidated
partnerships (5) 686,400 -- 7,616 177,112 501,672
Notes payable of consolidated
partnerships 81,500 81,500 -- -- --
Repurchase agreements of consolidated
partnerships 301,284 301,284 -- -- --
Operating lease obligations 77,047 8,796 16,958 15,008 36,285
Subleases (7,673) (1,214) (2,553) (2,616) (1,290)
Unfunded investment commitments (4) 262,430 145,593 116,837 -- --
Financing arrangements (1)(2) 1,875,544 1,875,544 -- -- --
Preferred shares of subsidiary (subject
to mandatory repurchase) 273,500 -- -- -- 273,500
----------- ----------- ---------- --------- -----------
Total $ 4,563,162 $ 2,668,036 $ 297,505 $ 215,053 $ 1,382,568
=========== =========== ========== ========= ===========
(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) Recourse debt represents principal amount only. The weighted average
interest rate at period end, including the impact of our swaps, was 4.87%.
(3) Of the notes payable of consolidated partnerships, $421.8 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 $147.8 million is collateralized with the underlying properties
of the consolidated operating partnerships. All of this debt is
non-recourse to us.
(4) Of this amount, $232.3 million represents mortgage loan origination
commitments with corresponding sale commitments.
(5) Excludes premiums and discounts of financing arrangements of consolidated
partnerships.
As we are unable to project the timing of any payments related to our FIN 48
liability (see Notes 8 and 11). No such payments are included in the table
above.
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,
48
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 impact of variable interest rates on our earnings; and
o the impact of interest rates on the fair value of our assets.
IMPACT ON EARNINGS
Our investments in mortgage revenue bonds generally bear interest at fixed
rates, or pay interest according to the cash flows of the underlying properties,
which do not fluctuate with changes in market interest rates.
In contrast, payments required under our 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
credit and warehouse facilities, with rates based on LIBOR. Other long-term
sources of capital, such as our preferred shares of our subsidiary 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.
Of the March 31, 2007 total amount of our liabilities labeled on our unaudited
condensed consolidated balance sheet as Financing Arrangements and Notes
Payable, $1.1 billion is variable rate debt and not hedged via interest rate
swap agreements. We estimate that an increase of 1.0% in interest rates would
decrease our annual pre-tax income by approximately $11.4 million.
Conversely, we have large escrow balances maintained by our Commercial Real
Estate business and we are entitled to the interest earned on those balances. A
1.0% increase in interest rates would therefore increase our pre-tax income by
approximately $1.8 million.
We manage interest rate risk through the use of interest rate swaps, interest
rate caps and forward bond origination commitments, as described in the notes to
our unaudited condensed consolidated financial statements. In addition, we
manage our exposure by striving for diversification in our businesses to include
those less susceptible to interest rate changes and by managing our leverage.
IMPACT ON VALUATION OF ASSETS
Changes in market interest rates would also impact the estimated fair value of
our portfolio of mortgage revenue bonds. We estimate the fair value for each
revenue bond as the present value of its expected cash flows, using a discount
rate for comparable tax-exempt investments. Therefore, as market interest rates
for tax-exempt investments increase, the estimated fair value of our mortgage
revenue bonds will generally decline, and a decline in interest rates would be
expected to result in an increase in their estimated fair values. For example,
we estimate that, using the same methodology used to estimate the portfolio fair
value, 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
$173.5 million and a 1% decrease would result in an increase of approximately
$194.7 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
49
asset values.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule
15a-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of the end of the period covered by this quarterly report. Based
on such evaluation, such officers have concluded that our disclosure
controls and procedures as of the end of the period covered by this
quarterly report were effective to ensure that information required to be
disclosed by the Company in the reports that the Company files or submits
under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC rules and forms, and to ensure
that such information is accumulated and communicated to the Company's
management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Management's assessment does not include internal controls at Investors, as
the business was acquired in August 2006. This exclusion is considered
appropriate using guidance provided by the SEC in 'Management's Report on
Internal Control Over Financial Reporting and Certification of Disclosure
in Exchange Act Periodic Reports'. Management is currently documenting the
key controls for the business processes and application that may have a
material impact on financial reporting and will complete its assessment by
third quarter of 2007.
We expect to grow in part through acquisitions and joint ventures. To the
extent we make acquisitions or enter into combinations or joint ventures,
we face numerous risks and uncertainties combining or integrating the
relevant businesses and systems, including the need to combine accounting
and data processing systems and management controls and to integrate
relationships with clients and business partners. In the case of joint
ventures, we are subject to additional risks and uncertainties in that we
may be dependent upon, and subject to liability, losses or reputation
damage relating to, systems, controls and personnel that are not under our
control. In addition, conflicts or disagreements between us and our joint
venture partners may negatively impact the benefits to be achieved by the
joint venture.
(b) INTERNAL CONTROL OVER FINANCIAL REPORTING. The changes in the Company's
internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) that occurred during the Company's
quarter ended March 31, 2007, that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting are as follows:
o The loan servicing, investor reporting, and asset management
functions of the agency portfolio (i.e., Fannie Mae, Freddie Mac,
GNMA, and other small investors) were transitioned to our Irving,
Texas location along with a conversion of the servicing database
to a new servicing system.
o The Corporate Group revised the approval authority policy for
debt investments, equity (including joint venture equity)
investments and guarantees made by the Company and/or acquired
through exercise of its rights under a prior investment, which
was approved by the Board of Trustees.
o The Treasury department of the Corporate Group was consolidated
across all business segments.
Management has reviewed these material changes and obtained documentation
from the process owners in order conclude comfort that these changes do not
have a significant material impact on our controls over financial
reporting.
50
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Claims have been asserted against subsidiaries of the Company in two
separate but interrelated lawsuits relating to two properties for which
we have provided debt and equity financing, but associated with the
same developers. The lawsuits allege, among other things, (i) breach of
fiduciary duty; (ii) breach of the implied covenant of good faith and
fair dealing; (iii) intentional misrepresentation, fraud and deceit;
(iv) negligent misrepresentation; and (v) tortious interference with
contracts. One of the lawsuits claims unspecified damages while the
other lawsuit alleges damages of at least $10.0 - 15.0 million. One
suit (which alleges losses of at least $10 million) is currently
scheduled to commence trial on March 31, 2008 and the other suit (with
unspecified damages claimed) is currently scheduled for trial in May
2008. The parties have engaged in discovery and have entered into
settlement discussions seeking a global resolution of all of these
disputes. If such a settlement cannot be achieved, we intend to defend
vigorously against the claims.
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, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Securities purchased by us
The following table presents information related to our repurchases of
our equity securities during the first quarter of 2007 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 (2)
----------------------- --------------- -------------- ----------------- ----------------------
January 1-31, 2007 257 $20.40 --
February 1-28, 2007 1,283 19.39 --
March 1-31, 2007 299,179 19.28 293,971
--------------- -------------- -----------------
Total 300,719 $19.28 293,971 276,569
=============== ============== ================= ===============
(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.
(2) In April 2007, our Board of Trustees authorized an additional 1.5 million
shares for our share repurchase program. As the authorization was made
after the end of the quarter ended March 31, 2007, the amount shown does
not include the incremental shares.
51
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS
10.1 Executive Employment Agreement, dated as of January 15, 2007, by
and between CharterMac Capital LLC and Nicholas A.C. Mumford.*
10.2 Incentive Award Agreement, dated as of January 15, 2007, by and
between Centerbrook Holdings LLC and Nicholas A.C. Mumford.*
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.
52
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.
CENTERLINE HOLDING COMPANY
(Registrant)
Date: May 10, 2007 By: /s/ Marc D. Schnitzer
---------------------
Marc D. Schnitzer
Managing Trustee, Chief Executive Officer
and President
(Principal Executive Officer)
Date: May 10, 2007 By: /s/ Robert L. Levy
------------------
Robert L. Levy
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
53